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How Airbnb shook up hotels (and why New York is fighting back)

It's the thin red line that protects a free people from state tyranny, thinks Airbnb Inc. The rest of us might think it was just a quick way to make a few hundred bucks. Indeed, that is probably how Eric Schneiderman, New York's attorney general sees it and that's why he wants to know who is hiding under the beds and in the closets, collecting the rents. In the outraged language of Airbnb's blog: "If you're one of the thousands of New Yorkers who has ever rented out your place while you were away for a weekend, the Attorney General still wants to know who you are and where you live."

Airbnb has turned the quaint business of Bed and Breakfast – renting a spare bedroom to a tourist or low-budget commercial traveller – into a multi-national corporation. After the firm's latest financing, it's worth some $10-billion, and it operates in 35,000 cities offering a bed for the night in lodgings that range from four-poster beds in palatial castles to sofas in dingy flats. We have become used to the idea of hotel companies that don't own real estate, but Airbnb doesn't know or even care when the sheets were last changed on the bed. It is a business model that is as far removed from the underlying activity as eBay Inc. is from its millions of vendors. And that is what irks the New York attorney general and the community of New York hoteliers. Airbnb's providers are not regulated – and probably are not paying all the taxes due.

In an effort to jam the wheels of Airbnb's juggernaut, Mr. Schneiderman subpoenaed the company in October to hand over data concerning some 15,000 New Yorkers who have advertised rooms on the website's booking service. The attorney-general isn't, apparently, chasing legitimate householders offering up a spare room, but those who are violating state laws by renting out multiple rooms in the manner of a hotel or even a brothel. In an effort to head off the offensive, AirBnB quickly removed some 2,000 "bad apples" from its listing. It even offered to set up a system to collect NY's hotel tax on behalf of the authorities, but to no avail. The company is locking horns with the attorney-general in a New York state courtroom this week over the data demand.

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Frequent visitors to the city might think the local authorities ought to be pleased that entrepreneurs are finally puttting up real competition to the over-priced and often lousy service offered by New York hoteliers. Visitors to Paris would take the same view of Uber BV, the mobile-app taxi service whose introduction almost shut down Paris when the union representing the city's official licensed taxis launched an ill-tempered strike blocking access to airports and highways.

If the row was just about the collision of vested interests opposed to the arrival of a disruptive technology which creates unwanted competition, the answer would be simple: Ignore the protesters. New York's complex hotel regulation is archaic and needs to be reformed; Paris needs more taxis and every big city needs better, cheaper accomodation. What worries the government is the way in which businesses such as Airbnb and Uber can create vast and profitable business networks which operate out of sight, and tax-free.

A couple of years ago, it was assumed that businesses like Airbnb were creatures of recession, feeding off the crisis by offering middle-class householders a means of paying the mortgage in hard times. So far, recovery does not seem to have dented the enthusiasm of the renters. The underlying story may be that, far from being the by-products of a downturn, small-scale entrepreneurs are leading the economic recovery, using digital intermediaries to sell their services at low cost and under the radar – taxi drivers, landlords and dealers in all sorts of goods.

It is a huge challenge to governments – clamp down on the unregulated, untaxed digital businesses and you kill off the recovery. Ignore them and you give tacit approval to a burgeoning underground economy that digs a large hole in the state's tax base. This may be the birth of a political conflict of global dimension, and New York's attack on part-time hoteliers is just the first shot over the bows.

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More

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