> This is of course Amazon’s model, which underpriced competitors in retail and eventually came to control the whole market.
This is wrong, wrong, wrong. The difference is Amazon saw what the marginal costs could be, and had a specific roadmap to drive investment into bringing them down. WeWork fundamentally has no way to drive down the margin on real estate in any meaningful way. Especially as a lessee.
> The goal of Son, and increasingly most large financiers in private equity and venture capital, is to find big markets and then dump capital into one player in such a market who can underprice until he becomes the dominant remaining actor. In this manner, financiers can help kill all competition, with the idea of profiting later on via the surviving monopoly.
A bold assumption with no citations. There are just as many counterfactuals to this strategy as there are examples. The scooter market is an especially bad - there is so much capital from so many companies - if you were trying to establish monopolies that would be a bad bet.
> Endless money-losing is a variant of counterfeiting, and counterfeiting has dangerous economic consequences. The subprime fiasco was one example.
The subprime crisis is completely unrelated! And if anything it was proof that money-making assets should be scrutinized more.
WeWork is a garbage, charlatan company. But don't misunderstand what is happening here.
That's what the article says:
>At first, with companies like Walmart and Amazon, predatory pricing can seem smart. The entire retail sector might be decimated and communities across America might be harmed, but two day shipping is convenient and Walmart and Amazon do have positive cash flow. But increasingly with cheap capital and a narrow slice of financiers who want to copy the winners, there is a second or third generation of companies asking Wall Street to just ‘trust me.’
It's not that WeWork is the same as Amazon, it's that WeWork is symptomatic of a bubble caused by investors looking to copy Amazon's success without understanding why it succeeded.
Amazon was also able to make money selling products at little or no markup by taking advantage of the float. They'd collect money from the purchaser immediately, and would pay the vendor after 90 days. Then, Amazon would make interest on that money for the 90 days.
I do the same thing on a (very) small scale. I buy with a credit card, and don't have to cough up the money until the credit card bill is due. That gives me free use of the money for 30 days.
Pretty much all businesses do this, it's just that Amazon did it on a massive scale.
Amazon has succeeded at beating bookstores in none of these categories - but it has succeeded in greatly lowering the difficulty and impediments in case that a customer wants a specific book, the unfortunate thing for bookstores is that that user flow is extremely common and winning on that flow pretty much got them the market.
W.r.t. the other flows... Amazon is still terrible, did you enjoy The Colour of Magic? Why don't you try Magic Eraser - guaranteed to get stains out of any fabric! Curious if this book is good? Why not try reading one of the hundred shill comments talking about how this book changed their life!
I think the key here is to focus on winning a specific market segment (a significant one) and winning it hard if you can do that you too can be the next amazon.
1. I can get pretty much any book ever printed, not just newly printed books.
2. Prices are usually better.
3. The friction to buying them is very low.
If I want to buy books by the lot, such as every book in a series, I usually go to ebay.
2. Ditto. Pricing algos and greed can do insane things to prices. When I needed one out-of-print academic title recently the copies on Amazon were going for four figures. Luckily the author had uploaded a PDF to his web site.
For other books I've looked at, three figures aren't rare. Communicating with sellers directly has sometimes brought the price down to something more reasonable - a sale now being worth more than a listing that may take years to pay off.
3. This part is true - pay, wait, receive. Although it's not infallible, because some of the bigger sellers play an arbitrage game where an algo checks possible sources for tens of thousands of titles and then if found, adds a percentage to create an auto-listing. I've had orders cancelled when this process has failed, for whatever reason.
Sure. But you wouldn't find those at B&N either. Amazon isn't in danger of putting university bookstores out of business.
The key part is “decent”. Outside of the “walk out” part, none of these advantages apply if you don’t have a bookstore that matches what you’re interested in, which can be pretty difficult outside of mainstream subjects and the latest-Summer-novel-everybody-buys. There’s no discovery system that I know of that would allow you to find a bookstore near you based on what you like or want to read.
This is why I use Amazon so much: I have a half-dozen wishlists and bought my books here for years, so its suggestions are often relevant. I like to be able to compare prices between new and second-hand books from third-party sellers. Reviews may not always be great, but that’s still better that what you’d get in a bookstore: one single review from the owner, if they did read the book.
Note: I live in France, where the law requires that books are sold the same price in bookstores and on Amazon (you’re allowed to do go down max -5% on the public price). You can also ask any bookstore to get any book for you, most often free of charge. However, this means they get very little profit from it since they have to pay the shipping cost themselves.
As for books in particular - Kindle wins hands-down on convenience and portability for me, over bookstores (the 'walk-out' part is definitely covered). In my particular case, as I'm vision-impaired, Kindle ALSO wins hands-down on usability, because I can make the text any size I want. That's important enough for me that it can mean the difference between actually being able to read a book and not being able to read it.
I think I have 451 Kindle books. I can carry all of those in my pocket on my phone or in my backpack on my tablet, if I want. That's another huge advantage.
I should probably mention that given all that, I _still_ like physical books! I remember walking the aisles of Borders, but that was because they were huge and they had books in the niche I was looking for. I fondly remember a small bookstore that used to specialise in software development and IT books and they had a great selection of game development books. I used to love that place! For me though, that was all before I got a taste of the convenience of Kindle. Getting the book is worth more to me than stopping and having a nice coffee at the bookstore.
Maybe post-Amazon retro bookstores provide this, but prior to Amazon bookstores were mostly garbage. You could only browse what they had, which was far from everything. Prices were also very high. I remember as a kid bringing in pencil and paper to copy down algorithms from books that were simply too expensive to purchase. There were also few if any 'experts' at the book store.
For me, the internet + Amazon (and now 1/same day delivery) is better than a book store in every way.
The only place that I know of now that provides something close to what your are romanticizing about is libraries. People who work there for the most part still care about books and understand their catalog. But, anything even remotely popular will likely be checked out which means I'll end up back at Amazon.
However, the Barns and Nobles and Chapters found out that if you knew what you wanted, and gambled on going to a small generic or even niche bookstore, you often had to put the book on order or get something you didn't want. They capitalized on this by stocking much more books than a smaller place could hope to hold. They still could on the surface handle the browsing public, so they quickly put the smaller generic stores out of business, and forced many niche stores out too.
They still have the issue though, that while a small generic may be able to stock the selection for around 80% of requests, and the larger stores 95%, Amazon immediately would sell you the book, either sending it out to you quickly or seemlessly putting them on back order. Also, in the early days, the unfiltered reviews and recommendations based on the other buyers of the books were great in identifying if you really wanted to buy the book anyways.
While Amazon now is facing issues with recommendations, 10-15 years ago it was hugely different, and provided a seriously better customer experience. What I've actually noticed, is that if any small niche bookstore has survived until now, they actually are starting to provide a real differentiated experience. A small, curated selection of books, that I feel easy to browse and I feel they've been filtered already. I also don't know off hand without leaving this and searching, wether barns and noble is still in business.
It's not a flashy service by all means and has definitely been neglected by Amazon since the acquisition; the community makes it what it is, and it is a very high quality community!
The more human interaction I can avoid, the better, so I'm recharged when I have to interact with people.
Honestly, his books are just amazing though, quite worth a read.... possibly skipping to start at Equal Rites since The Colour of Magic and The Light Fantastic were less polished than his later works - but do check out the Tim Curry having movie covering those first two books... maybe bring a power point presentation or two along to appease any power hungry wizards though.
I think it's also possible that at least part of Amazon's success was due to creating/increasing price sensitivity in an era where wage stagnation has become more and more apparent. That is, they are also the Dollar Saver & K-Mart of the Internet.
The segments that Amazon has conquered may be more abstract than those they're usually given credit for. Segments like "poor people."
Surely that's only true for a vanishingly small subset of fields of interest?
e.g. I want to read books on construction site drainage. Is the dude in Borders going to have any tiny clue about that?
I mean come on, Amazon didn't invent obscure topics. Bookstore people would know more specialized stores, though this was naturally less true at chain stores. This was at least as effective as Amazon giving you a list of other books bought by people who bought the one you're looking at.
Amazon's margin for a long time was rorting the tax system, something they enjoyed via federal regulatory capture. Their competitors were paying state and local taxes. They weren't.
One can legitimately argue that the system sucked or could have been done better but it is not exploitation in the sense of a glitch any more than handling moving by selling your furniture, mailing your small items, and then buying new stuff insread of renting a van since depreciation losses would be less than moving expenses.
Catalog precedent was what they used for taxes and even a large company using it to sell everything enmasse wasn't new either - Sears Catalog.
rort - verb - AUSTRALIAN/NZ
gerund or present participle: rorting
engage in sharp practice.
- work (a system) to obtain the greatest benefit while remaining within the letter of the law.
At the time Amazon relied on huge 'subsidies' from the book publishers, they had huge trade debts, but the publishers couldn't afford to pull the plug as they'd loose that revenue
Now that they are on an equal footing and have to collect tax, Amazon's retailing isn't doing as good.
And were particularly bad at it for a long time. Selling books was the only thing keeping the company afloat during that span.
> They never have had a monopoly on websites that sell stuff to be delivered by mail, either.
Actually, they did on books. You seem like you may be young. In 1994-1996, credit cards were nowhere near as ubiquitous and certainly the online use of them was even less so. Online gift companies were still a big thing and not simply a given even into 1999-2000.
The big bookstores at the time all had physical presence. If they attempted to ship you book and not charge tax, some taxman was going to show up at their door. This stifled the development of the online websites for those companies.
Amazon had no presence that people could go after, so could skirt tax laws with far less danger. That gave them an in-built 5% advantage over everyone. And the small bookstores took it in the chin particularly hard.
The success of people like Bezos becoming huge by skirting the law is why we have people like Kalanick who thought they can become huge by skirting the law.
It wasn't at all obvious that Amazon would take over the world well into the 2000s. They looked like every other dotcom, particularly because they didn't consistently make GAAP profits and so people were just waiting for them to die. AWS, Kindle, Prime, Fresh, lots of stuff are recent developments.
Absolutely nothing about the original concept could have told you what it would become or was in any way exclusive.
You're forgetting that mail order wasn't the norm--even if you ordered from a catalog you picked it up in person at the store. So, not collecting tax on mail order wasn't a big deal until Amazon flattened bookstores with it.
Per FRED, monthly mail order sales doubled from 1992 to the end of 96.
Obviously it was nothing like today, but mail order was, like, a thing.
*Also, I learned in my google rabbit hole about this that it’s a 1992 Supreme Court decision that confirmed that mail order retailers didn’t have to collect state tax unless they had a physical presence in the state.
Note that we are talking about small rural towns in the middle of nowhere. When sears started most of the population was either a farmer, or lived in a small town in farm country. If you lived in a large city you could go to a department store downtown and it would have everything. If you lived in a small town the department store had only the very popular items and you were expected to order from them.
By the 1980s the population had shifted to bigger cities, and UPS offered affordable shipping to your door, so those small town stores had little reason to exist and started closing.
I get that it feels neat and tidy to say that Amazon and Uber had the same growth model of skirting regulations, but the facts don't match that.
This doesn't mean that Amazon is good--I think that what the effect of what they've done to retail is awful. But using Uber as the key piece of a kind of Godwin's Law doesn't really help matters.
Wework does that via the private market, hence the game is up when it needs access to the public markets.
Amazon does that via AWS. AWS is the money that fuels the eCommerce side. The game will be up when:
1) Kubernetes will move AWS customers back to on-prem, or at least turn clouds into a commodity. Amazon knows that and this is the reason for the push toward lockin (aka lambda / serverless).
2) Amazon will be divided into two companies.
For almost all startups their app would run comfortably on a single dedicated server. This has been true for many, many years but only the YAGNI greybeards would go with it. Maybe two HA but even HA is overhyped, it's cheaper to be down. Down is part of this industry, you will be down in many circumstances anyways so perhaps don't chase a unicorn? Of course, above a certain size, two servers make sense but ... don't overdo it even then. You don't need microservices, you don't need containers. All of this is unnecessary hype. (And yes, both of you who works at a large enough company where being down is enough of a problem that it worths engineering about: good for you. I have architected a Top 100 website myself and we still didn't use more than a dozen servers and that included the staging infra.)
Gary Bernhardt of WAT fame from 2015 https://twitter.com/garybernhardt/status/600783770925420546?...
> Consulting service: you bring your big data problems to me, I say "your data set fits in RAM", you pay me $10,000 for saving you $500,000.
Very strongly related: a terabyte of RAM in just 16 modules so it fits most server boards is now under $5000 https://memory.net/product/p00926-b21-hp-1x-64gb-ddr4-2933-l...
Final shot, codinghorror of StackOverflow fame: https://twitter.com/codinghorror/status/347070841059692545
Overdoing the infra-HA-magic is bad, of course. But if you use containers, you can spin up dev envs faster, devs can just docker-compose (I still recommend Vagrant + docker, so devs can use whatever OS they like), and it helps with config management a bit too. (Much easier testing, deployment and upgrades.)
That said paying for AWS is the worst idea ever, it's so overpriced and the most used servie is EC2, which people could get anywhere else. (Sure, there are probably nice tricks that this pony can do, but there's probably a whole cottage industry trying to copy their niche offerings.)
I remember working for a company about a decade ago where we spent so much time engineering duplicate everything hardware or hot spares everywhere.
Guess what, when switch failed it didn't properly failed over. When router it started sending spurious packets everywhere and had to be taken down manually.
All the effort that went into duplicating hardware and making hot spares could have been save by just... having cold spares, and in the end the amount of downtime would have been the same, or less -- because when one thing fails it's really easy obvious where things stopped working.
In other words, like Yahoo getting a lot of their late-90's advertising from dot-com bubble companies that evaporated in 2001, AWS is massively exposed to the current bubble in "we have so much VC cash we don't know what to do with it" companies. When that goes away (i.e. the next downturn), AWS will lose a huge chunk of their business all at once. It will be interesting to see what Amazon's bottom line looks like at that point.
I also think that AWS did an excellent job locking its customers, so they cannot just "leave".
The real treat here is kubernetes. If I program to kubernetes , I can, in theory, move the workload from cloud to cloud, or move the workload from on prem to cloud.
This brings actual competition to the cloud space.
The problem is how to provide all the high-level services that AWS provide, and this will have to be taken by future startups which would extend kubernetes.
yahoo was at risk because the BULK of their ad business was ads for a budding industry that was hit hard. Normal boring enterprise was still selling buying ads elsewhere.
The subprime mortgage crisis is basically godwin's law for finance. Want to make something look awful? Compare it to CDOs or mortgage-backed securities.
During the GFC, toxic mortgages were bundled in with mortgages with a high probability of repayment. Since the debt rating agencies gave those mortgage backed securities a AAA rating without doing quality assurance, they entered the market on the same footing as legitimate AAA-rated debt.
The AAA’s wouldn’t have failed if it weren’t for the cascading effect of ARMs blowing out shit mortgages causing the financial system to get caught with its pants down.
In other words, the AAA criterion based on historical data would have been applied to the vast majority of each of the individual mortgages as well because they wouldn’t have been problematic assuming housing prices didn’t contract more than they ever had.
There’s a reason it’s called the subprime crisis.
This is so spot on - I'm 100% going to steal this.
No other industry has gotten that kind of bailout that far into supposed maturity.
What I had in mind is that once you take several rounds of investments (especially from private individuals) and are not profitable, bad faith critics may try to picture you as some kind of Ponzi scheme (trying to repay early investors with late ones, etc.)
I don't understand...if you undercut your competitors so you're the sole survivor, I don't see how profiting is a obvious end result.
When you return prices to market value wouldn't competitors just appear again. Is predatory pricing really such a bad thing, I'd assume the market would just corrects itself later?
Although things like Uber may be a different beast. They basically got big enough that cities were willing to push aside all of these special interest rules that kept the taxi industry crappy. So by dumping their product and acquiring customers, they were able to change the legal environment and infrastructure around them.
But they are also at a huge disadvantage because they changed it for everyone behind them as well. Lyft doesn't have to burn money as fast and gets all the same benefits for scale. Under their current market position, the minute Uber starts raising prices, they die.
no. business school teaches you that you can compete on price (cost strategy), or on value (differentiation strategy).
if you compete on price, you’re betting that you are, or will be, the most efficient provider in the market (e.g., walmart and its supply chain dominance). it’s completely viable/acceptable to compete on price. what you don’t ever want to do is price on cost, rather than on value provided.
you can also compete on being better in many other dimensions, which is lumped into the broad differentiation strategy category. you are then betting that you are better on your dimension and that customers really value that dimension (more than price).
A classic example (presented to my MBA class) was the two adjacent pizza parlors in NYC competing on price and driving the selling price of a pizza down to less than a dollar, whilst a shop a block away and around a corner was able to keep normal pricing.
but you also compete on price in the marketplace--not so much as to ignore your costs, as you note, since negative margins generally don't lead to viable businesses, but price competition nonetheless.
your example is the simplest game-theoretic version of price competition, which is more of a teaching model than a practical application.
(dynamic) price discrimination and other marketing tactics are typically employed to ensure positive margins even as you compete on price in the marketplace (e.g., airline seats).
no, you should compete on price if you are the low cost producer, as my neighbor comment notes. monopolists frequently are the low cost producer because of economies of scale, scope, etc.
another "compete on price" strategy is if you are the disruptive upstart: you have small market share, so your losses (tangible and intangible) will be lower compared the losses suffered by the fat lazy high-multiples incumbent who must satisfy angry shareholders when they see profit eroding.
I could be wrong, but "network effects" is a recent phenomenon and business schools haven't really taught students about it much. Either way, we have very little history for assets that appreciate in value the more they are used. Traditionally it's been the exact opposite. In fact, this concept basically doesn't exist in finance other than translations into FCF...but depreciation does.
In the case of retail office space, it would depend on how much of the available office space you had locked up in long-term leases. If you have locked in most of the office space in long-term leases, but you are renting short-term, you can crank up your rates and in order to compete your would-be competitors would have to build an office builing, which is not impossible but is not quickly or easily done.
Not saying this was likely to work for We, just saying that's the theory.
WeWork is basically a hybrid bank/retailer. They take big, complex, slow-moving long-term commitments, just like a car rental company or a bank, and repackage them into shorter-term, small commitments, while managing risk and adding a bunch of value-added services.
I don't know about all this governance stuff or their growth rates, but on its face, that activity clearly DOES add economic value, and might be a viable business if executed well.
A REIT owns real estate assets.
WeWork doesn't need to own assets, they're an intermediary that does something economically useful.
The only company that can compete with the cable company at scale is usually the local phone company.
And yes, of course the strategy might work if there is a substantial network effect. But if there isn't, such as in the case of Uber, or WeWork, or even maybe Netflix, then the whole operation can only end in losses.
When you're the sole survivor, you have a lot of options. In Amazon's case, what they have is immense leverage over the whole supply chain. Amazon extracts higher margins from manufacturers, shipping, etc, etc. And they have enough influence that people pay them $80/year for the privilege of being a customer.
At this point, Amazon is riding on the momentum created from their previous habituation. They built up a (true) reputation for being incredibly cost competitive for the products they carried, and enabled minimally delayed gratification in the form of 2, 1, and same day shipping. Because of this, they became the retailer of first choice and people only went elsewhere if Amazon didn't have the product they wanted.
Then they widened their inventory to items that weren't as capable of being efficiently shipped in individual units with last mile residential delivery. They also shifted more and more to holding less inventory on their own books and having third party sellers fill that void. And then had to start collecting taxes nationwide so they could more easily build out their distribution network without tax-related geographic constraints. All of which led to more and more price inflation.
But Wikipedia says it best:
"New behaviours can become automatic through the process of habit formation. Old habits are hard to break and new habits are hard to form because the behavioural patterns which humans repeat become imprinted in neural pathways, but it is possible to form new habits through repetition."
As long as consumers default to Amazon, they'll never notice how uncompetitive some of their product pricing has become. And as long as Amazon's inventory keeps expanding and they get closer and closer to instant gratification from compressed delivery timelines, consumers will have little reason to look beyond Amazon and change their habits.
No, because at this point the barrier to entry is substantial. And, if a competitor does come in, the incumbent with a huge warchest can just drop the price again temporarily to drive them out.
Not really. Unless the product has a powerful network effect, people can easily enter. If that weren't the case, starbucks would have run every coffee shop out of business by now.
There's no money in it, because Amazon has such as HUGE advantage in mindshare, pricing and delivery that you can't compete.
Does a book store have a network effect? No. But it's hard to sell something for more than the dominant competitor without a compelling reason.
Somehow, she still finds a way to sell books and make some money, as well as highlight local authors and sell trail guides. The Barnes & Noble down the road, to be frank, seems to be her bigger headache.
Sure, but normal legitimate competition causes worse-performing competitors to close, so some distinction should be made between this supposed "predatory pricing until competitors shut down" strategy and the normal "cause competitors to shut down by simply being better than them" strategy.
If the question is, given a willingness to blatantly violate anti-trust law, and lose immense amounts of short-term for long-term gains, could Starbucks drive out all competition? And... I actually don't think they could, because (A) coffee shop patrons like variety and (B) I'm not clear that Starbucks could necessarily outlast e.g. Dunkin' Donuts.
Starbucks is just a poor example. Walmart would be a much better example.
There's a reason that we had to deal with monopolies largely through regulatory means, and it's not because we were afraid of letting the market correct itself, it's because, by and large, the market does not correct itself once a stable monopoly has been erected.
Once big (and profitable) enough, you can also just buy out any threatening competitor.
Lose on every sale but make up for it with volume.
No, because they won't be able to raise enough capital to cover startup costs when investors know that the dominant player can just price dump long enough to starve any new company out.
Relatively unregulated capitalism works OK when the product area naturally approaches a perfect market:
- Simple easily compared products
- Consumers have easy access to accurate product information
- Low startup cost for producers to enter the market
- No costs for consumers to switch to a different producer
Very few markets actually resemble that. In order to keep non-perfect markets functioning efficiently, it takes a lot of strong, enforced regulation.
This is increasingly true as we transition to the Information Age where products are increasingly data and services. For those, network effects are powerful, which further entrench the dominant player.
> I'd assume the market would just corrects itself later?
How? "Market" isn't magic fairy dust that spontaneously causes efficiency to appear from nowhere.
For the larger company to do that, their losses would be correspondingly larger. This is why it's pretty hard to find a case history of this strategy being successful.
Neither is regulation. While it is true that "market failures" (imperfect markets) are common, it does not follow that regulation will improve them. In fact regulation usually makes things worse due to a combination of imperfect information (the regulators can't find out what they need to know to regulate efficiently) and regulatory capture (the regulators end up acting in the interests of the regulated industry instead of the consumers).
> This is wrong, wrong, wrong.
I agree with your analysis, that Stoller is wrong in this case (and I say this as a non-fan of Amazon)
> > Endless money-losing is a variant of counterfeiting, and counterfeiting has dangerous economic consequences. The subprime fiasco was one example.
> The subprime crisis is completely unrelated!
Here I don't really agree with you. That whole subprime market collapse was not due to monopoly (the ostensible focus of Stoller's blog) but it was an excellent example of the phenomenon he was talking about:
1 - some people saw opportunity in subprime.
2 - they made very good returns on their relatively small and carefully chosen working set
3 - they therefore got gobs of cash to try to duplicate those returns.
4 - the gobs of cash and the early outsize returns caused many others to rush in as well, not just the many charlatans but also honest fools.
5 - All that money turned into a smoking hole in the ground that swallowed up people who had nothing to do with it.
While the example is interesting, it is indeed irrelevant to the thrust of the article, serving more for the author to show off his cleverness.
I look forward to his book but I hope his editor is able to apply some focus.
The big question is how much lock-in they can achieve. The lock-in is largely caused by employee loyalty. Employees who like beer and camaraderie in the evenings may be hard to persuade to move to a soulless office park.
It's a micro version of the way a city gets lock-in. San Francisco office space costs 2-5x more than Sunnyvale, because employees will quit if you move your office from one to the other.
But for many companies, even 10% of employees quitting is enough reason to stick with the expensive office space.
It absolutely has a way; hold landlords hostage. They've got another WeWork 4 blocks away. WeWork can walk, and leave landlords with a lot of space to lease and an expensive buildout to demo. It's quite likely that WeWork will use that as leverage to put pressure on landlords to negate rent bumps, add in a new concession, or just decrease their rent. Landlords will be in a tough spot because the option is to let the space go dark and collect nothing, or take a bit on the chin to have WeWork keep the lights on.
WeWork has a lot of long term leases, so it doesn't take many concessions for them to get their rent far below market in the years at the end of their lease. WeWork is playing a game of arbitrage on two sides; it's about risk with the landlords and about time with the rest of the market. That's how they hope to money.
The issue is not that landlords can't relet the space, but in the additional cost and the lost revenue of doing so. WeWork has large blocks of space, and in many cities, multiple locations within a single submarket or adjacent ones. If WeWork decides to go dark, that's a significant block of space coming to market, which will drive down market rates. Landlords know this.
The other challenge is that there may not be a prospective tenant willing to take the amount of space that WeWork has, meaning a lot of CapEx to split up the space just to make it marketable. WeWork's buildouts are expensive, and they likely will not work for many tenants, so there will likely be significant costs to the landlord to get new tenants into the space.
There's also a good chance that the spaces WeWork leases may have been hard to lease in the first place. There are reasons why you'd want to take another tenant as opposed to WeWork if you're going to be getting the same facerate for the space.
>There is nothing WeWork is doing that a small Landlord cannot
Yes and No. For an individual WeWork location, your correct. At that level, it's more of an operational concern which the landlord could potentially take over. However, you need tenants and those tenants are attracted to WeWork, not the landlord itself. WeWork has the brand that brings in the leases, not the landlord. We've yet to see what happens when a WeWork location goes dark. Yes, the landlord could just take over the day to day and cut out the middle man. But it's not clear how the tenants themselves would respond to that.
The other side is that landlords don't want to operate and manage these short term leases. It's the reason why there was Regus before and why WeWork took off. The thing is that Regus wasn't really a desired tenant. WeWork has been a darling, but the tides could change quickly.
For WeWork to leave a lot of space behind that means they are taking a lot of space elsewhere (or going out of business) Of course they can leave one space behind no problem, but that happens all the time. (though less valuable places may run into problems it was the same problem they had before). Large tenants leave all the time, it is a cost of business: you factor that into the lease terms.
If WeWork goes out of buisness that changes things, but those renting from WeWork need to do something, some will talk to the building owner about getting a lease on their current space, so it won't be as bad as you state (it won't be good either). This same can happen if WeWork decides to move: those who are using WeWork space may decide that the location is important and see about remaining in "their" space.
It will be interesting to see what happens.
>Large tenants leave all the time, it is a cost of business: you factor that into the lease terms.
Big tenants leaving is something that takes a lot of effort to manage. If a tenant is potentially giving back 100k sqft at the end of the lease a landlord is going to be getting in front of that years in advance by determining renewal probability, engaging with brokers to find tenants that might be in the market, and possibly actively marketing the space even while the tenant is still occupying the space. Even with that lead time, that space still might be vacant for 6 months to a year, and that's in decent market. This is all because larger tenants don't move at the same pace medium or smaller tenants do.
As far as being factored into the leases, the way WeWork structures their leases is such that the break even point for a the landlord is farther into the future that most of their typical leases. This is mostly due to the significant build out work that WeWork does their best to get the landlords to subsidize, and the amount of free rent they ask for on the front end. Therefore, if WeWork goes dark before year 5 of their lease, then the landlord has likely lost money on that lease.
When it comes to the landlord taking over the short term rentals, some probably will, some maybe won't. Who knows if the tenants will be interested in that or whether the landlords will make enough money for it to be worth their while, but these kinds of short term rentals are not the kind of business landlords want to be in.
Ostensibly both Uber and Lyft are doing the same thing, but with the item that will bring the marginal cost down being self-driving cars. They've both bet big in order to capture the market, because it's likely that whoever owns the market before that transition will own it afterwards as well.
It does seem like there was probably more optimism that the technology would materialize sooner than it really has, but assuming it materializes some time in the near future it's likely that whatever company manages to hold onto the market until then will reap massive rewards.
It's clearly a risky bet, but at least from my view doesn't seem like a pump and dump type of scheme.
The key factor in the Uber/Lyft business model is not so much anticipating self-driving cars, as offloading the overhead costs of inventory (who owns and maintains the cars) onto someone else, so they can focus on just being a service broker and not have to get into all the messy details of large, expensive physical objects. From that viewpoint, self-driving cars really improve things more for the car owners, by decoupling having the car provide a service from having to drive the car yourself, thus reducing the overhead to the car owner.
It's certainly interesting. But I am doubtful about the self-driving cars being a factor. There are at least 4 companies developing the technology and there is really no indication that it will prove a barrier to entry at this point.
Really excellent post by OP - thank you.
That's not a counterfactual. The fact that the strategy wasn't executed in this market, or was poorly executed, or was executed by too many people, doesn't mean it's not a strategy. It's just a strategy that is imperfect.
BUT.. you haven't actually proven that it's viable business market.
I think the connection here is that the assets themselves were money losing but they passed them off as safe assets despite knowing they weren't safe. If I make money by producing counterfeit bills and circulating them then it makes money. It's still counterfeiting. The underlying assumption that makes capitalism desirable is that you are (supposed to be) rewarded based on the value you put into the system. If there are ways to reliably create and dump value inflated assets and those ways are easier than actually producing value, then we shouldn't be surprised when that becomes a competitive business.
Arguably this is what WeWork was trying to do by going public. I don't think anyone here who has followed WeWork over the past few years was itching to jump into day-1 buying even before the current iteration of the Neumann freak show began. Would any engineer here really have taken a stock heavy WeWork comp package in the past two years? On the other hand if you're a rando investor who just sees "oh Uber for office space!" you might line up to get fleeced.
They acted like a bet where you make a dollar if you roll 1-19 on a d20, but lose $50 if you roll a 20. And because they had higher-than-sp500 returns, short sighted investors flocked to them.
The one point where WeWork is similar to those CDOs is the stack of complexity used to obfuscate the fairly simple business financials
In this respect, I'd argue that We is very much playing the CDO game. They enter into long term leases and sell short term leases, harvesting the spread. They take on the risk of finding enough short term tenants to pay for the long term commitments, and their profit is the premium for this risk.
This trade will make a reliable but small margin during good economic environments, but they have to leverage it up a lot to actually make money over fixed costs.
What happens when recession hits? Nobody knows, but it is fair to assume that people will cut high cost, easily broken contracts first - exactly We's revenue source. On the other end, We is on hook for all the long commitment contracts.
Sure, they can just atop honoring the leases and shutter the subsidiaries who actually signed the leases, but this is signing their own death warrant because who will do business with them afterwards?
So I'm seeing a lot of indications of a negatively skewed pnl profile, with not a peep about how We plans to hedge them.
I would say though that WeWork's insistence that it's a "tech company" is an obfuscation at the social/marketing level. This appears to be working somewhat, as evidenced by the various "Is WeWork a tech company?" articles . Even though this time the trick seems to have been caught early it doesn't make it different in nature, just in how well it worked.
https://www.builtinnyc.com/2019/03/11/spotlight-working-at-w... (had to find someone with a vested interest to provide an affirmative answer)
But they can make the spaces more popular and raise their prices (thats the added value they claim). Coworking at full capacity can be quite more profitable than any other RE investment
The author of the Yale LJ Note assumed that there is in fact a conscious desire on the part of investors to fund companies pursuing a growth over profit strategy.
If her assumption is correct, then there is no precedent for this type of investor behaviour. That explains the lack of citations.
Here are some quotes from the Note:
"Ironically, the logic that is motivating investors - the idea that it is worth encouraging platforms to bleed money to establish a dominant position and capture the market, at which point these firms will be able to recoup those losses - maps on to the logic underpinning current predatory pricing doctrine. The main issue is how narrowly the law currently conceives of recoupment, which does not account for how Amazon can leverage its multiple lines of business."
"One might dismiss this phenomenon as irrational investor exuberance. But another way to read it is at face value: the reason investors value Amazon and Uber so highly is because they believe these platforms will, eventually, generate huge returns."
"First, the economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational - even as existing doctrine treats it as irrational and therefore implausible."
"Despite the company's history of thin returns, investors have zealously backed it: Amazon's shares trade at over 900 times diluted earnings, making it the most expensive stock in the Standard & Poor's 500.10 As one reporter marveled, "The company barely ekes out a profit, spends a fortune on expansion and free shipping and is famously opaque about its business operations. Yet investors . . . pour into the stock."11 "
"Just as striking as Amazon's lack of interest in generating profit has been investors' willingness to back the company.195 With the exception of a few quarters in 2014, Amazon's shareholders have poured money in despite the company's penchant for losses. On a regular basis, Amazon would report losses, and its share price would soar.196 As one analyst told the New York Times, "Amazon's stock price doesn't seem to be correlated to its actual experience in any way."197"
[Diapers example] "Through its purchase of Quidsi, Amazon eliminated a leading competitor in the online sale of baby products. Amazon achieved this by slashing prices and bleeding money,306 losses that its investors have given it a free pass to incur - and that a smaller and newer venture like Quidsi, by contrast, could not maintain."
"Relatedly, Amazon's expansion into the delivery sector also raises questions about the Chicago School's limited conception of entry barriers. The company's capacity for losses - the permission it has won from investors to show negative profits - has been key in enabling Amazon to achieve outsized growth in delivery and logistics. Matching Amazon's network would require a rival to invest heavily and - in order to viably compete - offer free or otherwise below-cost shipping."
"In interviews with reporters, venture capitalists say there is no appetite to fund firms looking to compete with Amazon on physical delivery.354 In this way, Amazon's ability to sustain losses creates an entry barrier for any firm that does not enjoy the same privilege."
"Given that online platforms operate in markets where network effects and control over data solidify early dominance, a company looking to compete in these markets must seek to capture them. The most effective way is to chase market share and drive out one's rivals - even if doing so comes at the expense of short-term profits, since the best guarantee of long-term profits is immediate growth. Due to this dynamic, striving to maximize market share at the expense of one's rivals makes predation highly rational; indeed, it would be irrational for a business not to frontload losses in order to capture the market. Recognizing that enduring early losses while aggressively expanding can lock up a monopoly, investors seem willing to back this strategy."
"In essence, investors have given Amazon a free pass to grow without any pressure to show profits. The firm has used this edge to expand wildly and dominate online commerce. The idea that investors are willing to fund predatory growth in winner-take-all markets also holds in the case of Uber."
"Though this trend departs from the history on which I focus, my analysis stands given that I am interested in (1) the losses Amazon formerly undertook to establish dominant positions in certain sectors, (2) the investor backing and enthusiasm that Amazon consistently maintained despite these losses, and (3) whether these facts challenge the assumption - embedded in current doctrine - that losing money is only desirable (and hence rational) if followed by recoupment."
"Amazon often flip-flops between showing profits and losses, depending on how aggressively it decides to plow money into big new business bets. Investors have granted the company much wider leeway to do so than other technology companies of its size often receive, because of its history of delivering outsize growth."
>The difference is wework saw what the marginal costs could be, and had a specific roadmap to drive investment into bringing them down. FutureTechCo fundamentally has no way to drive down the margin on its business in any meaningful way. Especially without being the owners of their infrastructure.
What I'm telling you is, how do you know what Wework's roadmap is? You don't.
This template appears to be one of the author's deepest understandings of capitalism. It wouldn't be so bad if I didn't look at his resume and realize he was Senior Policy Advisor and Budget Analyst on the Senate Budget Committee from Dec 2014 – Dec 2016.
edit: also 2 years as a Senior Policy Advisor for a congressman
There's an intelligent conversation to be had for sure about how large firms like SoftBank are intentionally playing the market and unsavvy investors. This isn't it.
If you want WeWork/SoftBank to be regulated, which a lot of people do, it's kind of important that the people doing the regulating understand what they're doing.
(edit: If you think a comment is off-topic then just say so. There's no need to be so insulting.)
To this day I don't know whether the people who throw around and parrot the valuations actually mean it.
I mean, take the price of a small portion of an asset that is illiquid and in short supply, and assume the same price would apply for valuing the whole?
This sort of crap wouldn't fly amongst kids in kindergarten, so I'm astounded that it is being perpetuated on this scale.
I really feel like a massive reality distortion field has been pulled over our eyes by the inflow of easy money.
I don't know, it feels like deja vu. The same mistakes were done in the early 2000s, then 2008. Except we all think that back then people were idiots to not see it.
WeWork, and Theranos before it, are not really the norm in SV. But SV and the tech ecosystem in general has a culture of "money talks," so when Softbank and Kissinger start backing these ridiculous companies, people think "well, good for them?" and move on. Skepticism towards WeWork's model has been the conventional position since Day 1, but no one is going to argue about the validity of Masa Son's dollars.
Which just shows how much "valuation" is bullshit. I would've thought that was clear ever since 37Signals were (sarcastically) valued at $100B in 2009:
(They repeated the joke at least in 2011 and 2015. Maybe 2009 wasn't the first time either)
I think also, if you have to find a place to park billions or tens of billions of dollars, it's easy to convince yourself that the $10million company you're looking at is worth a billion, or the $1billion company you're looking at is worth ten billion. The alternative is to go back to your own investors and say, "sorry, there's not enough good ideas out there to invest in, here's your money back". It's got to be hard to convince yourself that's the least bad option.
> CHICAGO — December 1, 2015–Basecamp is now a $100 billion dollar company, according to a group of investors who have agreed to purchase 0.000000001% of the company in exchange for $1.
> In order to increase the value of the company, Basecamp has decided to stop generating revenue.
Because it's politically difficult. Sometimes, infeasible. The public often pays for defrauded grandmas' mistakes.
There are also positive externalities to stable business environments. Diligence costs money. Putting some of that cost on the issuer, once, is more efficient than each investor incurring it. Consistent rules around fraud and disclosure thus prompt new capital formation.
The best examples of the need for this protection are the cesspools that are ICOs.
I'm no expert about legal matters. I'd appreciate if someone else can chime in here. But I found this with a brief search:
"To be an accredited investor, a person must have an annual income exceeding $200,000, or $300,000 for joint income, for the last two years with expectation of earning the same or higher income in the current year."
Let's say you're smart but poor. So, even after doing your research, you have to be richer to get richer? Again, seems hypocritical and feels like it does less to protect people.
Now, let's say the SEC develops a test for an accredited investor status. How is the SEC supposed to test that you can assess good business ideas/risk efficiently? Some of the smartest people took bets that seems insanely risky and were considered stupid. I don't think there's a test able to judge this.
As an aside: It would be cool if hacker news could let you attach a flair to your profile for an area of expertise, and then you could request input from people with a specific flair who are also commenting on a thread.
Say you take that argument and apply it to education. Poor people are generally less educated. Does that mean we should optimize limited budgeting resources to only teach to the average denominator to maximize total knowledge among lower classes (increasing value among many, just as we did with your previous argument)? This means the needs of many outweigh the ability of a few to move up.
I don't think it makes sense to hold back a few ambitious people for the good of everyone, when those few are not adversely responsible for other people's losses.
Diligence costs money. Legal diligence costs more money. Deep, expensive diligence is pretty much required for private market investing, setting a lower-bound threshold on transaction sizes.
Someone who can’t make that minimum size will thus either invest (a) more than they can lose or (b) based on insufficient diligence. The first leads to getting screwed and second leads to getting screwed.
Which is a protection around American private capital markets.
It is the SEC's job to build trust and prevent fraud, which it looks like it's doing a great job.
1. Pensions are diversified for exactly this reason and VC isn't usually a large % of the fund.
2. This should be exerted through other pressures at that LP level: political, regulatory, etc...not at the GP level.
*of course because it is completely unregulated we have no real way to determine if it is truly a “massive” market or just a relatively small amount of people painting the tape with wash trading....
So, at least more than zero.
Things don't return a lot over zero in the long run. Maybe 5-7% in the absolute best case for long term returns. Enough that even a million dollars generates maybe less than $40k of reliable income.
Most people need to expend so much of their income just to live that this mostly doesn't affect the average person.
But yes, the rich get richer. They don't always buy things proportionally more, some of it just sits there.
Now as for other stuff, returns can be greater than 0 because there's more stuff to buy, later on, hence greater than what there is today. There are two components to long term returns above 0: population growth and productivity growth. In the past century we've done quite well on both fronts. Productivity has expanded at 2% per year and populations have increased by a massive 1.6% per year, add to that the 4% dividend and 3.5% for inflation and that gives you the 10% return on equities everyone is quoting.
but the future returns are expected to be much much lower. labor force size in the US is projected to grow 0.4% and per capita increase in productivity is now at about 1% for the last 20 years. and dividends are roughtly 1.8%. So, in the longer term, not including a contraction in PEs, we can see roughly 3% increase in equities on average/yearly
And nobody is “forced into the market.”
I would go stock up on popcorn. We may see some very interesting lawsuits soon. Unless the Saudis get him, well, the Saudi way.
"Counterfeit capitalism" in the era of cheap money is probably a net benefit to the average Joe because it subsidies his co-working space/taxi trips/meal deliveries/etc.
I do think there should be greater checks for private capital but then again it is their money to throw around. I just lament the lost opportunity because a 50:1 unicorn was picked over a 5:1 more generalized solution, failed, and now although billions was put back into the economy no progress was made.
If he'd left the stretch goals out of it, it would have stood as a perfect foil to the avalanche of "meta-meta-meta analysis of everything except where the money's gonna come from" in the Stratechery article  also up on HN now.
It's the same point Stoller is trying to make: Financiers "find big markets and then dump capital into one player in such a market who can underprice until he becomes the dominant remaining actor."
Stratechery is hit or miss in my view. It epitomises the definition: "An expert is a person who avoids the small errors while sweeping on to the grand fallacy."
I'd recommend giving it the occasional gander.
You're only depriving yourself of an important perspective in this case.
He's open to arguments and is extremely reasonable. If you're only looking for writing that agrees with what you already believe then you might be disappointed, but if you're looking for extremely thoughtful thinking on strategy and technology then you won't find anyone better than Ben.
It's not just a blog, it's a paid publication with a ton of research and effort behind it.
This essay reflects a profound failure of imagination with respect to the present and future of online tracking, and the risk it poses to consumers and citizens. This is an issue which is at the heart of the business models and strategy of the world's most powerful corporations, so in my opinion having this blind spot (or, perhaps, degree of ethical flexibility) seriously undermines the veracity and objectivity of his analysis in many areas.
Say some company found that they could pay landlords to let them borrow everyone's keys, and used them to go inside while you are out and stick an ad inside your bathroom where you will see it when you're taking a dump.
Sure, the ad is harmless. But you can't just shrug it off because then you've accepted the principle that companies can pay your landlord for access to you and your house.
But even all that aside, by your own words, it's not his treatments of the facts but his failure to account for the worst possible hypothetical situation that you have imagined in this specific area that is most important to you that makes him an unreliable journalist on any-and-all subjects? I would challenge you that this is an unhealthy purity test for him to pass.
1. To be clear, I am specifically referring to cloudflare because it's the service under question. I have no opinion on Cloudflare or knowledge of any specific and current privacy issues.
He's said a few interesting things but how much of what he writes can you use to make better choices yourself? Almost nothing.
I realized that for how insanely smart he is in analyzing business plans he ultimately worships the rich and despises collective power.
I now HN loves that kind of rhetoric but yeah, I’m not really a fan anymore.
I don't understand, this article seems completely reasonable. He's asking people to think critically about their absolutist takes.
That's a valid heuristic for assessment in cases where quality is hard or expensive to measure or value. Information acquisition is not itself free.
This is false.
First, Amazon is far from controlling the whole market. They control close to 50% of e-commerce which itself represents less than 12% of total retail sales.
Second, Amazon didn't predatory price, or if it did, it didn't for long, certainly not long enough to achieve its current market share. The author is mistaking Amazon's lack of profit for its propensity to reinvest all of its profit into other businesses (e.g. AWS), or its willingness to take short-term losses in order to reach economies of scale where profits exist (which, as Amazon's retail business has shown, they do).
> AWS revenue came accounted for 13% of Amazon’s total revenue. Of Amazon’s total $3.1 billion in operating income, 52% came from AWS. 
AWS, or rather S3 was a pet project of one of the very early Amazon employees who wanted to do something fun. It wasn't really taken seriously or had deep strategy at first. Once it's started to gain traction, Bezos realized the enormous potential and full-steamed-ahead AWS.
Then it took many years for Amazon retail to actually start using AWS products in any meaningful way.
Which means, conversely, 48% came from Amazon retail and other services.
In other words, it's not true to say that AWS subsidizes the rest of Amazon, or that the rest of Amazon runs at a loss.
Amazon did predatory price for several years, subsidising sale and delivery with venture capital.
I’m baffled by the nonsense point about reinvesting profit from a lack of profit. AWS doesn’t excuse the years of cynical predation.
50% of a market is easily enough to dominate and control one, of the other players aren’t the same order of magnitude of influence.
Amazon was founded in 1994 and went public in 1997, and sold more than books in 1998. Where does "several years of subsidy with venture" factor into this?
It's also hard to believe that Amazon weathered the dotcom crash while losing money.
Both of these numbers are surprising to me, can you source them? Particularly the first one, which I assume is a global measure, and I'd be interested to know what % of North American e-commerce Amazon controls. I wager I could walk outside my home and ask 100 people on the sidewalk to name one e-commerce site and far more than 50% would name Amazon first.
I don't know how many people would consider the likes of Wal-Mart, Target, and Kohl's "e-commerce sites" even though they have probably ordered stuff through their websites.
Clothing is also a big part of e-commerce, and Amazon doesn't have a good hold on that.
Unless you count, like, Walmart. Basically everyone else has some kind of niche. Amazon sells everything.