This is a rather personal episode. We have no guests this time.

It’s just you and me.

From the outside, it looks like Airbnb is crushing it in Japan. Listings and rentals are both increasing at an unbelievable rate, and Japan is loosening her room-sharing (or minpaku) laws. The future looks bright for Airbnb here, but behind the scenes a resistance is secretly growing.

You see, Airbnb has a real problem in Japan. At first glance many of the issues look familiar. They seem to be the same kinds of challenges Airbnb is facing all over the world, but things are different in Japan, and today we’re going to take a look at how important these differences can be. 

It’s worth noting that so far, Airbnb has not taken steps to address their Japan problem, or even publicly acknowledged that it exists. But it’s a situation they will be forced to deal with over the next 18 months, and it’s something that we can learn a lot from.

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Transcript from Japan

Disrupting Japan Episode 63

Welcome to Disrupting Japan. Straight talk from Japan’s most successful entrepreneurs. I’m Tim Romero and thanks for listening.

Once again, I’ve got a special show for you today. There will be no guests, no beer, no playful banter with someone speaking English as a second language. Today it’s just you and me. For the next 20 minutes I’ll be whispering in your ear about something I consider very important, but that not enough people are talking about.

Airbnb has a serious problem in Japan. They may or may not have recognized it yet, but there has been something massing behind the scenes, getting stronger and stronger. And it’s something that will become very visible over the next 18 months.

Now, to the casual observer, and lets face it, most journalists and bloggers are casual observers. To the causal observer, it seems ridiculous to even claim that Airbnb has a problem in Japan. In fact, if you rely on what’s written in the English-language press, any rational person would conclude that Airbnb is crushing it in Japan.

Let’s look at the facts. Japan is Airbnb’s second largest and their fastest growing market. In fact, listings are up over 500% from last year. Furthermore, Airbnb are way out in front of their local competition. They have far more listings, and using publicly available data, it looks like Airbnb’s Japan site is getting more than 15x more traffic as the most popular local competitor. 

In fact, I’ve had several different investors speculate that the Japanese companies providing cleaning services to Airbnb hosts are probably making more money than the Japanese companies competing with Airbnb.

And yet, Airbnb is dancing through a minefield in Japan. Whether they are doing it blindfolded or with their eyes wide open, well that’s anyone’s guess. But if you read Japanese and you care about such things you can see that there are powerful forces lining up against Airbnb in Japan, and next year we are going to see the start of a real public backlash.

Now, I know what you are saying. This is nothing unique to Japan. Airbnb is fighting this backlash all over the world. I mean New York and Berlin just passed strong anti-Airbnb legislation, and Airbnb’s lawyers are suing and pushing back hard. San Francisco recently added new restrictions to Airbnb rentals and Airbnb is suing the city, of course.

Airbnb is used to handing that kind of backlash and legal challenges. They are good at it. It’s in their DNA. No, what is happening in Japan is different. It’s quieter. More secret, and in some ways far more dangerous than the challenges they’ve faced in other markets.

But i’m getting a bit ahead of my story. We will get to all of that. First let me set the stage and explain what is actually playing out on the ground here in Japan.

So lets walk though what is happening around Airbnb in Japan and the drama that will be unfolding —  whether they want it to or not — over the next 18 months. We’ll talk about what Airbnb has going for them in Japan, then we’ll take a look at the strange coalition of powers that are quietly aligning against them, and then finally, we’ll take a look at what Airbnb can do to counteract it and examine the three most likely ways this story will play out over the next few years.

OK. To be sure, Airbnb actually has a lot of things going right for them here in Japan. 

Most important of all, Japan needs Airbnb — or something very much like them — to handle the inbound tourist traffic that will be coming to Japan over the next few years.

Last year, a record 19.7 million foreign visitors came to Japan. That’s up 47 percent from the previous year, and quite frankly Tokyo’s existing hotel infrastructure simply can’t handle the load. Both occupancy rates and the cost of a stay are both extremely high right now.

But that’s not all, the Japan National Tourism Organization (or JNTO) has announced their goal is to double that number to 40 million by the 2020 Olympics and then to triple that number to 60 million by 2030.

The JNTO even went as far as announcing that revising the minpaku laws, those that regulate renting private accommodations, is a major part of their initiates. Of course the JNTO is not actually in charge of minpaku regulations. That would be the Ministry of Health, Labour, and Welfare, which overseas the whole hospitality sector.

So don’t expect the changes to come quickly or smoothly, but in fact, we have already seen some loosing of the minpaku laws in parts of Tokyo, and  overall, this is a very positive sign for Airbnb and from room-sharing in Japan in general.

Another thing Airbnb has going for it in Japan, and this is possibly even more important in the long run, is that the team in Japan is handling the market here with a much softer touch than they used in other markets or that was used by fellow sharing-economy unicorn Uber, here in Japan. 

If you missed our podcast a few months ago on the Real Reason Uber is Failing in Japan, you’ll want to go back and listen to it. It’s a pretty good one, and it will give you a lot of background info for what we are talking about right now.

So Airbnb has has not filed lawsuits in Japan and they have been saying that they really do want to obey all applicable laws and work with, rather than fight, the Japanese regulators. The Airbnb team in Japan has also reached out and set up projects with local governments. Earlier this year, for example, they ran a joint tourism promotion with the city of Kamaishi in Iwate Prefecture.

Airbnb & seems to be far more aware of the importance of winning the hearts and minds than many foreign companies coming into the market.

Now, that’s all good news for Airbnb in Japan, and much of that information —you can find in the English language press. But now, let’s take a hard look at some of the pressures building up against Airbnb in Japan, and why we are going to start to see a backlash against them in the next 12 months.

Listeners who follow Airbnb closely might recognize some of these as problems Airbnb has faced, and largely beaten, elsewhere in the world, but there is a dangerous undercurrent that is unique to Japan — and we will get to that.

First, estimates are that about 90% of the Airbnb listings in Japan today are illegal. By illegal, I don’t mean in violation of the tenant’s contract not to sublease the apartment. I mean that about 90% of these listing are in violation of Japanese statute. For comparison, New York authorities claim that about 50% of the Airbnb listings there are illegal.

Airbnb’s response to this in Japan, is much the same as it is everywhere else in the world. Airbnb insists that they are  just a technology platform, and that they require all hosts to abide by all local laws. They insist that they are Shocked! Shocked! to find illegal rentals going on in here.  They then vow to do everything that the local law absolutely forces them to in order to help resolve the matter.

Now, it’s obvious that no one believes that. It is defensible in court, and such fictions do well in highly litigious societies like the US, where the question of whether Airbnb is legal is the most important one to answer. In Japan, however, the law is a much fuzzier thing, and intent often counts just as much as the actual actions. and that can be good or bad depending own who you are.

Over the past year in Japan, neighborhood associations and landlords have been increasingly vocal in their opposition to Airbnb.

Well, no kidding, I hear you say. Building managers and neighbors all over the world vocally oppose Airbnb. Local regulators around the globe are passing regulations designed to change Airbnb’s behavior. So what? Airbnb eats these people for lunch. This is nothing for Airbnb to worry about.

That’s absolutely true. And it’s certainly possible that Airbnb will be able to stonewall until Japan comes around to their way of thinking. Possible, but not likely. On the surface, it seems like there is nothing unusual going on in Japan, but digging below reveals three trends that indicate that a large, visible, Airbnb backlash is coming.

First, building management companies are being very aggressive about evicting tenants for being Airbnb hosts. In my apartment building alone I know of five such evictions. These people were all evicted within six weeks of hosting, and lost their security deposits. I’ve heard that other managers have been demanding to see rental contracts and even confiscating keys from from Airbnb renters, telling them they are trespassing, threatening to call the police, and then telling them they need to find somewhere else to stay.

I don’t have any real stats on this. Its all anecdotal evidence. If you are from New York or Paris, you might not even find that behavior particularly surprising. But listeners with some knowledge of Japan know that this level of confrontation and aggression is exceptionally rare here, and it indicates how much anger is building up beneath the surface.

Tenants rights in Japan are ridiculously strong. It can take six months to evict a tenant that refuses to pay rent, and evictions for what could even plausibly be considered a misunderstanding of the rental agreement are … unheard of. 

I have yet to hear of an Airbnb eviction being contested by the tenant, but two different management companies I’ve spoken with said that although they had not yet gone to court to evict an Airbnb host, both were confident the courts would side with them, and order the tenant evicted. They were both confident that the judge would be very troubled and concerned by the of the so-called “danger” the hosts put their neighbors in and also understand the urgency in putting a stop to it immediately.

If any listeners know of an Airbnb eviction case that has been settled in court, please let me know. Id love to have hard data on this.

Of course, the hosts are not really putting the neighbors in any danger.  But this is a very Japanese reaction to this kind of situation.  Many things here that are new and unknown, particularly those that cause meiwaku or .. inconvenience … to others, tend to be described as discussed as “dangerous”.  Even when no one can articulate a specific danger.

Still, the perception that Airbnb is dangerous is very real, and the management companies are not so much perceived as fighting Aribnb as they are protecting the other tenants and neighbors from Airbnb.

Second, Tokyo’s new and very popular governor Yuriko Koike has mentioned the minpaku laws several time and has said she plans on seeing that the laws are enforced. Yes, local politicians the world over are talking tough about Airbnb, but there is something a bit different happening here in Japan.

Governor Koike is bit of a populist. Her campaign and her administration so far has focused on fighting corruption, increasing transparency, and standing up for the little guy. .. and she wants the little guy to know that she will protect them form Airbnb.

Another striking difference in Japan is that around the world, Airbnb has been very good at grass-roots organizing. When legislation is up for a vote or when public hearings are opened, Airbnb makes sure there is a groundswell of support from their hosts. Airbnb hosts show up in mass and pressure lawmakers and regulators to change things in Airbnb’s favor.

In Japan, it’s been crickets. Mosts hosts prefer to remain anonymous, and most articles about Airbnb here include at least one example of an ex-Airbnb host who shut down their rental as soon as the authorities showed up to inform them they were breaking the law.

As the new minpaku laws are clarified, we might see more of this. If the government ever decides to directly crack down on the hosts. Public sentiment will with the government and against the hosts. Airbnb hosts are not seen as just regular folks trying to make a little extra money, but as selfish people who are putting their neighbors in danger.

The third problem Airbnb faces in Japan, and you know, this on it’s own is much more significant than the other two problems, but it also makes them much more severe.

Airbnb’s biggest problem in Japan is that it is not seen as something Japanese people use. It is viewed as something for foreigners. I don’t mean that it’s seen as a foreign company. That’s not a big deal in Japan anymore. Apple, Google, Microsoft, Facebook and many others are seen as foreign brands, but are wildly popular in Japan.

No, Airbnb’s biggest problem in Japan is that it Airbnb not seen as something Japanese people use. Almost every single article and TV story about Airbnb in Japan explains how the renters are unknown foreigners who simply pop up in quiet neighborhoods, don’t know how to behave, and cause all manner of minor annoyance and inconvenience to the Japanese who live there. 

In the long run, this perception is far more dangerous than any actual violations of the law made by their hosts.

You see, Japan has a curious relationship with foreigners. On the one hand, the country is extremely welcoming and accepting of foreign guests. In all major cities signage on roads, public transport, major buildings, arenas, everywhere really is in both Japanese and English, and occasionally Korean as well.

And people are genuinely welcoming and helpful. When I first arrived in Japan and before I spoke the language, I discovered that if I was ever lost or confused at train station, all I had to do was just stare up at the tangle of colored lines that is the Tokyo Metro map   with a confused look on my face.  Within a few minutes some would approach me as ask me in broken English “Are you lost?” Where are you trying to go?”

Japan truly enjoys having foreign visitors, and Japan can make you feel welcome like no where else on the planet.

And yet, Japan has a very strong sense of soto and uchi — of inside and outside. The nuances of what is soto and uchi — what is inside and outside in specific situations is complicated, and something that I still slip up on occasionally even though I’ve lived here for about half my life.

Basically though, visitors should be welcomed, assisted, and treated politely. And those visitors are expected to respect the social boundaries of acceptable behavior. Airbnb’s guests are not Japanese, and it is improper and impolite that they are disrupting neighborhoods and inconveniencing every-day citizens.

Now, some of this anger is directed passive-aggressively towards the foreign visitors themselves. Neighbors quietly grubbing in Japanese that they assume the foreign guests cannot understand. But the focus of the anger really seems to be on the hosts themselves.

The foreigners are annoying, but they don’t know how they are supposed to behave. The hosts however are seen as people acting not only illegally, but selfishly and secretly to endanger their neighborhoods.

Airbnb’s success in the US has largely been built on the foundation of vocal activism by their hosts and a quiet tolerance from their neighbors. In Japan, however, the hosts are silent and their neighbors are demanding that they be identified and stopped.

Once identified, an Airbnb host in Japan has almost no fallback. There is no moral or legal ground for a host to stand on. Over 90% of them will not be able to claim that they are either legal or that they are providing any kind of social good. When the backlash comes, these hosts will abandon the Airbnb platform in droves.

Now before we talk about the possible ways in which this drama will play out over the next few years, I want to give the Airbnb team one piece of unsolicited advice.

You need to crack open that war chest and take on this perception that Airbnb guests are a bunch a foreigners, you need to take on that perception head on. You need to run a series of ads on Japanese TV, and yes it has to be television, YouTube won’t cut it, featuring, say, a famous and wholesome Japanese actress traveling around Japan and then warmly reminiscing about the friends she made and how she never felt alone. If they still have budget after that, run similar ads with an elderly Japanese guest.

Most Japanese citizens don’t know what Airbnb is yet, and their options can still be changed.  Television ads in Japan not only reach the bulk of the Japanese population, but validate an idea or a company. It’s worth noting even Japanese startups, once they raise about $10 million almost all begin television advertising. It’s that important.

As long as Airbnb is viewed as something that is bringing foreigners into quiet neighborhoods in Japan, Airbnb is going to struggle here. If, however, public perception shifts so that Airbnb is seen as something Japanese guests and hosts use to connect with each other, than frankly Airbnb’s other troubles begin to shrink to an almost manageable size. 

Interestingly, Airbnb has recently produced a series of Japanese YouTube videos with exactly the right kind of heartwarming focus. Unfortunately, they seemed to be targeted at recruiting more hosts, and half the videos portray the guests as foreigners.

OK, so how will all this play out?

To keep things simple I am going to assume that the big trends continue pretty much as they are now. That Airbnb does not run a successful charm campaign in Japan, and that they do not suddenly decide to play nice with the Japanese government by opening their books and taking steps to proactively remove illegal listings.

First, Airbnb could be pushed out by local competition. Room-sharing itself is here to stay in Japan. There is no real social acceptance of it yet, but both the prime minister and the Ministry of Health, Labour, and Welfare have accepted the idea in principle. and as we discussed before, Tokyo needs some form of room sharing to hit their inbound tourism targets leading up to and even beyond the 2020 Olympic games.

At the moment, Airbnb is the dominant force in the room-sharing market in Japan. Airbnb’s Japan site seems to have at least 5x the rooms available and public website traffic shows they have more than 15 times the traffic as their home-gown competition.

But this could change. Not by normal market forces, mind you, but my government and social ones. Most of Airbnb’s competition here is following the law and cooperating with the regulators. Ironically, one of the reasons Japanese firms are doing so badly is that they are following the law.

Over the next year the minpaku laws are going to be loosened in some ways, but that also means they are going to be clarified. The social pressure for a crackdown on Airbnb hosts is already building, and if some of the local competition steps up their marketing game overseas or if a deep-pocketed Japanese corporation who understands overseas marketing steps up to the plate. Airbnb hosts would migrate in mass to the new legal and socially acceptable platforms and away from the anti-social, dangerous Airbnb platform.

This could also give the heath agencies the cover they need to go after Airbnb directly, since their actions would be seen as even more egregious when compared to the responsible room-sharing platforms who ensure their hosts obey the laws and share data with the government.

Under this scenario, scenario one, Airbnb would be marginalized and perhaps even driven out of the Japanese market. That said, even in the worst case, Airbnb will likely be able to tap into their war chest and simply acquire whatever company ends up with the lion’s share of the Japanese room sharing market, particularly if the did so after the 2020 Olympics when we will probably see a drop in inbound tourism.

The second, likely scenario is what I call the slow boil. In this case, Airbnb weathers the backlash by opening up just enough to let the immediate pressure off. Giving into occasional government demands for data and setting up programs to better educate their hosts on the law.

This is basically a stalling tactic, since the underlying social and legal problems will not actually be resolved. I think this is the likely result if domestic room-sharing competition can not gain traction, and no national room-sharing association is formed. The reason I think this is unlikely, is that there is too much economic incentive to compete in the room-sharing market, and once the government can make the case that they are protecting both Japanese companies and Japanese citizens from the illegal behavior of a foreign company, they will act quickly, and the public will be behind them.

I want to say again, that as I understand it, Airbnb is not actually breaking any laws in Japan, only the Airbnb hosts are. However, that legal distinction does not matter as much in Japan as it does in most of the world. So scenario two, is not really stable over the long-term.

The third scenario, is the one that Airbnb fears the most, but would actually be the best for them. The government passes laws making companies like Airbnb partially responsible for enforcing relevant regulation law. They could do this by, for example, not letting obviously illegal hosts list on their platform, requiring documentation when hosts register, and requiring enforcement data to be tuned over to the government.

Airbnb most likely views this as a nightmare scenario, and the’ve spent a lot of money lobbying governments around the world to make sure it does not happen. It’s easy to understand why, 90% of the Japan business would disappear overnight.  But the next morning, things would start to look better.

All of their image problems caused by their host’s violations of the minpaku laws would start to evaporate. Their domestic competition is still weak with little overseas reach. And since competition could no longer point to Airbnb as enabling illegal activity, these companies would have to compete fairly in the market, and they would lose. It wouldn’t even be close. Scenario three is Airbnb losing 90% of their business in the short term, and  then making it up over time.

Now astute listens have noticed that in all three scenarios, Airbnb remains in Japan (at least through acquisition. In a sense, all roads lead to the top of the same mountain, but some of those roads are far longer and much more expensive than others.

It going to be very interesting to see which path Airbnb chooses.

If you’ve got a story or an insight about Airbnb in Japan or the so called sharing economy in general, let’s talk about it. Come by and let’s continue the conversation.

And also, I want to let you know that if you have ideas or feedback about our new advertising format or the podcasts subjects or ideas for the show — maybe I should start a listen mail sect5ion — or anything about Disrupting Japan in general. Don’t be shy. I really do want to hear from you. Podcasting is a much more personal and interactive medium than something like radio and I honestly value all suggestions and often make changes based on the suggestions I get. And most of the listener comments I get have been fantastic. Although one listener did email me to tell me quote “You suck and should eat a bag of dicks” even then I was too amused to be offended. I love hearing from you.

Also, be sure to check our Inroads at disruptingJapan.inroads. It’s a subscribetion based detailed case studies on Japan market entry. It’s based on the interviews we do on the show, but it’s so much more than that.

But most of all, thanks for listening, and thank you for letting people interested in Japanese startups know about the show.

I’m Tim Romero and thanks for listing to Disrupting Japan.