> WeWork then used this cash to underprice competitors in the co-working space market, hoping to be able to profit later once it had a strong market position in real estate subletting or ancillary businesses.
> 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.
>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.
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.
Totally agree with the last pint, people completely tend to ignore the effort and attention to detail Amazon puts into executive and planning. That plus a very sound strategy. Also Amazon was profitable, even if just barely, for the most time while growing appr. 20% constantly. Not comparable to, say, WeWork from what I know. But it shows how powerful that narrative can be.
I'm pretty sure Amazon was profitable all along - it's just that the profit was all spent on expanding the business. Hence, there was no taxable profit.
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.
Bookstores provide a lot of service value, a decent bookstore will allow you to find similar material, allow you to browse as you please (instead of the skimpy sample pages), usually contain an expert that can offer advice and allow you to walk out with your purchase. Additionally it's common to see a heavy effort at investing in the atmosphere.
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. True for mainstream books, absolutely not true for academic special interest titles. Many books simply aren't available - including some still-in-print titles from academic publishers.
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.
> True for mainstream books, absolutely not true for academic special interest titles. Many books simply aren't available - including some still-in-print titles from academic publishers.
Sure. But you wouldn't find those at B&N either. Amazon isn't in danger of putting university bookstores out of business.
Also Amazon (or to be fair any Internet book indexing service such as Google) allows me to know about books that I would almost certainly never have known existed in Barnes&Noble days.
> Bookstores provide a lot of service value, a decent bookstore will allow you to find similar material, allow you to browse as you please (instead of the skimpy sample pages), usually contain an expert that can offer advice and allow you to walk out with your purchase. Additionally it's common to see a heavy effort at investing in the atmosphere.
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.
So much this -- and it applies not only to bookstores but to retail in general. So many times I've thought "I should give these retail shops some support"; I go looking for something particular I want, spend several hours of my own time only to come up empty-handed because nobody had what I wanted in stock. Example: I read about some really cool Etymotic musician's earplugs. I thought great, there's actually an instrument store near my work. Walked there; nope, none in stock. Or reading about one of those induction cooktops. Went to my local big-box electronics/appliances retailer. Nope, nothing. Pretty much anything that's even slightly niche, it seems like retail just doesn't have it.
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.
> Bookstores provide a lot of service value, a decent bookstore will allow you to find similar material, allow you to browse as you please (instead of the skimpy sample pages), usually contain an expert that can offer advice and allow you to walk out with your purchase. Additionally it's common to see a heavy effort at investing in the atmosphere.
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.
If I try to build up a history of bookstores as I remember them as a consumer, at one point there were many small stores. A mall may have 3-4 book stores, all taking around the same space as any other retail store. There were also 'used' book stores and some niche stores around. When you didn't know what to buy, you browsed the generic stores and pretty much they all had the same content, if you sought out a niche/used store, you'd often get a personalized set of recommendations.
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.
I'd consult goodreads.com (ownded by Amazon) to meet your criteria of matching experience with respect to genuine reviews, similar book recommendations, etc.
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!
I've read that Goodreads has kind of an opposite problem to shill reviews: everything you write about a book is always completely public, so people don't write them.
Bookstores only offered negative value to me, outside of selling me what I wanted. Amazon allows me to purchase stuff without having to interact with another human. Not everyone is extroverted and introverts get drained by human interaction. I don't even have to talk to a human when returning stuff.
The only way you get past that is by forcing yourself to be uncomfortable. It's worth it. It's a learned and reinforced behavior. Much like the child who only eats hot dogs and mac and cheese, and their parents never really made them do otherwise. Now they're in their 30's, living in their house and don't have a job, still eating junk food, but now they have diabetes.
My point was, the more you do it, the better you get at it... kind of like exercise or anything else. By avoiding interactions, it makes it worse over time.
A battery won't get better by providing energy to some device. It gets drained. Similarly, introverts get drained by human interaction, so they need to recharge by staying alone. Extroverts on the other hand get drained by being alone and recharge in company of other humans. Telling an extrovert to not socialize with anyone for a year to get better at it is as much nonsense as telling an introvert to go socialize more to get better at it. That's not how it works.
The more human interaction I can avoid, the better, so I'm recharged when I have to interact with people.
It's like trying to use a tool all the time expecting it to get better instead of wearing itself out. That's not how this works. No matter how good you get at human interaction it won't change the fact that it will drain you, if you're introverted.
The Vimes series is amazing... I think it's a bit above the Moist series but I absolutely love Raising Steam and, to a lesser extent, Making Money - because both characters are coming together. Still, I think my top pitch is somewhere within Night's Watch, Men at Arms & Jingo - I think Guards! Guards! is also quite good but Night's Watch did nearly everything Guards! Guards! did... but did it better.
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.
The movie was reasonably entertaining, and a stellar cast. I agree about skipping the first couple books were not as well polished - I'm glad I did not start there.
Yep: one major advantage of bookstores is that their recommendation engines work several magnitudes better, and reliably. I believe they always will, too.
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?
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 was also able to make money selling products at little or no markup by taking advantage of the float.
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.
If there was regulatory capture it surely couldn't have been provided by them given they didn't exist yet. They were doing exactly what the tax system was designed to do - promote investment no trickery involved.
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.
A friend of mine after moving several times discovered it was cheaper to just throw away all the furniture (i.e. give it ot Goodwill) and buy new at the new place than ship it.
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
Personally, I think companies should have one of two models, growth or dividends. In the end, it really shouldn't be companies paying taxes (or meddling in politics), they should be growing, or paying out dividends that are taxed.
Amazon had an in-built 5-10% advantage for a very long time because they weren't required to pay tax. This clobbered small retail--and bookstores in particular.
Now that they are on an equal footing and have to collect tax, Amazon's retailing isn't doing as good.
I don't understand this comment. Amazon didn't invent mail order. They never have had a monopoly on websites that sell stuff to be delivered by mail, either.
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.
Not paying sales tax on mail order was the norm. The time period you're talking about, Amazon, and the internet in general, hadn't penetrated to the general public. 1995-96 was just when a small minority of people were waking up to the idea they needed to be on the internet and getting their first direct PPP dialup account. People still went to physical book stores because, for one thing, you couldn't preview a book online.
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.
> Not paying sales tax on mail order was the norm.
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.
Huh? That’s not how I remember it at all. You ordered from the catalog and then waited three weeks. If you were going to pick up in the store, why not just go to the store instead of calling an 800 number and reading off your credit card info? There was a whole Seinfeld episode about how the only mail anyone got anymore was catalogs.
Per FRED[1], 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.
You picked up in store because there was free shipping to the sears store in town. You didn't go to the sears store in town because it didn't have very much inventory.
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 grew up in the 80s and 90s, and the claim simply isn't true. My family mail-ordered all the time, and it was nearly always delivered to the house.
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.
The only difference between wework and amazon is the way they finance their money-losing ventures.
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).
Kubernetes is only a threat in that it is a buzzword much as cloud is a buzzword. The cloud and Kubernetes both are used to sell a triple fallacy: You need to care about scaling from day one, there is an easy way to scale, this way is the cloud/Kubernetes.
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.)
Containers, k8s (or k3s, because less bloat) and micro-SOA (but preferably in a monorepo) make development easier.
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.)
Having a hot spare, a database slave and a mirror of your assets so you can manually fail over? Probably a good idea. Architecting a very HA infra? Now wait and look hard at all the possible downtime causes (you have a DDoS provider for sure, Voxility or Cloudflare probably, what if they go down and so forth) and so and then look at what you are protecting against: a hardware failure which is exceedingly rare and again you can manually failover. The costs vs benefits will not come out in your favor up to a very large company size where even the smallest amount of downtime is so costly it doesn't matter how many engineering hours go into avoiding it.
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.
It's interesting that you bring up the importance of AWS to Amazon, nowadays, because...companies like Uber, Lyft, and WeWork spend a lot on AWS.
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.
So I am not sure. I think that startups (with all due respect) generate buzz, inversely correlated with their technical depth. So AWS is mainly composed of non tech companies.
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.
Lol, or the bulk of the AWS income that is probably boring enterprise. Sure, less startups is less cpu cycles bought, but there are a shit tone of companies that aren't going to scale down in a massive way.
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.
So tue. AWS is generating the biggest part of overall profits while contributing 10% of revenue (from top of my head, so numbers might be wrong). Only logic that one day Amazon would be split up. Might also partially explain the high valuation.
Operating a kubernetes cluster on-prem is much harder than you think. Kubernetes is an overcomplicated mess if you want to build a cluster yourself and it's a mess every time you want to upgrade to a newer version.
> The subprime crisis is completely unrelated! And if anything it was proof that money-making assets should be scrutinized more.
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.
I think the point the author was trying to make with "counterfeiting" wrt the subprime crisis is like this: counterfeit goods offer superficial similarity to the real thing, but are made of inferior materials when you unpack them.
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.
That’s not really what happened. It’s not that AAA rated MBS packages were secretly full of shit that should have brought down the whole rating. It was that the systemic feedback of over leverage wasn’t really taken into account.
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.
I take your point, though counterfeit goods aren't necessarily made of substandard materials. There are plenty of ways to skimp and then take advantage of the brand's existing reputation beyond shoddy crafting.
I was thinking 'counterfeit' in terms of things like baby formula and plastic rice, which cause severe consequences when co-mingled with regular inventory. I believe that's the scenario the author was referring to. For things like knockoff handbags, the materials used are largely the same and the price premium is heavily dependent on brand itself and not the cost of production and regulatory compliance.
That’s because it’s such a massive example of a systematic corporate private capital failure that was bailed out by equally massive public power while regular people were left on the hook.
No other industry has gotten that kind of bailout that far into supposed maturity.
Huh. Many sectors are "strategically important" and are constantly subsidized. Farming. Everywhere in the world. Automotive industry. Fossil related industries (oil subsidies).
The multibillion post 9/11 ones for one both post attack and Iraq wars and SARs related travel reductions. If you count uniquely privileged bankruptcies and other activities there is a whole lot of the 20th century to include.
People usually know what Ponzi is about so comparing unrelated things to it is going to be obviously wrong. But most people have very murky idea beyond "something in capitalism went bad" when talking about the subprime crisis, so any time anybody wants to criticize anything going bad in capitalism, they are free to grab this example with low(er) risk of being called out.
I was thinking of a Godwin equivalent for finance, which is narrower than capitalism as a whole.
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.)
Well, the trick of Ponzi scheme is that it looks externally exactly like legit financial company - you get investments, you pay dividends, you attract more investments to finance growth - this is how many legit companies work. Without looking inside - whether or not the company has legit activity going on on the inside, whether currently profitable or not - it's impossible to know, externally it looks the same.
> with the idea of profiting later on via the surviving monopoly
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?
This is a big topic in business school - never compete on price for that exact reason.
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.
> “This is a big topic in business school - never compete on price for that exact reason.”
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).
Technically it's not competing on price. It's competing on cost, a result of which is often, but not necessarily, a lower price point. Business strategy courses explicitly teach you that simply competing on price (that is, simply lowering prices in hopes that you'll beat the competition), will blow up in your face.
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.
well, it's not so black and white as only competing on cost or price. it's true that your competitive advantage has to come from lower costs (via operations, marketing, finance, or whatnot), so you do compete with other market participants on cost.
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.
It depends on how hard it is to get going in that business. For example, in some markets (e.g. computer operating systems), it takes a big ecosystem of 3rd party companies making applications for your OS to be viable, so if you drive Blackberry out of business, you can own the smartphone market and crank up prices later. But, Google saw that coming and sponsored Android to prevent it, because they recognized that pattern from the PC market.
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.
I don't know why this is so hard for people to understand (you obviously seem to get it).
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.
If you can maintain a credible threat that you'd do it again (and win), competitors shouldn't be expected to enter the market even as you're extracting rent. This is amplified by any barriers to entry.
What do you conclude from cable companies? On the one hand, competition is legally restrained. On the other hand, the cable companies are still somewhat constrained by imperfect substitutes - for instance, wireless is not a great substitute for cable, but it's enough for me to live without it.
Not as much as they use to be from what I understand. Other providers can get right of way access via the city, but building out infrastructure is not easy and is costly and as soon as they build out the incumbent will reduce their prices low enough to not make it worth switching.
The only company that can compete with the cable company at scale is usually the local phone company.
Maybe markets would just correct themselves later, but in the meanwhile a lot of people went broke and a lot of businesses closed, because a company was giving out free meals (payed by someone else who is also going to lose money). In the end who profits? Only the "charlatans" who managed to convince others to give them absurd amounts of money. Everybody else comes out with a bloody nose.
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.
I work in a sector where to build a single factory it takes many billions of dollars and half a decade; if you wipe the competition, for the next 5 years you are free to ask for any price you want, by the time competition appears you are loaded with cash to kill them again.
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.
Is Amazon really much more than an arbitrage on people's desire for "free shipping" at this point? The last time I wanted to buy something online, the price plus shipping elsewhere was noticeably cheaper than with free shipping on Amazon.
The majority of shoppers do not actively price shop. If they do at all, they do so passively in the form of selecting a retailer based on perceived prices (i.e. they may not compare pricing between Target and Walmart on specific items, but they may choose to go to Walmart due to the perception of Target being more expensive).
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[1]:
"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,[7] 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.
> When you return prices to market value wouldn't competitors just appear again.
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.
In the case of WeWork the warchest is streched by a price war. And the barrier to entry is basically office space in the interesting locations. Just what is an interesting location changes, and real estate is plenty. So the barriers aren't probably that high. Generally speaking the point can be valid so.
>No, because at this point the barrier to entry is substantial.
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.
My mother-in-law did just that and is doing fine, thank you very much. May not be the world-beating "money in it" as you define it, but for the small business she's running it's viable.
Would it shock you to know these topics have already come up in the family, and have since day one? Or that she herself is an Amazon customer?
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.
Starbucks has caused a lot of coffee shops to close. Boutique coffee shops have a significant advantage however—people like variety in their café's. This exists in some industries more than others.
> Starbucks has caused a lot of coffee shops to close.
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.
...to my knowledge, Starbucks has never engaged in predatory pricing to begin with, so at this point I'm legitimately not sure what we're discussing here.
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.
Has Walmart ever been charged for predatory pricing? There have been plenty of accusations and lawsuits, but from what I've seen, they amount to accusations of having a few "loss leader" products. I can't find any evidence that either 1) loss leader pricing strategies are clearly illegal or 2) that Walmart actually prices things at a loss rather than simply cheaper than the cheapest price a competitor can offer.
This assumes that starting up a competitor is frictionless and has zero-overhead. If the market which is now dominated has a large enough barrier to entry the monopoly can temporarily return to their loss-making tactics to starve you out. Capital will rightly look at your business and ask why they should invest in it when they can just get onboard with the current monopoly and get those profits instead.
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.
For example, when you reach that scale, you may have enabled some economy of scale for you that is unavailable to your smaller-sized competitors (like Amazon). Or, may be, there's some friction for customer to switch when you stop selling a dollar for 90 cents, like with american internet operators (I don't live in US but I constantly hear horror stories about Comcast here on HN, and I assume it's similar).
The issue is fixed vs variable costs. The scale argument requires very high fixed costs and very low variable costs. Then, once the initial hurdle is cleared, marginal costs per incremental unit of revenue are very low while barriers to entry against competition are very high. WeWork is the exact opposite of this as their leasing costs (variable) are like 90% of rental revenue.
If WeWork had ownership claims to the properties it rents out then it wouldn't be in trouble. It's value would be equal to how much real estate it owns.
Competing with a monopolist takes a lot of capital. Where would those competitors get it from? Investors would probably prefer to hold stock in a company that can extract monopoly rents, all else being equal.
> When you return prices to market value wouldn't competitors just appear again.
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.
> 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.
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.
> "Market" isn't magic fairy dust that spontaneously causes efficiency to appear from nowhere.
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 of course Amazon’s model, which underpriced competitors in retail and eventually came to control the whole market.
> 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.
There are two ways to get to positive margins: Either drive down costs (as Amazon did) or increase price. Part of WeWork's plan is presumably to increase prices once tenants are locked in.
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.
>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.
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.
I don't see how. WeWork would need to be a large player for this to work out. Landlords in office parks will rent to anyone. WeWork can threaten to walk, but the landlords can just offer the space they left to someone else - they might not supply beer, but rent is cheaper so you can bring your own and still save. Or they can offer beer if that is what customers demand. There is nothing WeWork is doing that a small Landlord cannot. Or at least nothing that I can see.
In comparison to nearly any other tenant, they are quite large and also structured quite differently. Other large tenants put similar pressure on tenants, with the clearest example I can think of being anchor grocery stores in strip malls.
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.
Many of those pressures also apply to WeWork staying in the same place.
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.
I don't think it's about WeWork leaving like a normal tenant, but simply shutting down a given location.
>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.
The entity on the lease is a single SPE that is specific for that one lease. The landlords to not have the We corporation behind the lease itself. WeWork is fully aware of the possibility that their business model does not become as profitable as they've portrayed and left themselves the back door of getting out of leases. Landlords don't like it, but WeWork does not budge on this in negotiations.
They can't hold landlords hostage. The best they can do is to cancel the lease and convert WeWork into an Airbnb style platform that lets the landlord rent out their office space as a workspace. This shifts most of the risk to the landlords and WeWork can simply take a transaction fee as a middle man.
Landlords don't want to do that, or else they wouldn't have had the need to rent to WeWork in the first place. Landlords like the risk profile of having an entity in the middle. There are significant operational costs of doing this, and in some cases there may be legal or tax provisions that prevent a landlord from doing so.
Dunno why the downvoted but I’m glad somebody is willing to argue why it is a good idea WeWork leases all their offices. To me it seems nuts, but I am more than happy to hear arguments for why it makes sense.
I hope this doesn't get entirely buried at this point, but I think you bring up something interesting with driving marginal costs down.
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.
> 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.
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.
I'm not sure if there was any thought beyond "make it really big and figure out details later".
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.
Not to pick nits, but gambling your business on self driving cars being just around the corner is nuts. They aren’t gonna happen for decades, if ever. We may well have teleportation before self driving cars because it turns out that solving teleportation is easier...
Today, but if the ability to teleport (last I heard we can teleport a single particle half a meter - but not even an atom) gets the needed breakthroughs... If teleportation worked and was safe [insert other considerations that I don't know here] I'd teleport to work instead of hoping for a self driving car. Today it looks like the self driving care will be practical sooner, but who knows how the science and engineering will really advance.
The Economist had a good essay on taxi companies going back to the 1600's. Basically it's always a race to the bottom and no one wins for long. Four hundred years of history there through all kinds of changes in transportation.
> 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.
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.
> The subprime crisis is completely unrelated! And if anything it was proof that money-making assets should be scrutinized more.
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.
The CDO assets were money losing but in a much more obfuscated way.
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
CDO assets were money losing for people who mispriced them. CDOs are a class of instrument similar to insurance in terms of payout. You collect very regular premium and occasionally have to pay out big when a claim cones in. This is a valuable investment vehicle for people who know what they are doing. They all come under the umbrella of negatively skewed investments, that is, the distribution of returns on these investments have a negative skew. They are fat tailed to infrequent but large drawdowns. Short selling options is another strategy with this profile for example.
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.
Absolutely true that a CDO is more obfuscated in terms of its actual structure. Pre-crash I don't pretend I would have spotted the risk (because my stats knowledge is meh on a good day).
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 [0]. 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.
It's more like this "blitzscaling" system is sort of a ponzi scheme. Keep taking money from investor after investor until MAYBE you have a massive payday.
BUT.. you haven't actually proven that it's viable business market.
> WeWork fundamentally has no way to drive down the margin on real estate
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."
More quotes:
"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."
In a remarkable coincidence, someone will post the exact same comment in 2039:
>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.
> [Company] then used this cash to underprice competitors in [market], hoping to be able to profit later once it had a strong market position in [market].
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.
Interesting. I'm not sure I understand why one type of charlatan is more important than the other.
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.)
For me, this whole WeWork fiasco has shown just how valuable the SEC and the S-1 filing process is. Let's be clear -- Neumann was fired because any investor who read the S-1 was mortified and wouldn't touch the company with a 10 foot pole. If anything, this shows how lawless the private markets are and the lack of guardrails that are present to protect private investors -- perhaps this will lead to some reform in the private market and more transparency, but either way I'm glad that the SEC provides such a breath of fresh air when evaluating companies with large valuations.
I think it also shows the stunning level of mass delusion in the SV VC space.
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.
Anecdotally, no one in SV ever believed in WeWork except Softbank. I couldn't find anyone to take the Bull case on WeWork, whereas at least some people could argue Uber had a real business model that depended on self driving cars.
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.
Softbank didn’t start investing in WeWork until others had gotten it to a $16B valuation 3-4 years ago. A lot of the investors weren’t SV but some were in its history.
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:
Yeah for sure. I think we are on the same page. I was specifically pointing out the OP seemingly putting SV at odds with WeWork implying WeWork is ridiculous with ego, money, et al, and not SV.
Two possibilities:
1) Jamie Dimon and Softbank/Saudi Arabia are the only idiots here, and everybody else just chipped in relatively small amounts; neither could be considered classically "SV VC".
2) Similar to many people deciding to all buy the same stock at the same time, bidding it up far beyond it's real value but hoping to sell before everyone else realizes it, the VC money was thinking that the sheer size of their investment would make everyone else get on board, allowing them to cash out. A sort of "pump and dump" before it technically went public, such that it is (perhaps) not illegal, except that they did it too late in the cycle so people spotted a bad deal before buying.
Oh, well in that case, it's a combination of:
1) lying, and...
2) there are no better numbers available for an early stage company. You can't go by profitability or revenue early on, because there's a lot you need to do before you get your first customer, and some of that continues to pay off. So, in the absence of reliable measures of value (a long history), they make do with the least bad method available (how much did somebody guess it would be worth).
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.
To be fair public company valuations are not that different. Sure, the price discovery is more efficient, but still if you were to sell any significant part of the stock it would lower the value of the company.
> 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.
> Why can't they be held responsible for the foolishness of their actions?
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.
But she can buy lottery tickets without understanding that her odds of a profit are worse than jumping on an ICO? Seems hypocritical to me.
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.
You sort of answered your own question. Yes, there are people who are smart but poor. But they are significantly outnumbered by those who are poor but don't have great financial/investment sense. Since there isn't really a good way to differentiate between the two, you have to choose between letting many people be scammed to enable the few to invest or prevent the few from investing to protect the majority.
In your argument, the sum of all wealth for the lower class is what's being optimized for here, which you claim is a good thing. We can prevent the most money loss by restricting movement of capital. I happen to disagree with this but's let's table that and look at an analogy.
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.
> How is the SEC supposed to test that you can assess good business ideas/risk efficiently?
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.
Erm... okay, but grandma couldn't have invested in WeWork unless she was an accredited investor, and if she's an accredited investor, I'm not so sure we need to be feeling a lot of sympathy for her greed.
Our economy and financial systems are built on trust. Fraud makes it hard to have productive transactions. Fraud also has a massive detriment to society. It's not that private investors needs protection. It's that people who commit fraud needs to be punished.
It is the SEC's job to build trust and prevent fraud, which it looks like it's doing a great job.
It's not that private investors need protection, it's that legitimate businesses have to compete against their fountain of capital and that all of these companies employ a lot of people.
The model of driving every profitable company out of business by undercutting on price to a massive per unit loss, funded by venture capital, in an attempt to corner the market and have a pseudo-monopoly is bad for "the public" in the long run.
Markets are more effective when there is truth and transparency, that's why the S-1 was so effective and derailing WeWork's IPO. Private investors don't necessarily need protection but if I was a big player in the private market I'd definitely be an advocate for more transparency.
What if there’s no way to know what’s foolish and what isn’t? The protection we’re talking about here is equal access to information which is a necessary prerequisite for an efficient market.
equal access implies every participant has all known information, the key word here being 'known', so you're probably right, but it doesn't matter either way in the real world :)
I have the impression this is what lead to the Great Depression. Lots of people were saying, well, banks are failing, they screwed up, let them fail. More recently we had bailouts because the people running things learned about the Great Depression in school.
Don’t forget crypto currency. Massive* unregulated market that is probably 99% fraud.
*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....
I think part of the article's point is that private investors cannot be held responsible for their foolish because they cause "ripple effects" as externalities (eg: dismantling of a functioning taxi industry)
Because with the rise of 401k and lately low interest rates a lot of people were forced into the market who simply don’t have skill or time to learn these skills to make investments in an unregulated market.
The vast majority of 401(k) funds are in large-cap mutual funds which don't invest in IPOs. Most 401(k) plans also offer some sort of money market or Treasury bond fund. It takes about 5 minutes and zero skill to learn that T-bonds are safe investments.
I never understood how anything can return more than zero after inflation "in the long run". If it did, then over time people with that asset would have all the wealth. But if they did, then they would buy things with it, raising prices of everything else.
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.
I never know if "the rich get richer" means the people on the tail of the distribution now will be farther out in the future, or if it means the people on the tail of the distribution in the future will be farther out than the people on the tail now.
That's actually a very good point. That's kinda why Housing will always return 0 (real return - not including all the costs, like property taxes, repairs, HOA, insurance, etc) in the long run. And if we're actually making progress on housing, it'll return negative returns.
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
Return by itself is meaningless. If you want to discuss retirement then you have to account for the other variables: consumer price inflation, risk, contribution levels, lifespan, etc. For individual workers the most practical suggestion is to save more instead of expecting high returns.
While you're right, I also wonder why anyone cares if a bunch of cash-rich, overconfident private equity funds get fleeced? They're more than capable of taking care of themselves.
"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.
Unfortunately the opportunity cost of those bad investments might sting many in the long run. I'm not going for any trickle down style economics just that smart investment may help a smart company blow up and solve a generalized problem. They can profit but over time that improvement might spread to another industry or company and slowly make many other groups better off sort of like how investing in NASA led to advancements in technology we all use today.
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.
I’ll bet money he was “fired” for something much more banal, like using harder drugs than just the admitted marijuana. Still probably can credit the IPO process for bringing it to light, but I don’t think taking Neumann off the tiller of this company is going to make it any more attractive to investors.
I really wish the author had sensed the limits of his argument, because I think the point he's trying to make is basically correct. He's just stretching it to the breaking point by invoking Amazon and the subprime crisis.
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 [0] also up on HN now.
There's a line in the Stratechery article that makes perfect sense in the context of WeWork: "Uber without an at-scale competitor is a much more valuable company."
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."
On the contrary, given the author's myopic and rosy perspective on surveillance capitalism as espoused in the article "Privacy Fundamentalism"[1] (and apparently amended in a follow-up which is paywalled), I find it hard to take anything on that blog seriously.
Even a viewpoint or philosophy you disagree with strongly can be useful as insight into "the other side's" thinking.
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."
Ben is one of the greatest thinkers in technology writing today - period.
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.
The article I referenced boils down to dismissing fears of online privacy invasion as alarmism. Exploring his own site's dependencies, Ben concludes that the third parties phoned home to for every visitor are probably harmless. He recommends that discourse focus on striking a balance between technology being convenient and secure, and not worrying too much.
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.
Wow. That is a SERIOUS mischaracterization of the article and his conculusions. The third parties in question were services like Stripe (since he monetizes with subscriptions, not advertising) or Cloudflare. His whole point was he takes privacy seriously, but fundamentalist policy punishes good and bad actors equally.
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.
Except that using CDN services is a privacy hole in itself - I don't know whether Cloudflare[1] currently collects or sells tracking data on usage (including referrer information) but there is definitely a technical capability there and no legal impediment. If they don't do it now then whenever a vulture capitalist scoops them up you can be sure they'll start.
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.
Which is why that article that OP points out is such an odd outlier. In contrast to the normally wonderful and insightful reading on that site, the one on privacy stood out as total defensiveness. I’m not going to condemn the author over just that one but it was weird!
I agree, I'm pretty unfamiliar with that source personally but I did check out that article and was quite disappointed with the content of it... It didn't seem malignant but it was certainly quite ignorant of potential issues.
I think Ben is one of the greatest writers, I'm not so sure about thinkers. It's pretty easy to sound smart in a very carefully calibrated format where you get the Monday morning quarterback things that have happened after you set all the rules for the game.
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 was a paid subscriber for years until he started saying shit like “actually, the US giving employers control over access to healthcare is good because they can force people to work harder” and “it’s bad for China to jail ethnic populations but ok for the US because they’re good guys”.
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.
> Again, this is not to say that privacy isn’t important: it is one of many things that are important. That, though, means that online privacy in particular should not be the end-all be-all but rather one part of a difficult set of trade-offs that need to be made when it comes to dealing with this new reality that is the Internet. Being an absolutist will lead to bad policy
I don't understand, this article seems completely reasonable. He's asking people to think critically about their absolutist takes.
> This is of course Amazon’s model, which underpriced competitors in retail and eventually came to control the whole market.
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).
No, long before AWS, Amazon intentionally re-invested all of the excess revenue that would be reported as profit back into the business instead (expanding capex and opex).
I thought aws sprung out of investment in their own infrastructure. A happy accident of sorts, not some preplanned mammoth investment in building AWS from the ground up
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.
>Amazon did predatory price for several years, subsidising sale and delivery with venture capital.
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.
> They control close to 50% of e-commerce which itself represents less than 12% of total retail sales.
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 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.
I'm not the original commenter, but here's two sources [1] [2] for the 50% number, with [1] saying this represents 5% of US retail sales. It's 50% of US e-commerce.
Why wouldn't you count Walmart or Target? For household consumables I bounce between Amazon and Target's subscribe and save offerings depending on whichever is cheaper.
This doesn't excuse WeWork being excessively unprofitable but low or negative returns don't directly imply anything "Counterfeit".
I like to point out that low or negative real returns on stores of value have historically been the norm. Before financial systems existed, almost all investment had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of.
Even more recently, it has often been difficult to get low risk, hassle free, liquid, positive real returns. From a basic science perspective this seems to reflect the laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth.
The 20th century may have been an outlier. Because of unprecedented demographic and technological growth, positive risk free real returns on liquid assets were easy to find. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources.
While people are used to get negative returns on very short term purchases, you buy fresh vegetables at the supermarket even if they degrade over time, they can’t seem to accept the normalcy of negative returns on longer term assets despite the tendencies inherent in the laws of physics. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Returns tending towards the negative are natural even if they can seem unusual for people just out of the 20th century.
His assertion here is that "Endless money-losing is a variant of counterfeiting". I just don't see how that claim stands up to any real scrutiny. Counterfeiting is a totally different thing.
To your point about negative real returns: just because it's been that way in the past doesn't mean that it's not a tragedy or that it's not possible to have reliable assets that keep their value over time. This is an especially desirable quality in currencies, and why gold and now bitcoin are so important.
>This is an especially desirable quality in currencies
This is an especially UNdesirable quality in currencies.
A deflationary currency cannot become mainstream without causing a huge amount of instability.
Deflation at some point causes people to build stashes of tokens instead of investing in real businesses with real production capacity.
When this trend becomes widespread enough, it causes global production capacity to drop. That's right, when enough people do it, token hoarding displaces investment in businesses and factories and lowers global production capacity. This means token hoarding causes a future drop in things available to buy with these very tokens.
Eventually when token stashes become too big and seemingly valuable, there will be people who want to buy real things with their stock of tokens. These tokens will be chasing fewer goods which will mean prices for stuff will rise (tokens will lose value). This may happen suddenly when people with large stockpiles of tokens notice that value is dropping and see that there are tons of other tokens waiting on the sideline ready to make it drop even further.
Hoarders are likely to rush to get rid of their stockpile all at the same time before they're worthless which will cause their fall to worthlessness. This kind of drop brings the tokens closer to their natural intrinsic value of zero and resets the cycle, which can then start again, such is aggregate economics.
The 1920s and 1930s suffered from this type of production drop but with gold tied currencies instead of cryptocoins. It happened to a lesser extent in 2007 when western world central banks failed to keep inflation rates high enough.
It's important for the world's sake to not let deflationary currencies become too popular. When savings or financial promises are insufficiently tied to future production or to accumulation of real goods, there will be disappointment when many people try to exchange them for real stuff. That is true for crypto currencies as well as government currencies (that is why the system is designed to make banks invest people's money in real businesses and minimize the proportion of money that is stockpiled idly).
It's true that crypto currencies are currently not widely held enough to significantly affect the aggregate economy but speculation already keeps them volatile and the knowledge that as they get more popular, there will be more macroeconomic pressures towards volatility will keep the speculation wild and cryptocoins unstable.
Currencies that are not designed to lose value over time can not be stable. Intrinsically worthless tokens engineered to have better than market real returns (risk adjusted, liquidity adjusted,) compared to real productive investment will always fluctuate increasingly wildly as they get more popular.
> Deflation at some point causes people to build stashes of tokens instead of investing in real businesses with real production capacity.
I am deeply skeptical of this claim. I would still rather invest in a real business than get a 0% return on my stash. If a free market for currency existed, no way in hell would I choose to store my wealth in a depleting asset.
Plus, any argument about hoarding cash should consider the multitude of billionaires that exist and whose presence is not crashing economies around the world. (Yes, most billionaires have most of their wealth in business investments, but they still have bigger piles of cash than you or I can reasonably fathom.)
What you're espousing seems to be standard Keynesian economics but you should know there are other schools of thought :)
Yes but what about the not so rare times explained in my original comment when returns on tangible private marginal assets become negative (on a risk adjusted, liquidity adjusted basis)? During the financial crisis of 2008, the tailor rule put the natural rate (a rate correlated with private marginal safe asset returns) at as low as -4%. In those conditions, having a currency that returns 0% risk free gets you way above market returns and blocks a lot of private market assets from existing. It's indirectly, a huge subsidy to people shutting down projects, laying off people and hoarding government paper instead. It's basically the government shielding savings from the private markets and causing untold economic damage through economic idleness and unemployment. It's a subsidy on job destruction.
At least a private currency like bitcoin or gold will tend to become volatile in these conditions (which increases its risk and reduces its "risk adjusted" return). But if ever crypto coins were to become popular enough for governments to deem it worth it to use their powers to reduce their volatility, it could certainly put the economy into a gridlock like it did when they tried to artificially stabilize gold.
The fact that crypto coins in a free market tend towards increasing volatility makes them not very good as a medium of account to negotiate contracts and conduct business. It makes them not useful as a currency.
> The fact that crypto coins in a free market tend towards increasing volatility makes them not very good as a medium of account to negotiate contracts and conduct business.
Crypto volatility is not solely or even primarily because of the coins' deflationary natures. In fact some cryptos ("shitcoins") are not deflationary at all, and have their value regularly inflated by a central authority.
Note that my comment said Bitcoin specifically and not crypto in general. The ultimate deflationary currency, gold, is not volatile at all, which leads me to believe that crypto volatility is because of external factors like market manipulation, shady ICOs, etc.
> It's indirectly, a huge subsidy to people shutting down projects, laying off people and hoarding government paper instead.
As a counterpoint, consider how an inflationary currency causes income equality. Poor people typically hold their net worth in cash whereas the rich have the ability to invest in income generating assets. An inflationary currency ensures that the poor remain poor, because their primary asset is being constantly depleted.
Gold is very volatile (sure not as much as cryptocoins) and this is for the best as gold volatility prevents it from hurting the macro-economy.
You think poor people get a better deal getting a few bucks a year of returns on the little savings that they have while being forced to indirectly fund a much larger subsidy on rich people's wealth, a subsidy that is given specifically to the those who get out of the private markets in favor of holding government paper, that close down businesses and lay these poor people off?
I won't be responding to follow ups to this conversation as it doesn't feel very fruitful but there's a couple things in your comment that just don't follow for me.
How is an asset that holds its value a subsidy? How are poor people indirectly funding that subsidy by holding an asset that doesn't inflate? Really seems like you're projecting qualities onto something that just aren't there.
Plus there are other factors in wealth inequality besides cash holdings -- wages (minimum or otherwise) that don't keep up with inflation being the most notable.
If it is stabilized by a government to hold its value while marginal assets on the private markets only offers negative returns (adjusted for risk and liquidity), the government stabilized asset is effectively a forced subsidy.
It's a subsidy to those who hold the subsidized asset from those who don't hold any (though long term it's a bit unpredictable who exactly ends up footing the bill, it depends on whether it happens through inflation or taxes or price distortions etc.).
What is super destructive about this type of subsidy is that it displaces private investment. The world shifts from people owning real shit, such as factories, inventories, business infrastructure, machinery, houses, cars, etc. to collectively holding government manipulated tokens. While for an individual, holding the tokens is more advantageous, for the aggregate it's super destructive as it becomes a negative sum game.
Tokens are just IOUs. They don't have intrinsic value. When everyone wealth is in the form of a promise that everyone else owes them something, no one really has anything.
Despite a bit of exaggeration and unnecessarily salty language, I found the OP to be a though-provoking piece, well worth the read.
This passage, in particular, struck a chord with me -- it criticizes all the money-burning unicorns selling products and services below cost:
"What predatory pricing does is to enable competition purely based on access to capital. Someone like Neumann, and Son’s entire model with his Vision Fund, is to take inputs, combine them into products worth less than their cost, and plug up the deficit through the capital markets in hopes of acquiring market power later or of just self-dealing so the losses are placed onto someone else. This model has spread. Bird, the scooter company, is not making money. Uber and Lyft are similarly and systemically unprofitable. This model is catastrophic not just for individual companies, but for their competitors who have to MAKE money."
Everyone in this thread is nodding sagely along with this while not thinking about how this insanity drives up their own tech salaries to insane levels which will collapse soon after the vision fund collapses.
Would software salaries (in the US that is, we here in Canada get paid nowhere close to American levels) collapse though?
There's practically unlimited amount of work that needs to be done and practically unlimited amount of good ideas left in the world to exploit. One fund going out won't do anything to change that.
They would. The actual value that developers make is only a fraction of what they re paid in US. Look at wages in Europe, eastern europe or china which dont have a bubbly market and get paid the market fair price. Its very difficult for internet companies to make actual profit value when everything is locked down by behemoths sucking all the revenues. Besides , VC subsidies is what attracts developers to SV
I understand your concern, but the author’s conjecture is that if we drive this “counterfeit capitalism” out, then instead of a few companies being run by and for financiers, there will be more companies and more startups and more competition.
I suggest that would lead to more tech jobs and higher salaries, because businesses would be based on creating value, not on using an ocean of cash to drive everybody else into bankruptcy.
If you buy his argument, “counterfeit capitalism” is actually at odds with what YC is trying to accomplish.
To think how close Wall St was to selling this turd to Investors....
JP Morgan says the company was worth somewhere between 46 -63 Billion, Morgan Stanley estimated 43-104 Billion. Their lease obligations are over $40 Billion and the company loses billions every year. The next recession in Commercial Real Estate space will wipe them out sticking Landlords with billions in losses including upgrading buildings to accommodate them.
If it weren't for SoftBank using money from the Saudis Vision Fund as well as other sovereign funds like Abu Dhabi's, I have no idea if they would/could exist. These funds are going to take a bath unless they can convince someone to buy into it.
I got halfway through, but I'm stopping. There's some valid points in here, but I don't find the author credible.
> If you know Dimon’s actual reputation, him getting suckered isn’t surprising.
Jamaie "doesn't give a shit about Bitcoin" Dimon. So he won't just hop on any bandwagon.
> [Masayoshi Son is] an owner of Sprint, and he’s currently trying to force an illegal merger of Sprint with T-Mobile
Not sure how it's "illegal," it's a healthier merger than the previous T-Mobile-AT&T attempt, and a lot of people don't think Sprint is a sustainable business than can last as the number four player, so giving AT&T and Verizon a run for their money is the best outcome for consumers.
What the rich and powerful say in public is often different from what they do in private. People at Dimon's level are absolutely invested in crypto, they're just quiet about it so they don't spook the markets.
Warren Buffet often spouts folksy sounding wisdom like "I don't like businesses I don't understand", and then talks about Heinz Ketchup or General Mills. But at the end of the day, he extended Goldman Sachs a $5bn lifeline in September 2008 in a highly complex deal. [0]
Do you have any proof of that? Because your article about Buffet is neither about Dimon, crypto, or rich people investing in the latter.
In fact, I'd say Buffet understood Goldman was undervalued when it plummeted during the height of the housing crisis, because Buffet understands financial operations. That behavior is not contradictory to anything Buffet has said, nor is it proof Dimon invests in crypto.
While the writer is a irritating in how he presents info, he does have good points. WeWork never looked like a real business to me, I thought the IPO as presented was such a great work of fiction. In the end the "business" is renting office space. It's not worth any more than that. At least Uber and Lyft provide something new (calling taxis from phones, I guess you could think of that as not terribly new) but it did change how people travel in cities. WeWork is basically shared office space but the business is mostly the founders scamming money out of investors.
> At least Uber and Lyft provide something new (calling taxis from phones)
It's less than that—they provide the ability to call taxis from an app. You've been able to call taxis from phones for significantly longer, you just had to dial a number.
I know this isn't a common way to call taxis everywhere, but it was in some locations. I went to college in a small-ish city called Saratoga Springs. If you wanted a taxi, the expected method was to dial one of the local taxi companies. They'd arrive in a few minutes. It was a little more expensive than Uber and Lyft, but not drastically so, and while I'm sure a bit of that price difference comes from increased efficiency, I think a lot of it is just VC money.
I think what they uniquely provide is actually tracking the cab to your door.
I probably called 3 cabs total before I was aware of uber, and my experience each time was wait for around an hour, even if you had pre-arranged the pickup, and when calling the dispatcher, they would just say the cab was 10 minutes away, no matter what was actually going on.
I briefly drove airport shuttles and we'd sometimes rescue people who had been screwed over by taxi dispatchers. I don't think drivers faced any consequences for never showing up at all.
I personally don't blame the drivers, most of the time.
My impression is that taxi companies, wanting to be profitable, keep the largest number of drivers on call that can be maximally utilized -- not the smallest number needed to guarantee a certain SLO. So when you call dispatch and they tell you "30 minutes", that's a bald faced lie. It's not that the taxi driver got lost or stopped for a coffee break on the route, it's that they did not have any taxi drivers available for the next 80 minutes, and knew it.
The drivers don't get punished because they did nothing wrong; there may have never been a driver assigned to go pick you up.
It's like when you go to the grocery and there is one checkout open and ten people in line; it's not that the cashier is slow, it's that it is more profitable to make you wait than to have two cashiers sitting idle after you leave.
And (perhaps more importantly) actually give the end user a reasonable estimation of what's going on and how long it'll take for the driver to reach you.
Perhaps even more significant is that Uber gave you the price of the trip in advance. With regular taxis you had to guess, and if you weren't familiar with area, you best guess might well be just "expensive". And then you had to worry about being ripped off.
Uber gave everyone access to information about the cost of taxis - and generally people found it wasn't as expensive as they'd thought.
One thing they provide as well is price transparency. You know how much you will pay when ordering a ride. You get a nice receipt with a map and the route afterwards. No cash changes hands. All this makes it much safer than traditional scummy taxi industry where getting a ride for 2-3x the price because of some technicality was common occurrence. Being drove around by longer route was standard as well.
It's likely not true for all areas or countries but here Uber provided so much better experience that I would use it even if it was more expensive. It's the best thing that ever happened to taxi customers here as now many other players implemented apps with similar features to Uber. Even if they go bust I will remember them for making my life much better.
Uber and Lyft also broke the uncapitalistic taxi medallion system, lowering prices and easing entry for new drivers. In places where taxis weren't being crushed by the government, the equilibrium price was already in place and Uber wouldn't have been able to lower it by much. In places like NYC there was a big difference.
WeWork's big mistake is that they didn't roll out their own web application framework and machine learning libraries, and didn't showcase enough their microservices architecture.
Sarcasm, but up to a point.
> This is of course Amazon’s model, which underpriced competitors in retail and eventually came to control the whole market.
Amazon's model is to be better at ecommerce and logistics than everyone else, including Walmart, which itself gained market share through incredible skill at logistics. They reinvest what would be profits into getting better, and frequently succeed at it.
Most companies don't actually do that once they're mature.
The whole thing about subprime mortgages and how jp was slow to get in isn't entirely accurate. I mean I guess it could have been the actual reason since there's always a disconnect between management and the ones actually doing the work, but the structured credit team at jp Morgan was acutely aware at the time how the whole cdo business was going out of control. This was because they were also the team who invented the cds and knew the whole cdo business made 0 sense and active chose to refrain. It's documented very well in the book "fools gold" which is a pretty good read.
At that level of income, clothes are a choice. Simply insulting him about his clothes may not be very helpful, but thinking about the message Neumann is sending with that clothing choice is productive. I'm inferring from the text that that picture is from an investor presentation, though I don't quite know, but if it was, those clothes are rife with meaning. They are as deliberately crafted as any of the words in that presentation were, and you are fully entitled to analyze that and make decisions based on that analysis.
That is pretty much exactly the same thing as seeing a character wearing a T-Shirt in a movie and trying to argue it must have just been what the actor came on to the set wearing that day.
In a behaviorial finance class I took we learned about a few hedge funds that followed CEO's during the 90's, and shorted their companies whenever the CEO underwent plastic surgery. Turns out that personal appearance insecurity of the CEO was inversely correlated to company performance.
From Steve Job's turtleneck to Zuck's zip-up hoodie, CEO appearance is a market signal that some speculators choose to use.
Also the bits about these people "Jamie Dimon of JP Morgan and Masayoshi Son of Softbank". Two paragraphs of hearsay about the skills and motivations of these people and not a drop of anything resembling hard evidence. A lot of "he's actually incompetent and the only reason he made good decisions in the past is because he was lucky".
If you follow Matthew Stoller on Twitter (or subscribe to his substack), you'll find lots of specific content about those two. Usually he's snarky about people he's built a wealth of back story on.
I don't find the t-shirt bit irrelevant, it's an aesthetic that speaks volumes and has a place in the critique, particularly as contrasted with the aesthetic that will replace it. That's how it's referenced, and not as a direct or adhominem attack.
And describing Jamie Dimon as a mediocrity is simply ignorant. JPMorgan has outperformed all the big banks for the past 10 years, and it's not close.
JPM is tied up in billions of dollars of loans to WeWork, but those loans are commercial mortgages. Typically those loans are largely underwritten based on the building and real estate rather than focusing the borrower. Presumably the loans were made on the same terms they would be made to a REIT, based on what revenue the building can support. If WeWork fails, well then JPM owns the building.
It's ok to make fun of the guy who gets in trouble for smoking weed on private planes and whose new age nepotism hire wife fires people for having bad energy. The reason people like this exist is because nobody has been ridiculing them and saying no.
If anything we need way more people making fun of elite billionaires. Sharpen up your wit and sarcasm folks, we're gonna need it in the years ahead.
I did not read that as a criticism of Neumann, I read it as, same shit different day. As in, don't matter how you dress up their CEO the company is still shit
He has some criticisms but he strays from seriousness with jabs like the one you point out. It sounds like me in high school being sarcastic in a juvenile way —it’s momentarily funny but totally detracts from the main story. In this case issues in self-dealing. In a small biz self dealing may be necessary and may be common practice. After all it’s all your money or your debt. But here it’s in conflict with fiduciary duty of a CEO.
While it can sound personal, I think it's more aimed at the general lax and loose silicon valley "new age" way of doing things, opposed to the stuffy old ways of white-collar finance.
There's this mantra that you need to suspend your disbelief a bit, when it comes to (tech) startups.
Defending those of poor character and moral fiber (not my judgement, facts reported) from a jab about their clothes is low priority. The other issues presented are far more pressing.
I personally think it's good to call out arguments that we disagree with, that are imprecise, or irrelevant.
Not as pressing in this case but elsewhere if you leave those arguments uncriticized it gives those you are arguing against more leverage in the form of things they can point out.
What if its totally irrelevant to the larger issue and the nitpicking of minor parts of an article are just used to distract and diffuse any conversation actual issues?
You presume to tell others how to arrange their priorities? Very well. I will say that you are wrong. It is a fine priority to defend people from unfair jabs and accusations. These attacks damage the quality of our public discourse, which is in bad enough shape already.
You will find no shortage of fair jabs and meaningful accusations to be aired in the matter of WeWork. They are scathing enough on their own. Random sniping about T-shirt quality detracts from the points that matter.
What is more embarrassing is picking one statement in huge article and getting hung up on it? As a writer certain things make stylistically sense perhaps only to the author, but that is one substantive article about the state of Capital markets and "Captains" of New Industry.
We're not under any time pressure in this discussion; there's no need to prioritize. Pointing out "low blows" which and writer should strive to be above is pressing, in my opinion.
That's not at all a low blow. It's pointing out one of the many signaling methods this conman used to swindle investors "look at me, I make no sense because I'm so unconventional..."
It's crazy to me that a forum full of the self proclaimed intellectual elites can't get the meaning of that sentence without a full blown explanation.
Ah, I see your point. That is deceptive; I thought it was just generic vitriol.
As for me I only _dream_ of dwelling amongst the ranks of the Valley's intelligentsia... many years to go before I proclaim myself a bonafide intellectual elite.
So you don't care about convincing people, that's fine, but just realize that you're doing your own causes no favors by not caring about how you make your arguments.
I am so glad that the author of this piece doesn't limit his criticism to just Neumann, but he also goes after the people and firms propping up such obvious dumpster fires. Neumann would not be able to siphon off so much investor money if he weren't given legitimacy by big players. This issues at play here are absolutely systemic, and any analysis that doesn't acknowledge that fact is fundamentally flawed.
> Part of what’s going on with WeWork is that monopolies and private equity have eliminated profitable opportunities for investment, which is why the Federal Reserve is increasingly powerless.
No, you are confusing "monopolies and private equity" with the natural result of Sarbanes-Oxley. If you make going public too costly... companies are less likely to go public.
That would make sense only in the context of actively fraudulent companies.
A big reason to IPO used to be to gain the liquidity necessary to scale the business. This is no longer as necessary, since private financing allows companies to get billions in funding without trading control and being beholden to what most perceive as the short term thinking of public shareholders.
The business model of these companies goes something like this...
In phase 1, sell $1 at deeply discounted rates of 50 cents. Sell a lot of them to show tons of revenue.
In phase 2, sell $1 at slightly less disconted rates of 40 cents and show growth in margins.
In phase 3, establish monopoly but still sell $1 at 80 cents and show both topline and bottom line growth.
Finally, go belly up after not able to overcome the fixed costs in their business.
Trying to corner a market is not a new idea. A forgotten incident from the 1980s: the Hunts brothers thought they could corner the market on silver. They spent about $6 billion buying up silver futures. That's about $30 billion in today's money. They briefly controlled the majority of all the silver coming out of silver mines, and thought they could dictate terms to industries that needed silver (such as the photography industry, which needed silver for film development). The price of silver skyrocketed. However, over the last century, silver has become fairly democratic. Most families have some items of silver lying around. When the silver price peaked, millions of families began rummaging around their homes, finding what silver they could, and then selling it. The price of silver crashed, and the Hunts brothers were forced to declare bankruptcy.
Cornering a market works if the supply of something is really limited and new supplies can not be quickly created. Maybe WeWork thought it could do this with office rentals? If so, it seems it lost the bet.
"If you know Dimon’s actual reputation, him getting suckered isn’t surprising. From what I heard back in 2009, Dimon is a mediocrity who essentially got lucky his bank was too slow to get in on the subprime scam in 2006; he then used his bank’s incompetence at getting into the bubble as justification for how prudent he was."
I take issue with this.
Nothing to do with Dimon or the subprime crisis particularly but rather, what I think is an important logical fallacy.
I think (hope) there is a formal name for this - please correct me - but I internally label it the "missed extra point fallacy":
"My team played better but they had a weird, missed extra point and so they lost the game - but they are certainly the better team."
This is wrong thinking, in my opinion.
There was a game. The game had rules. People participated. The team with the highest score when the game ended was, by definition, the better team.
I don't know how much credit one should receive for not being wiped out by the subprime crisis, etc., but however much credit that is, Jamie Dimon should get it.
> If you can counterfeit something for cheap, the counterfeit will eventually take over the entire market and drive out the real commodity.
This is definitely true in the case of parmigiano reggiano cheese which is a $1.2 billion dollar a year business from the real cheese. The fake cheese, called parmesan, makes $100 billion. 99% of Parm cheese sold each year is fake.
The article paints a picture of how this model of funding businesses is growing and will taker over all capital markets. But then points out that mandatory disclosures and a sane public market actually stopped things in its tracks for WeWork.
Burning many billions of dollars before the market takes a step back and says "WTF?" is hardly a model of market efficiency, but if the market is now waking up to the problems of this sort of investment then, yes, however imperfectly the market is correcting this bad behavior. I suppose the question then is whether WeWork represents a turning point in this trend, or merely an outlier.
Author makes some good points but also comes across as quite aggressive himself. The entire article is just throwing shade on everyone in sight from their choice of clothing to their timing on the fraud boat...
It's interesting to me that so many people are picking up the clothing thing as mean - he literally said: "The new business model will be to beg investors to give money to the new co-CEOs, who will radically change the company by wearing suits to investor presentations instead of ill-fitting t-shirts."
That's not really saying 'look at this idiot in his ill-fitting t-shirt' it's saying 'this system supports snakes, and whether they wear suits or an ill-fitting t-shirt, they are still snakes.'
WeWork and Uber are viable businesses which are heroically trying to absorb flood of excess capital sloshing around the world today. Both WeWork and Uber have potentially enormous TAMs which can justify insane valuations despite being loss-making. And both WeWork and Uber had charasmatic but highly dysfunctional (from a management perspective) leaders who were able to combine salesmanship with dirty dealing to solve the problem facing the big institutional investors - having too much money and nowhere to put it. You can't parcel up $100bn into tiny packets and participate in hundreds of thousands of series A/B/C/Ds - instead you find a business with a plausably enormous TAM, a founder who is essentially a professional PR/brand builder (so as to reassure your clients), pump them full of cash and wait for the IPO.
WeWork didn't quite make it over the line this time, but I wouldn't count them out just yet.
There is nothing stopping WeWork or Uber becoming profitable businesses, even if it means they have to forgo volume (for Uber, they almost certainly have to increase fares. WeWork would have to stop building new locations). The explaination for why they don't is the above.
I think there's a space for a one-stop business services company. Office space with utilities, with the definition of utilities expanded to include Internet access, catering, software licenses, shared IT staff, and such does make sense. I also think, though, it's a new tweak on the office real estate business and not a groundbreaking tech business that needs to be valued the way a tech company would be.
WeWork is really just a middle ground between a co-working space and a full blown office. Seems like a no brainer for someone to fill the space. If WeWork collapses I'm sure a dozen other companies will fill the space.
> If you know Dimon’s actual reputation, him getting suckered isn’t surprising. From what I heard back in 2009, Dimon is a mediocrity who essentially got lucky his bank was too slow to get in on the subprime scam in 2006; he then used his bank’s incompetence at getting into the bubble as justification for how prudent he was.
This is some backwards logic if I ever saw it. Damned if he did, damned if he didn't, I guess.
> This kind of counterfeit capitalism is terrible for society as a whole.
Well, so says the author, but he doesn’t make a very compelling case. He hammers WeWork, but WeWork is failing spectacularly and miserably, as Adam Smith’s invisible hand suggest it must. A lot of people have a problem with Walmart and Amazon, but I have yet to see any evidence that either of them has harmed society _as a whole_. He suggests they have the potential to, but rather than throwing out the baby with the bathwater and preventing the world from getting Amazon and Walmart, we can deal with any actual abuses (like illegal labor practices) if they occur - just like we would if they were being done by “Jim’s corner store”.
The author seemed to be more pointing out opportunity costs and the inability to build a long-term employment structure as consequences.
Lower workforce participation, 'underemployed' workers, the rise of the gig economy (essentially just independent contractors with no insurance) and a concentration of wealth without community investment are others.
Some of that is countered by going for illegal labor practices specifically, but mostly it's countered by restructuring the incentives companies work with and constraining their freedom to act generally.
It should have been obvious to any layman that WeWork is a house of cards. My previous company moved into (what I think was) the first WeWork in East London in 2016. There is now 15!! I know they have empty floors in some of these buildings as current company got moved due to a rat infestation. If this isn't a flimsy facade I don't know what is
> if Adam and Rebekah have not contributed at least $1 billion to charitable causes as of the ten-year anniversary of the closing date of this offering, holders of all of the Company’s high-vote stock will only be entitled to ten votes per share instead of twenty votes per share.
This is the second scam that investors fell for. First Theranos and now WeWork. In both cases the founder is a cheat and a fraud. My guess is investors didn’t want to believe it’s fraud and desperately wanted it to be a real company and so kept funding them.
WeWork has no franchising business model nor is it acting as a middle man like Uber that pushes the risk to the users of the platform. Instead it is the worst of both worlds. They lease the office space and basically resell it at a loss.
> Across the West, the basic problem of a corrupted productive process is becoming a quiet crisis. The reason is simple. The people that do the work in organizations are increasingly excluded from the decision-making about the work. That is why Boeing is losing its ability to build planes
The best managers simply stay out of the way of the people working, but most managers these days are in it to aggrandize themselves and cause suicides. Are you listening Facebook?
He points out that if we still had Glass-Steagall, which kept banks and brokers apart, we wouldn't have some of these problems. Probably wouldn't have had 2008, either.
Bringing back Glass-Steagall was in Trump's platform in 2016.[1](p. 28) [2] That went away as soon as he was elected.
This article is on fire. I got a particularly good laugh out of this bit:
>> Dimon is a mediocrity who essentially got lucky his bank was too slow to get in on the subprime scam in 2006; he then used his bank’s incompetence at getting into the bubble as justification for how prudent he was.
I have never heard this theory floated. But to say JPM failed because it didn't fail like all the other banks is the most contorted sort of logic you can find anywhere...
Engaging in such a strategy used to be illegal, and was known as predatory pricing.
The Sherman Act and the Clayton Act are no longer enforced in the post Citizens United world, i.e. legal US corruption: kochtopus, dark money, super-pac, 501-c-3 foundations and institutes, etc.
edit: I think the article is deeply confused about whether it wants to talk about how shitty WeWork and it's associated investors are, versus why pumping loss-leading companies full of cash is a bad idea. The former is just yellow journalism and not very interesting (also well-aired already), the latter is important (imo).
The point is a simple one, I think. It's well understood that capitalism breaks if an actor is able to consistently create and defend a monopoly. Pumping a loss-leading company full of capital under the expectation that it will loss-lead until it dominates the market is one such strategy. WeWork is a classic example of this strategy in action, albeit an ill-begotten one. We've made this illegal in the past, we should consistently enforce such laws as exist, and improve them to bring them into 2019.
Let's not get pinheaded about this thought. I'm personally bootstrapping a company from $0. That means I'm using my "deep pockets" to "loss lead" a company. Nothing about what I'm doing is "anticompetetive" in the relevant sense because of scale. Furthermore, my growth is pegged to my ability to make money (I won't hire unless I can pay a salary out of revenue). I do think capping naked investment in loss-leading companies is probably a good idea. I personally think VC culture results in bloated, unsustainable companies that over-hire overpriced engineers, and that it's long term a very inefficient strategy that is bad for the health of the economy.
Obviously this is a weird forum to air that view on, but here we are. At least I'm putting my money where my mouth is.
"We've made this illegal in the past, we should consistently enforce such laws as exist, and improve them to bring them into 2019."
It seems to me that this sort of thing is the direct opposite of the "quarterly profits mentality" that people complain about. While you can say there must be a happy medium, I don't really believe there is, because every business can be framed in terms of the "short term focus" or "predatory and trying to take over the world" extremes.
Sounds more like a cargo cult than counterfeit. And he describes it as a social problem. After Theranos, everything is possible, investing seems faith based. And incidentally, Tech is faith-based too , with some bets failing, like VR/AR, self-driving.
I was coming here to see if there were any comments on this and if I might leave one.
It seems like a sketchy real estate company is a little bit less consequential than a medical device that doesn't work (potentially killing people).
But I find the two points interesting as: What will it take for the Silicon Valley community to start being openly critical of a company and that's OK?
For example if you leave comments on here that are skeptical of any given company or its prospects, even rightfully so, you may get a lot of push-back and people assuming you're some kind of mean jerk. But once the founders are shown to be actual frauds, the tone changes to what it might have been in the first place, had we had a bit more healthy skepticism and less "ra-ra, new companies good" kind of blind faith.
In that I rate Theranos and WeWork to have something in common. They tipped these ocassionaly overly polite scales towards admitting that some companies act in bad faith.
AFAIK he hasn't done anything illegal beyond (allegedly) smuggling drugs across international borders (also i guess the acts OP mentions to stop self-dealing). This was all fairly known, we all thought it was stupid, but no one cared until the IPO revealed the public markets were more skeptical than anticipated.
A relevant line from the essay that reminded me of Holmes:
"The men and women who run them have to be charlatans, because they are storytellers justifying losses."
> Son is a powerful and connected political operator
Yeah no shit. Most money is built on satisfying egos than actual work. It's a house of cards which will face its greatest challenge with the climate crisis.
cargo cult - where someone sees bounty falling from the sky and then imitates the behavior without understanding it. Supposedly this happened in New Guinea during WWII where people saw parachutes of food and weapons coming down after the soldiers laid out marker panels. So they laid out marker panels in a ritual. Also this happened in 2019 when companies were constructed without understanding what was required to actually have a business.
Funny enough, the founders who are cargo-culting are finding monetary success (Neumann will still be rich when the dust settles, although I'm not suggesting he got all that money out of WeWork by accident). It's the investors who will find out that just making it look like you are investing in a world-changing tech company isn't enough to make it rain.
This is key:
"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."
> Adam Neumann is not “quirky,” he is not “charismatic,” and he does not have “an unorthodox leadership style.” He is an untalented and abusive monster who lies to get what he wants. And he was given an unlimited credit line from which he could legally steal.
'Charismatic' is often a trait found in sociopaths. I'd say Adam IS charismatic, but that is often a problem - charisma charms people and blinds them to the bad parts.
> Time to Restore Honest Capitalism
It takes a long time to scale something, and it inevitably loses money in the beginning. How do we tell the difference between 'counterfeit' companies and real ground-breaking concepts?
He is making an interesting point but misses the source of this ‘counterfeit capitalism’... it’s not “capital”, it’s a printing press run wild leading to misallocations of hard earned productivity surpluses
I prefer calling it "Poker Capitalism". What he's describing is a situation where a player with a big stack can bully his way to taking the other players' money, even when his cards are not particularly good or well played.
In any case I think he's got a good point. The main thing I'd say is that capitalism requires both freedom and true signalling. We focus a lot on the former but tend to forget the latter, despite lessons learned since the 1800s.
Lost me at calling the Sprint/T-Mobile merger "illegal" ... I mean, I was pretty interested in the content up until that point. WeWork itself lost me at "no meat" will be reimbursed or paid for.
The WeWork CEO is in my opinion a charlatan douchebag, but the author just feels like a twice burnt socialist by the time you get halfway through, and I stopped reading.
“ There are laws, like Robinson-Patman and the Clayton Act, which, if read properly and enforced, prohibit such conduct. The reason is very basic to capitalism.”
This is critical in this issue. Societies have grown but our legal systems have not. Justice today is conditioned on the interpretation of judges and on the enforcement of some bureaucrats. These are vulnerabilities and they are being exploited.
Counterfeit capitalism is a nice term. I think neoliberalism will be labeled as such by historians in the future. The collapse of Bretton Woods and the subsequent neoliberal laissez faire economics set off a chain reaction which led to the 2008 sub prime crisis and the current climate crisis. The world will eventually move away from that. Friedman was wrong. Society is not built on greed.
Bretton Woods system collapsed due the stagflation crisis of the 70's. Economists started re-thinking Keynesian economics and the gold standard was abandoned. That precipitated the collapse. [1]
The Chicago School economists were successful in pushing through the neoliberal agenda. They were so successful that both democrats and republicans adopted it en masse. Even Singapore adopted neoliberalism. There is direct correlation between increase in income inequality with the switch to neoliberal policies. [2]
"The company is losing an enormous amount of money and 'has no path to profitability at scale'." - well if there is no path to profitability, how is it still worth 10-15 billion ?
"If you know Dimon’s actual reputation, him getting suckered isn’t surprising. From what I heard back in 2009, Dimon is a mediocrity who essentially got lucky his bank was too slow to get in on the subprime scam in 2006; he then used his bank’s incompetence at getting into the bubble as justification for how prudent he was." - Dimon is the most respected banker and he led JPM to become the largest bank in the western world. Well somehow that is mediocre.
"WeWork ostensibly became more valuable because Son said it was more valuable, and bought shares for higher prices. " - well isn't this how market pricing works.
And then whole blurb on Counterfeit Capitalism - which in essence described capitalism. The stronger player aims to get market share at the expense of a weaker player.
The author is just another one with a big mouth writing clickbait articles !
> The author is just another one with a big mouth writing clickbait articles !
This is not clickbait. This is not promising one thing and delivering another or being overly inflamatory. It's a highly intelligent analysis of systematic issues in the current (US) capitalist system.
> well if there is no path to profitability, how is it still worth 10-15 billion ?
It is not worth anything. If they really have no way of becoming profitable and they have more debt than capital (in terms of money and property) WeWork is worth less than $0. That's why the IPO failed.
> "WeWork ostensibly became more valuable because Son said it was more valuable, and bought shares for higher prices. " - well isn't this how market pricing works.
There was no market. That goes together with the point above. In a real market: Sure, it's worth what people would pay for it. But here people wouldn't pay that much, the valuation only arrived at the point because it was decidedly not a market situation.
> Dimon is the most respected banker and he led JPM to become the largest bank in the western world. Well somehow that is mediocre.
Evidently the author disagrees with you. Without judging myself I'd kindly suggest that "most respected" anything does not have to be a sign of merit.
You have naive and warped view of what constitutes capitalism. Dumping, protectionism, state subsidies, what have you, have had a long and varied role to play in the history of capitalism.
> And then whole blurb on Counterfeit Capitalism - which in essence described capitalism
This is my favorite thing. Whenever someone describes something like "Counterfeit Capitalism" or "Crony Capitalism", it's always just describing capitalism.
I feel like this is similar to how Greta Thunberg recently described capitalism as "fairytales of eternal economic growth". That too is just describing capitalism.
The way she is attacked by the Right, and what they say in their attacks, really makes it obvious that they know it's not an environmental issue. It has absolutely nothing to do with the environment or climate change. It's neoliberalism and capitalism and imperalism and "fairytales of eternal economic growth". They know that, and that's why they pretend like they cannot engage her because "she's a child".
All climate change activists should switch their message and focus on capitalism, not reducing emissions or climate change. Because the amount of CO2 emission reductions we need are clearly impossible with the current system. And if you leave capitalism out of the argument, it lets neoliberal leaders off the hook.
> Because the amount of CO2 emission reductions we need are clearly impossible with the current system.
Depends what you mean here, if you mean politically impossible because right people want to get richer and the easiest way to do that short term is do nothing, sure.
Technically from my understanding the climate crisis is very much solvable, but it is a giant coordination problem between very dishonest actors with zero trust.
I actually don't think it's really greed. I think part of it is ethical business owners who just want to keep their businesses running. But to do that, they have to compete on a global scale and even if the business owner wants to cut emission and be carbon neutral, they can't compete with other businesses who aren't doing that. So, just points back to capitalism being the root cause. Same thing with moving factory production & jobs back to the US. You can't, even if you want to. It's not economically viable. Greed is not required to make these decisions. And even if you do move the factory back to the US, the jobs are super low paying (see: American Factory doc).
I also think part of it is a complete unwillingness to reduce the qualify of life. The rich western nations of the world are consuming 4+ Earth's worth of resources. Clearly this isn't sustainable. So, why do we just keep fooling ourselves into thinking that we can keep eating massive amounts of beef and having gadgets that we throw away after 5 years and drive 60 miles per day commuting? A correction is needed, and it will be painful. The longer we wait, the more painful the correction will be.
This part bugs me. This is standard procedure for small businesses, having a real-estate business leasing property to your main business. If you want to succeed, you own the building. Otherwise, you are on borrowed time.
The thing is, a small business' owner for both of those entities is the same, with aligned interests. And the owner benefits from both being successful.
In the case where he personally owns property leased out to a company that's going to be public: The public investors are cut out of all that rental income. And in the case of WeWork, their regular business isn't actually profitable. Which means this dual business structure would be designed to siphon public investment into Neumann's personal property, as WeWork is forced to continue paying it's leases to Neumann while it continues to just lose money.
It's not as common as you may think. I know of a company where the CEO was doing this to line his own pockets. He went to jail for a different fraud (vendor kickbacks) and that's when the company board found out about his self-dealing and sued him for breach of fiduciary.
Yeah sure, when you're a 2 persons business making home made shoes in a garage. Not when you're a multi millionaire basically paying your _personal_ real estate loans through investors money. That's an obvious conflict of interests, I don't even know how these kind of companies are allowed to be honest.
I really enjoyed the author's perspective on this, and I like well-reasoned arguments from people whom I probably don't align with politically. To confirm my assumptions, I checked the About page
> Matt Stoller is a Fellow at the Open Markets Institute
Ok, what's that? A Koch sounding name, but I'm guessing more Soros because of the repeated calls to government action on this (and the Dodd-Frank connection). A quick search led to a Politico article https://www.politico.com/story/2019/06/14/open-market-instit... which contained this nugget:
> Despite its small size — 15 or so employees operating out of a shared WeWork space in downtown D.C. — Open Markets...
> 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.