To explain why I remain a WeWork bear even as the company cleans up its governance act, fires its weird CEO, gets out out of dubious non-core business to focus on trying to make money as a shared-space office middleman, I want to revisit a column I wrote four years ago about another hot startup that once thought about going public: SoulCycle.
Unlike WeWork, which loses a lot of money, SoulCycle was very profitable when it flirted with going public back in 2015, showing a pretax profit margin of 23 percent in its IPO filing. The question I looked at was whether this was sustainable: Were there aspects of SoulCycle’s business that would allow it to remain highly profitable, or could it expect to be undercut by competitors who would copy its business model, steal market share, and drive down profit margins?
The tentative answer I reached at the time was that SoulCycle should be able to sustain its high profits, even as it grew and matured. If you ask the same set of questions about WeWork, you get a different answer: It’s in a commodity business where competitors can copy (and already are copying) its model. That intense competition will make it hard to make high profits and also hard to gain dominant market share, which are perhaps not just reasons that WeWork’s future ambitions should be limited, but an explanation of why it is currently so unprofitable.
For that SoulCycle article, I asked Professor Jan Rivkin of Harvard Business School why some companies are persistently more profitable than others. He told me about three ways a company might sustain a competitive profit advantage. One is by owning or controlling a scarce asset that nobody else can access, like the formula for Coca-Cola. A second is by using an escalating advantage from growth: eBay benefits because both buyers and sellers want to be on the largest auction site; Amazon can pressure suppliers and shippers for the lowest prices because it is so big, and those low prices attract even more customers.
Hot startup companies typically lay claim to the first condition (SoulCycle) or the second (Uber). You can argue about how the numbers pencil and, for example, whether consolidating market share will ever make Uber profitable. But I don’t even know how WeWork would begin to argue that its key advantage comes from unique intellectual property or network effects. Angel investor Jason Calacanis argues WeWork has the best desks, desks so great Steve Jobs would wish he’d designed them, but my sense of the office-furniture market is that advantages in style and design are generally not protectable, so if those desks really are so amazing, there will soon be knockoffs.
WeWork would have to lean on Rivkin’s third route to sustainable competitive advantage: A complex business model that is very difficult for competitors to replicate in full. These are harder cases to spot, but Southwest Airlines (the largest U.S. airline never to have been bankrupt) is commonly cited as a firm that’s gained its advantage this way, through a corporate culture that combines a relentless cost-control focus with a fun attitude, which competitors have tried and failed to replicate.
Does WeWork, like Southwest, have a secret sauce that would stop competitors from copying its success? Is it really, really hard to build a co-working environment so pleasant and so space-efficient as WeWork’s, such that customers will persistently prefer it over other office providers and also pay a premium price?
If WeWork ever had an advantage of this nature, it would seem to me that now-fired visionary founder Adam Neumann must have been central to it. Neumann was fond of bold pronouncements that WeWork (later just We) intended to be not just an office company but a comprehensive blah blah blah in every sphere of its customers’ lives that would “elevate the world’s consciousness.” Wasn’t that supposed to be WeWork/We’s product differentiator that normal landlords couldn’t copy? If WeWork is abandoning the aspirational and the weird, and becoming just another place where we work, what’s going to stop someone from opening a co-working space across the street, buying some slick desks, and charging the minimum rent required to attain an appropriate risk-adjusted return on investment?
Unlike some once-hot startups, the problem with WeWork’s is not that it has a business model that could never work. It isn’t MoviePass. It’s certainly not Theranos. It meets a real consumer need, and its model is based on a real insight (shared offices are more space-efficient than small, separate offices along hallways) that allows it to charge more per square foot than competitors that use a different model.
The threat to WeWork is that competitors can copy its model. In fact, they already have: WeWork has less than half the U.S. market for shared office space, which shows competition is not just a future concern but a present one. WeWork and many other companies can be expected to sell products like WeWork’s for a long time coming. Whether any of them should be worth billions of dollars is a separate question.