I have been subscribed to Stratechery for almost a year now but have recently started listening to the Exponent podcasts. One of them, titled Pickaxe Retailers, makes the case that WeWork has an appropriate valuation due to their ability to leverage their strong brand and become the utility layer for real estate as well as provide a slew of products to their tenants. Similar to the way AWS has eliminated the need to run your own data center and Stripe has eliminated the need to acquire merchant accounts and negotiate with vendors, WeWork may do the same for physical space - both commercial and residential.

While the explanation is reasonable it’s tough for me to buy into it. The decision to use any product boils down to how easy is it to switch and what’s the cost/revenue potential. In the case of AWS it’s incredibly costly to switch. You have to incur the cost of updating your code and deployment to make sure it will run on a new platform, retraining your team, and if you plan on switching to your own datacenter then hiring for roles you’ve never had to deal with. Added to this you have Amazon constantly cutting costs while innovating on new products. The value in switching only comes at massive scale - even Dropbox is getting beaten up over their move away from Amazon instead of focusing on building a more compelling product.

Stripe is in a similar situation. Despite providing a seemingly simple service it’s difficult and costly to replace. Stripe contains customer data and has a slew of products, for example subscriptions, that make it tough to switch. Imagine having to ask every customer to re-enter their credit card information. At the same time, Stripe gets cheaper and cheaper as your volume increases which makes it less and less compelling to replace.

I just don’t see these sort of arguments holding true for WeWork. AWS and Stripe both run services that start of cheap and get even cheaper as you scale. They’re both unbelievably sticky and have a growing cost of switching. WeWork has neither of these. The actual office space may be great but over time it gets easier to make the decision to rent your space directly rather than pay WeWork’s margins. WeWork does provide additional services that make their space great when you’re small. Unfortunately, these same services can easily be outsourced as you grow. For unlimited coffee you go with Joyride. For office cleaning and maintenance you go with Managed by Q. For food you can go with one of the hundreds of delivery startups. Every service WeWork provides can be had via a separate company..

Picture a small company starting out on AWS, using Stripe, and renting an office at WeWork. As they grow it’s easy to imagine them still using AWS, still using Stripe, but no longer at WeWork. Netflix is the perfect example. They’re a public company with a current market cap of just under $41 billion. Yet they’re still on AWS. And Amazon is a competitor! I can’t imagine any public company using WeWork as their primary office space solution.