The blogosphere has been abuzz with the news that an individual renting her apartment through AirBnB was the victim of a heinous property crime.

The strong reaction to the incident isn’t just a result of the nature of the damage that was done to someone’s apartment, it was a result of the fact that AirBnB is one of the hottest internet startups at the moment. In fact, it’s so popular that some startups have opted to describe themselves as “the AirBnB of x.

The timing couldn’t have been worse for the fast-rising company, which
recently raised a whopping $112m in funding at a billion-dollar valuation. The company is aggressively expanding, and although it is already very popular, it could be on the brink of going ‘mainstream.

Not surprisingly, AirBnB rushed to respond to the incident, noting that a suspect is in custody thanks to its help, and promising additional safeguards. Its response was issued via one of Silicon Valley’s most popular tech blogs, TechCrunch, and apparently AirBnB has offered to compensate the member who lost so much.

According to Brian Chesky, AirBnB’s CEO, “With a single booking, one person’s malicious actions victimized our host and undermined what had been – for 2 million nights – a case study demonstrating that people are fundamentally good.

But is this really a PR crisis caused by a one-off event that the company can move beyond, or is it something bigger?

It just might be the latter. While AirBnB says that it’s going to be making “improvements“, the reality is that renting out to strangers is simply risky business.

AirBnB’s proposition to wannabe landlords — “your apartment will pay for itself!” — is just as compelling as it is flawed. The amount of money one can earn renting out his or home looks good on paper, but it can never come close to compensating for the risk. Note that renting out your home to strangers is not just an individual property risk; there is arguably huge potential liability beyond property.

For instance, if you rent out your home in an access-controlled building and the renter then commits a violent act against another resident of the building, you would likely be sued, and the theoretical damages could be life-altering.

Perhaps more importantly, in some instances, AirBnB is encouraging and facilitating illegal behavior. In San Francisco, where the ugly incident took place, it’s apparently against the law to rent out a home for short periods (under 30 days).

In many cases, AirBnB members are renters themselves who may be violating the terms of their leases by subletting their apartments. Insurance is the obvious protection AirBnB could offer members, and it says it may do just that, but insurance companies won’t insure activity where it is illegal.

All of this notwithstanding, even if 99.9% of the time, members can get away with what they’re doing, AirBnB faces an ironic evolutionary path:

  • As the service gets more popular, it will catch the eye of criminals. 

    Right now, AirBnB is popular, but it isn’t quite mainstream. The possibility of having complete access to a person’s home is so enticing that once criminals become familiar with AirBnB, the incentives to abuse it will exceed any challenges posed by the security measures AirBnB can realistically add. In other words, AirBnB will find itself in an arm’s race it can’t win.

  • The risks will drive regular folks away.

    For many prospective renters, AirBnB’s greatest appeal is that you can find sweet digs in great locations at a fraction of the cost of a hotel. And because you’re renting a real home, it’s more personable than staying in a hotel.

    But as the risks (and the laws) become more well known, AirBnB will likely see the percentage of regular folks renting out their homes decrease, and the percentage of professionals renting out rental properties will increase.

    The net-net: AirBnB will become a property listing service more than a peer-to-peer marketplace for those looking to rent out their homes, and that may not be compatible with the brand it is trying to build currently.

In light of the above, I think the logical conclusion is that AirBnB’s problem isn’t PR, but rather its business model. Its fairly modest response to the recent incident, which includes “creating a Host Education Center where hosts can find safety tips” and “facilitating richer communication between guests and hosts before booking, including experimentation with VOIP and video chat” are good fodder for PR, but won’t solve the company’s fundamental problems.

Which highlights a simple fact: at some point, many businesses discover flaws in their business models. This doesn’t always occur as a result of a PR crisis, but when it does, the key to overcoming the challenge is recognizing that dealing with PR fallout is only the first step; rethinking and reworking the business model is also necessary.

We’ll see if AirBnB does that.