Remember those black and red shoes? That’s what I remember most about going ten-pin bowling. Slipping my nervous feet into their dubious interiors and then sliding around on the polished boards. I’ve been thinking about those two-tone shoes recently as I read more and more about the sharing economy.
Uber and Airbnb are the most prominent symbols of this new slice of the economy, but WeWork is the hot new kid in town. WeWork offers office space — it will rent you a space in the sort of office that has colourful furniture and exposed air-conditioning ducts. A “hot desk” in an office on Melbourne’s Collins Street costs at least $450 a month; a private office costs $810 a month.
Described by The New York Times as offering “true shelter from a pervasive sense of alienation”, the company is set to float on the New York Stock Exchange at an expected value of US$47 billion. When a company launches onto the public markets, its value is finally judged in public. Investors ask whether the business makes sense, and they buy and sell its stock accordingly. And that’s where we get back to the bowling shoes.
Many people call WeWork a “sharing economy company”. But is lounging on its chic office furniture any different from slipping your feet into those dodgy bowling shoes? The answer to this question will help answer the question of whether WeWork deserves its outrageous valuation.
What is the sharing economy in 2019?
The allure of the sharing economy concept is simple: coordination via the internet allows diverse people to make more use of assets that would otherwise lie idle. But the term has expanded to include two very different business models.
One is exemplified by Uber and Airbnb — where people bring their own assets into a network and make money renting them out. This is the original vision of the sharing economy. The other is essentially a single business renting assets out. This second kind of company includes city bike rental schemes, shared scooters, and co-working spaces. The second model has been swept up in the hype, but it’s worth asking how it is different from any other business, like a hotel or a bowling alley.
When I go bowling I rent use of an alley, a ball, pins to knock down, and of course the shoes. The bowling alley makes money by controlling the space, fitting it out in a useful way and leasing its use to me at a profitable rate, while providing some ancillary services. If there is an important fundamental difference between WeWork and a bowling company, it’s hard to see.
WeWork began in 2010. Its mission statement espouses community, describing its offices like this: “A place you join as an individual, ‘me’, but where you become part of a greater ‘we’.” If you’d like to have your identity subsumed thusly, there are more than 500 WeWork locations globally, from Dublin to Manila. In New York, where WeWork was founded, there are 61 locations.
WeWork is taking the well-established idea of co-working spaces and making it into a big business. By controlling many locations and renting them out under one brand it is more like Hyatt or Hilton than Airbnb. Of course, there is nothing wrong with trying to be the Hilton of co-working! WeWork offices look really, really nice. They provide free coffee and the spaces are clean and light. But it is easy to make your product look better than the competition if you are providing it at a loss.
WeWork spends far more than it earns. It lost US$264 million in the last three months alone, even though its revenue doubled. In 2018, WeWork made US$1.8 billion in total sales and notched up a loss of US$1.9 billion. Impressive. The difference is funded by generous investors.
The business is still growing and investors are buying in on the idea that at some point the company can transition to making huge profits. But that is likely to involve raising prices and stemming the flow of free coffee. At which point it is unclear if WeWork can outcompete local venues with local knowledge (and without an enormous global corporate structure).
Beyond the hype
So is WeWork just an overhyped business model that’s neither tech company nor true sharing economy company?
It does have one positive trend it can count on: outsourcing. As the gig economy creeps up the value chain to accountants, lawyers and software engineers, there are more and more freelancers. They naturally want somewhere nice to work and, in certain entrepreneurial parts of the world, they will be joined by small businesses who need a place to base themselves until they grow larger.
The problem for WeWork is that those freelancers may well be the first expenses cut in any downturn. And the first expense a sacked freelancer will get rid of is their subscription to a fancy office. WeWork might turn out to be the ultimate barometer of the health of the economy… which makes it an especially risky investment right now. If the global economy weakens further it could bring WeWork crashing down like ten pins.