Dror Poleg
Unbundling Cities, Extending Airbnb, Disrupting Kitchens, and Building Startups
This week's newsletter looks at the Great Covid Survey, Unbundling the City, Cleaning up Airbnb, The future of CloudKitchens, Blue Ocean Strategy, Urban Employment, the Future of Cities, and Venture Capital's shift from pure software to hard assets.
24 April 2020 . 7 min read
I hope you and your family are well. This week, Antony Slumbers and I were hard at work on our upcoming Future-Proof Office Course. If you are building, designing, operating, or selling anything that goes into office buildings, do check it out. We're offering a 25% corona-discount.
The newsletter is a bit different this week. It includes a few longer (but still short) entries. Let me know what you think!
1. COVID and You. How is coronavirus affecting our mood, behavior, and plans for the future? My friends Anja Jamrozik (Ph.D.) and Packy McCormick (O.G.) are conducting the Giant COVID Survey. Fill it, share it, and get access to the results.
2. Unbundling the city? The corona crisis focuses our attention on "essential workers". Many of these people work in what economists call the "non-tradable sector" — providing services that cannot be outsourced to or imported from overseas. In The New Geography of Jobs (2012), Enrico Moretti described how the creation of a new job in a city's "innovation sector" facilitates the creation of five new service jobs, many of which in the non-tradable sector. In other words, one high-paid employee (and his/her family) spends enough to justify the employment of five lower-paid service workers.
This phenomenon has interesting implications in the 2020s. Employees in the "innovation sector" (tech, science, etc.) enjoy living in cities because of the opportunity to interact with other knowledge workers and because of the opportunity to access great services provided by the non-treatable sector. The city is a bundle. Different groups tolerate one another for mutual benefit. Each group pays a price for being next to the other.
Coronavirus showed that our cities are heavily dependent on service employees. Ironically, this dependence will encourage the innovation sector to develop new solutions that automate and replace many urban service jobs. In turn, access to (some of) the services that make cities so great will no longer require one to live in proximity to service employees. As a result, some members of the innovation sector might choose to move out of the city.
Such knowledge workers will not necessarily become remote workers or migrate to a non-urban environment. Instead, they could flock to new cities that have more people like them and less of those "other" people that used to service them. I'm not saying this is a desirable outcome, only pointing out the possibility. How do you think this will play out?
3. Clouds hit earth. While we're theorizing on the automation of urban services, evidence from the field suggests that it's going to take a while. CloudKitchens, the startup founded by Uber's Travis Kalanick, is reportedly struggling to overcome significant challenges in several of its locations. The company discovered that some of the buildings it bought are in much worse shape than it assumed, making them unusable or very expensive to put to good use. This highlights a key difference between pure tech business and those that involve physical assets. Real estate is hard. It involves complex regulation, public approval processes, combative contractors, and many other surprises.
4. Airbnb's long-term benefits. The travel industry is in dire straits. But Airbnb's CEO is betting that "when social distancing is over, people are going to eventually want to connect". He may be right. But if there is a boom, will people be eager to "connect" at homes of people they don't know? More importantly, will they be willing spend time in physical spaces that are not designed, built, and operated to provide a clean experience for short-term guests?
Beyond the temporary damage, COVID-19 is exposing a deeper flaw in Airbnb's business model.
In Blue Ocean Strategy (2004), Kim & Mauborgne analyze companies that engage in Value Innovation. The term describes businesses that can deliver better service at a lower price, breaking the price/quality trade-off. Many of the most successful companies of the past two decades were value innovators.
Amazon, for example, provides readers with a better experience and lower prices comported to a traditional book store. We can argue about specific aspects of the online buying experience, but it includes some overwhelming advantages (huge selection, detailed reviews, instant search, personalized recommendations) that are clearly superior to the old way of buying books.
More precisely, the functional benefits of Amazon's bookstore are superior to those of a physical store. At the same time, the symbolic and experiential benefits of Amazon's store are, perhaps, inferior: Customers have to give up the sense of adventure involved in walking through a real store alongside fellow book-lovers. They also have to give up the "story" involved in buying a book offline ("I bought it at a tiny bookshop in Paris" sounds much better than "I ordered it from Amazon" — a symbolic benefit that many people care about).
Along the same lines, Airbnb also attempted to be a value innovator. The company offered its customers lower prices than traditional hotels and access to what some may perceive as a better experience (an apartment vs. a room, personal vs. corporate service, a sense of adventure vs. cookie-cutter procedures). But while Airbnb's physical product was better in some ways, it was clearly inferior in others.
More precisely, the symbolic and experiential benefits of Airbnb were (often) superior to those of a traditional hotel. An Airbnb is often more spacious and cozy than a hotel room, and telling your friends that you stayed at "this amazing brownstone" is much cooler than telling them you stayed at the Marriott or Holiday Inn.
At the same time, Airbnb's functional benefits are clearly inferior. The basic booking process involves a lot of uncertainty. The physical product is defined less clearly. Checking in is more cumbersome, the ability to receive immediate service is more limited, the hosts are often amateurs, and the cleaning procedures are less standardized or transparent.
In some industries, a product's symbolic and experimental aspects can make up for low functionality (for example, an H&M shirt might fall apart faster that a Hines one, but people will still buy it because it has a cool print or is sold in a hip environment). But in the world of hospitality, a product's functionality affects the customer's basic health and safety. As such, a hospitality business that struggles to provide consistent functional benefits is destined to fail.
Airbnb's inferior safety, hygiene, and operational standards were always a barrier to mainstream adoption. The coronavirus only exacerbated this problem by making consumers even more conscious of these issues.
Does this mean there's no hope?
I'm willing to bet that Airbnb will never become a major hospitality company, in the old sense of the world (i.e. supplanting Marriott or Accor).
However, while the virus is pushing the hotel market to become more rigid and conservative, it is also pushing the housing market to become more dynamic than ever. Housing is where Airbnb still has a chance to build a massive company. In my book, I predicted that the boundaries between "booking an Airbnb" and "leasing an apartment" will blur until it would be impossible to tell the difference. I also pointed out that the housing rental market is several orders of magnitude larger than the hotel market.
It looks like Airbnb's CEO, Brian Chesky, understands this point. Earlier this week, he told Bloomberg that Airbnb sees a massive opportunity in "longer-term rentals to city dwellers looking for a protracted retreat". Chesky believes the world is currently undergoing a "a giant experiment where people are realizing they can work remote." A more flexible office and employment market equals a more flexible housing market. And more flexible housing market equals an opportunity for Airbnb.
Can Airbnb pull it off? I'd put the odds at 20%. In a multi-trillion dollar market, that's more than enough reason to try.
5. It's time to read. Airbnb and CloudKitchen's struggles tie into a bigger theme that is currently top of mind for many investors and entrepreneurs.
In 2011, Marc Andreessen, the high priest of Silicon Valley, published Why Software is Eating the World. The essay kicked off a decade in which software-powered companies transformed existing industries. Last week, Andreessen published another essay, It's Time to Build, highlighting the urgent need to rejuvenate America's ability to produce great things — trains, roads, apartments, hospitals, power plants, and more.
Andreessen's latest essay represents a shift in Silicon Valley's thinking. It is now clear that coders writing great software in California cannot solve most of the world's problems. To addresses our biggest challenges — and to unlock trillions in value — investors and entrepreneurs will need to expand their purview. This shift has been predicted and described in my book:
"Unlike their dot-com predecessors, today's unicorns are not operating in a virtual Wild West, where the laws of gravity don't apply and the laws of government have not yet been written. Instead, many of them are trying to change mature industries with entrenched competitors and complex regulation.
It's hard. And it requires a lot of capital. Even if they succeed, it is still not clear whether many of these unicorns will generate the type of returns that venture investors require and expect—which is why venture investors previously shunned many of these industries.
But investors no longer have a choice. More accurately, they have limited options. The low-hanging fruits have been picked: the industries that could be easily transformed have already been transformed.
Investors must look for new industries that are large enough to justify the risks. Real estate is an ideal candidate. It involves trillions of dollars in assets, it is highly fragmented, and it is rich with inefficiencies and untapped value."
Indeed, it's time to build. To do so successfully, technology investors and entrepreneurs need to gain a solid understanding of how the physical assets are developed, operated, and financed. For their part, those who own and operate physical assets need to get a better understanding of how technology works and how venture investors think.
My book provides a great introduction for both types of readers — empowering them to create great things. If you haven't read it yet, now is a great time! Order the print or Kindle version here.
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