WeWork – Network Effects in the co-working space
The concept of ‘co-working’ is not new but is gaining momentum as a viable work space option for the urban entrepreneurs of today and tomorrow. At its core, co-working simply means sharing office space. Co-working as a business, at first glance, resembles any real estate based business. A co-working business must secure attractive space and then find tenants who are willing to work in that space together. Bulk acquisition means that the company owning the space can secure it at a relatively low rate per square foot. Tenants initially benefit from having other companies in their office space by simply increasing the number of people working in a given building or floor, thus reducing the price per head. This way, the owner of the space can operate with decent margins while still providing an attractive space in a prime location at a reasonable rate to entrepreneurs seeking office space. The price these small businesses pay per square foot is not incredibly competitive but they are stilling willing to pay it because of the direct and indirect network effects of the community that they are joining. They benefit from joining a community of other creators, and one company is capitalizing on this simple neighborly concept faster than any other – WeWork.
I was granted the opportunity to spend a lot of time with WeWork this summer and was lucky enough to have access to the numbers that both measure and drive their business. I was astounded at incredible internal and external growth rates they displayed. Now, every day I sit in Networks, I think about how WeWork is successfully tapping into the network effects of literal networking in physical space by breeding strong social ties between their customers and partners.
First observation: direct network externalities. This is traditionally defined as an effect where each new user of a product increases the value of the same product for each of its users. WeWork is accomplishing this in a simple way. Each hip new start-up that joins WeWork helps breed a culture of creation that is attractive for other start-ups. Creative people often want to work around other creative people and sometimes will even find compatible skills and businesses such that they can form partnerships and business relationships with their neighbors in the WeWork space. Start-up marketing and branding firms will have plenty to do for the other companies. Financial services groups benefit in a similarly obvious way.
Second observation: semi-indirect network effects. WeWork members tend to be more successful. I saw this data first hand, and can say with great confidence that these small companies are doing better than they would be without WeWork’s services, amenities, and widening network. When these companies succeed, they expand, and when they expand, they hire. That means more customers for WeWork, and that means that WeWork’s space becomes even more attractive, thus perpetuating this cycle – this positive feedback loop.
Third observation: competition in a tipping market. I ask myself as I read articles like the very very recent one linked below, “can WeWork survive?”. As much as I want them to, I still think this is a legitimate question. Competitors exist, and though WeWork is probably easily the fastest growing co-working space company out there, you still have to consider that in a tipping market, final market dominance can be anyone’s game. The key of course is market share, and when a small number of firms own similar shares, they are in what is called the ‘battle zone’. Once one firm reaches a certain critical mass however (like Facebook did long ago in the social network space) they runaway with the vast majority of the rest of the market share because of the positive network externalities granted by becoming a dominant player.
Will WeWork reach this size? I don’t know but I’m going to go take a closer look. They’re network is more than meets the eye with a digital members network, healthcare partnerships, and other tricks.
http://www.forbes.com/sites/alexkonrad/2014/11/05/the-rise-of-wework/