The Business Of

Sharing | Uber | Airbnb vs Uber

Morning All!

TGIF! The weekend is so close! But before we get there, we’ve got one final newsletter to round off The Business Of Uber. Let’s have a quick recap of some of the fun, surprising things we’ve learnt about Uber this week…

• Founders Of Ridesharing - Whilst Uber is the undisputed #1 of ridesharing now, they weren’t the first to do it! That honour goes to Sidecar!

• Biggest, But Slowest - Uber’s cab business is still its largest segment in terms of revenue & profits. But Uber Eats and Uber Freight are growing much faster.

• The Great Wall Of China - Despite being #1 globally, one market Uber never cracked was China. And DiDi actually bought Uber China from Uber in 2016.

Okay so, today we’ve got a special newsletter. And I’ve been waiting all week for this one. Because in Part 1 of The Business Of Sharing, we looked at The Business Of Airbnb. This week, we’ve looked at The Business Of Uber. And as we’ve seen, both companies have pretty similar revenue drivers and cost lines. Today, we’re going to compare the two businesses and see how and where they’re different. So, without further ado, let’s get stuck in!

Airbnb In The Red Corner, Uber In The Black!

Alrighty, so to kick us off, we’re going to compare Airbnb and Uber’s revenues. We’re going to do this by setting up our own 3-round boxing match! And each round will be Airbnb vs Uber in one of the revenue drivers we’ve used to analyse both these companies.

Okay so, for Round 1, let’s compare the number of bookings each app had for 2022. For Airbnb, the number of trips booked. For Uber, the number of rides booked. And as we can see below, it’s not really a contest! Uber’s 4.7 billion rides makes Airbnb’s 96 million trips look tiny!

And this probably isn’t that surprising. Unless your surname is Kardashian, I imagine you get a taxi much more often that you go on holiday! The average Airbnb user probably books an Airbnb trip 1x or 2x a year. Whereas we saw on Wednesday that the average Uber user books ~36x a year! So the first round goes to Uber… 1-0 Uber.

Alrighty, Round 2. And the second driver is the average spend per booking. For Airbnb, the average amount people pay for their trips. For Uber, the average amount people pay for their rides. And as we can see below, again - it’s pretty one-sided! The average ride on Uber costs $11. And the average trip on Airbnb costs $656. Airbnb fights back… 1-1!

And again - this shouldn’t be that surprising! Holidays are going to be more expensive than cab rides! But what’s interesting is the total amount paid on Airbnb and Uber. Airbnb have 96 million trips booked and $656 paid per trip. Which gives a total booking value of $63 billion. Uber have 4.7 billion rides booked and $11 paid per ride. Which gives a total booking value of $52bn.

And I find this amazing because Airbnb and Uber both have pretty similar total booking amounts - $63bn and $52bn. But they get there in two completely different ways. Uber have lots and lots of cheap purchases from their customers. Whilst Airbnb have much fewer purchases, but they’re much higher value.

Now, what we’ve compared so far is the gross booking value for both companies. But what we’re really interested in comparing is how much of this booking value is taken as revenue. And so for Round 3 we’re going to compare take rates. As we can see below, Uber takes the crown… 2-1!

But here’s the real question. Why do Uber take 27% of their booking value when Airbnb only take 13%? Surely Airbnb could charge a higher take rate? Or are Uber charging too much?

Well, one reason Uber are able to charge a higher take rate is because of visibility. Or a lack of it! Remember, on Uber’s app, the driver doesn’t know how much the customer paid for the ride. The driver just knows how much they’re getting paid. And the customer doesn’t know how much the driver’s getting paid for the ride. They just know how much they’ve paid. And so Uber can play with their take rates in stealth mode… kind of without anyone knowing!

However, for Airbnb it’s unfortunately slightly different because everyone knows what’s going on! Hosts know Airbnb charge them ~3%, guests know Airbnb charge them ~14%, and Airbnb’s competitors also know what Airbnb charge! It’s a lot harder for Airbnb to start lifting their fees when it’s so visible for everyone!

Just quickly, the other thing that really helps Uber vs Airbnb in terms of take rate is the average spend on their platforms. Uber as we said has a much smaller average spend of $11 per ride, compared to Airbnb’s average spend of $656 per trip. 27% of $11 is $2.97. And 27% of $656 is $177. Consumers are much happier giving Uber 27% vs giving Airbnb 27%!

Reviews To The Rescue?

Okay, so we’ve just seen Uber (Mobility) take the revenue battle 2-1. But what about margins? Well, the chart below helps us visually compare the cost structure for both Uber and Airbnb. Like we saw on Wednesday, Uber spend 105% of their revenues on their costs - meaning a -5% EBIT margin. Whilst Airbnb spend only 79% of their revenues on costs - giving a 21% EBIT margin.

Now, hopefully you’ll remember that ‘cost of revenues’ is the main differentiator here. The chart below reminds us that a huge 62% of Uber’s revenue goes on this cost line. Versus only 18% for Airbnb. But the deeper question is – why do Uber spend so much more on cost of revenues than Airbnb?

Well, on Wednesday we looked at driver incentives and saw that Uber has to make additional incentive payments to drivers on top of trip fares. But hold on - why don’t Airbnb have to do a similar thing? I mean, it’s not just drivers who have alternative options… hosts have options too! If I’m a host, I can list my property on Airbnb, VRBO, Booking.com, Vacasa + other sites. So why don’t Airbnb pay me incentives to list with them, like Uber has to for their drivers?

Well, if you’re thinking that, it’s a fabulous question. And one probable answer is reviews. Building up a strong track record of reviews is arguably more important for hosts on Airbnb than it is for drivers on Uber. Why? Well, guests on Airbnb are much more likely to book with a host who has 100 reviews, averaging 4.5 stars, versus a host with only one review… even if it’s 5 stars! Whereas on Uber, driver reviews aren’t as important because we don’t even get a choice of picking our drivers! And so, for an Airbnb host, building up a strong review base on ONE vacation platform is super important. And hence maybe that’s why Airbnb doesn’t have to make additional incentive payments to hosts.

The other factor that seems to weigh Uber’s margins down but not Airbnb’s is insurance. Insurance against car accidents and criminal behaviour. But again, don’t Airbnb have to pay for insurance? I mean, hosts can have their possessions stolen, homes trashed, etc. And the answer is yes - Airbnb do have to pay for insurance! The difference with Uber though is that Airbnb’s insurance costs millions a year, rather than billions! For those interested, I don’t want to make the email too long – so you can read more about Airbnb’s insurance payments over here!

Do Regulators Want To Get Rid Of Uber and Airbnb?!

Okay, so to wrap up, we have just one final thing to cover about The Business Of Sharing. And it’s regulation! Now, earlier this week, we saw that Uber had to put in minimum wage laws in the UK. But it’s not just Uber who’ve had run ins with the authorities. Airbnb have plenty of regulatory challenges too! And it’s actually tough to say which company is under more regulatory pressure right now. But first, let’s start with Uber…

… and where do we begin?! Uber’s challenges with how to term their drivers is well-known. The whole ‘are they contractors or employees’ argument. But this isn’t the only issue for the company. In countries like Denmark, Uber completely shut down their operations because the country wanted them to install sensors and fare meters in their cabs. And even in their home country, Uber faces pressure, with Chicago imposing a ridesharing tax & New York wanting flat hourly rates for drivers!

Okay, so what about Airbnb? Well, things don’t look too great right now for Airbnb either. Just last month, New York basically ended short-term rentals in the city, bringing in a law that bans hosts from renting out their homes for less than 30 days. In Melbourne, the city council is also bringing in caps on how many days a year a host can rent out their property on Airbnb. And in Barcelona, rentals under 31 days have been completely banned since 2021!

So, what on Earth is going on? Why are so many big cities clamping down on Airbnb? And in specific, short-term rentals? Well, it’s because of a couple of factors. One, more and more people are using apartments as hotels - buying properties just to rent them out on Airbnb. And this is causing a shortage in the supply of houses - making it more expensive for people to get on the property ladder. And two, Airbnb’s popularity takes demand away from hotels. And hotels have big lobbying groups and pay more taxes to councils than Airbnb…!

So, what do these regulatory pressures really mean for Uber and Airbnb? Well, as always we need to ultimately see if and how these headlines will impact the company’s financials. But as thousands of New York listings are removed from the Airbnb site, it’s reasonable to think that the number of Airbnb bookings in New York will fall. And hence Airbnb revenue will fall. And in Uber’s case, if more cities follow London in making Uber call their drivers employees and demand minimum wage laws. Costs will rise and Uber may continue to struggle on the margin front!

For anyone thinking about investing in these 2 incredible companies - please do check out the regulatory news first!

13th Oct 2023

Nigel Jacob CFA