“We lose money on every sale but make it up in volume”. The old joke holds a painful kernel of truth: scale alone does not ensure profitability. This is a central problem for WeWork, whose ill-fated IPO brought its financial problems into the public spotlight. While the company’s growth has been impressive, its costs have risen at a commensurate rate. WeWork’s continued losses have called its business model into question, leaving investors wondering if it will ever achieve the economies of scale necessary to turn a profit. Many have identified the reasons for WeWork’s troubles, but far fewer have tackled the question of how to fix these problems. WeWork stakeholders hope recent corporate governance revisions will be enough. More likely, a turnaround for WeWork will require significant changes to its core business activities. So long as WeWork secures the short-term financing it so desperately needs, there will still be plenty of opportunities for the company to salvage its future while retaining its central identity.
Before discussing potential solutions, it is important to first identify the biggest problems facing the company. As stated in a previous article, WeWork is fundamentally a commercial real estate company. It secures long-term leases for office spaces, renovates the properties, then subleases them to startups and established companies like Microsoft and KPMG. The lease contracts have an average length of about 15 years, while WeWork memberships are renewable every 2 years. This creates a disparity between long-term costs and short-term revenues. While the flexibility is valuable for members, it can leave WeWork vulnerable in periods of lower demand like recessions, obligated to continue paying rent on underused properties.
Furthermore, WeWork’s growth comes at great cost. Greater membership revenues require a proportional increase in expenses as the company leases and renovates more properties to make space for new members. This is one of the biggest barriers to justifying WeWork’s valuation as tech company. Tech companies typically enjoy significant economies of scale; as they grow, revenue from products like software can increase greatly at little extra cost. This is largely attributable to network effects, in which a larger user base leads to higher quality, less expensive products. For example, a social network like Facebook becomes more valuable to users as more of their friends and family join the platform, creating greater demand for the service. WeWork has pointed to the data it collects on members’ work habits as one potential source of network effects, but has yet to capitalize on this data in any significant way. If WeWork is to warrant a tech valuation, it must show that it can effectively utilize network effects and economies of scale to turn its growth into profit.
Fortunately, these problems are not insurmountable, nor are their solutions antithetical to WeWork’s central business model. The following suggested improvements will be limited to business activities considered adjacent to WeWork’s current operations; they will take advantage of WeWork’s existing areas of expertise and the demographics of its current members.
One of WeWork’s primary goals should be to increase the amount of revenue it earns from a given office space. The solution is more complex than simply raising prices on existing memberships; the availability of substitutes like simply buying office space means a price hike could actually deter potential members and decrease revenue. In economic terms, demand for WeWork’s services is elastic, meaning customers are sensitive to increases in price because they can simply switch to comparable substitutes. If WeWork can decrease demand elasticity for its services, it can extract more revenue from its existing properties.
There are several ways WeWork can go about decreasing elasticity of demand for its products. It has already sought to do so by building brand recognition and loyalty around the “We” name and the accompanying goal of “[elevating] the world’s consciousness”. While this helps unify the We Company’s disparate lines of business, the company also needs to differentiate its central business from alternatives. WeWork must demonstrate the value of being part of its network beyond simply having access to flexible, well-designed office space created by a socially aware firm.
WeWork touts the potential interactions between the many startups that make up its clientele, but it could go further in specializing its products to attract and retain these members. There are well-documented benefits of having firms in close proximity, able to share ideas and talented individuals. WeWork could seek to amplify these effects by taking on similar qualities to a startup incubator. Like incubators, WeWork could offer its startup clients basic business services, including assistance with administrative needs, marketing, and networking. Furthermore, it could work to connect startups with financing through its relationships with established investors or even microfinancing from other members. Expansion into this line of business would carry additional risks, but it would also have the added benefit of helping WeWork clients grow and thus create additional demand for WeWork office space.
WeWork could also expand upon the modular nature of its office-leasing service, offering other products that appeal to businesses with uneven work flows. Amazon Web Services (AWS) has become a significant revenue generator for Amazon by allowing customers to pay for cloud computing services on an as-needed basis. As the success of AWS demonstrates, there is demand for cost-effective, pay-as-you-go services. This is especially valuable for companies that experience surge traffic at certain times of the year and for startups whose future needs are unpredictable.
Considering WeWork already offers flexibility for housing additional workers, it would not be a far stretch for it to capitalize on freelancing, which essentially applies the scalability and pay-as-you-go model of AWS computing services to human capital. In this hypothetical “WeLance” business, WeWork could link its client businesses with freelancer members, advertising openings at startups and established firms requiring additional employees for a specific project or time of year. WeWork has the advantage of already attracting firms that tend to have variable or uncertain workflows best served by the use of freelancers. Further expansion into this line of business would increase the value of the WeWork platform while limiting the accompanying expense of additional space, as firms would likely have different peak demand periods and require additional workers and space at different times.
One of the primary benefits of a service like this is that it can increase membership without creating a direct, proportional strain on WeWork’s facilities. The value of WeWork would rely more on the network it offers, rather than the physical space it provides. This network becomes more valuable as membership increases, and it diversifies the types of members that WeWork attracts. Customers would include not only firms requiring flexible office space and additional workers, but also those interested in freelancing for such companies. Furthermore, WeWork could attract additional users to its network with the promise of freelance opportunities advertised to members first.
While firms seeking to connect freelancers and employers already exist, WeWork has several advantages over these existing competitors due to the potential synergies with its current office-leasing services. As mentioned earlier, WeWork already tends to attract firms like startups, with variable needs for office space and personnel. It can also capitalize on the complementary nature of modular office spaces and freelancing, making it easier to coordinate scaling of both physical space and workforce size. By allowing firms to turn these traditionally fixed costs into variable costs, WeWork can also protect itself against recessions, times when companies are most likely to cut long-term costs in the face of uncertainty.
Perhaps most importantly of all, a transition to a WeWork business model that derives its value from its network can act as an insurance policy against a fast-growing threat: telecommuting. Working from home has become a closer substitute to working at an office in recent years, and thanks to ever-improving technology, it will continue to become a viable option for more and more companies. The adjacent businesses suggested in this article capitalize on WeWork’s office spaces, but once established, they could stand on their own as well. If WeWork can continue to appeal to firms by offering services that lower fixed costs and provide valuable human capital, it can maintain a distinct advantage over the alternative of telecommuting.
Though time will tell, even telecommuting may not be a bad thing for WeWork’s office-leasing business. More companies may decide they can get away with telecommuting most of the time, still requiring office space for certain occasions. As a result, they would seek to avoid the significant long-term costs associated with owning an office space. This dynamic would not only increase demand for the variable workspaces offered by WeWork, but also increase the supply of open office buildings that WeWork could rent and then sub-lease to members. This could offset one of WeWork’s self-admitted problems found on page 81 of its Form S-1: a shrinking pool of properties with attractive lease conditions.
It should be noted that all of these suggestions warrant further testing through market research to determine their appeal to potential customers. If consumers see the services offered by WeWork as unique and advantageous, then there will be greater demand for these services and WeWork’s network of members will grow. This is most likely to occur if WeWork can demonstrate that its diverse lines of business complement each other in a way that cannot be easily replaced by alternatives. Assuming WeWork makes it through its current cash crunch, small steps into adjacent businesses like those suggested may be able to put WeWork back on the path to regaining some of its massive, tech-company valuation. For now, though, its ultimate goal of “elevating the global consciousness” will have to be put on the back burner.
I am a second-year student at USC, majoring in Economics-Mathematics. On this blog, I will share my take on the technology issues the world currently faces.