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The primary difference is the marginal cost of an additional customer. The definition of a tech company (at least for investors) isn't really about technology,
by dumbfoundded 7y ago
The primary difference is the marginal cost of an additional customer. The definition of a tech company (at least for investors) isn't really about technology, it's about a near $0 marginal cost of adding an additional customer.
A great example of this is Facebook. For someone to sign up and start using Facebook, it really doesn't cost Facebook anything. Facebook probably only thinks about scaling in terms of orders of magnitudes.
Uber/AirBnb and other double-sided marketplaces debatably meet this definition. For these types of companies, the marginal cost of a new customer is $0. But these types of companies also have to onboard providers. Much of this is onboarding is automated but it can still require human intervention. Still, it's very cheap to onboard, there's not really any sort of capital expenditure that goes into scaling the provider side.
WeWork obviously has a giant marginal customer cost. This is the fundamental criticism of their business model. Lots of successful businesses like Amazon can do this but it appears like WeWork doesn't have any sort of scales of economy. For Amazon, you can put more products in the same warehouse, you can build warehouses closer to customers for faster shipping. WeWork pretty much can just open new locations with the same model.
Note that WeWork is trying to expand into other markets like gyms to get some of these benefits but whether or not this is a scalable business model is debatable. So far, it hasn't worked and there's not a great indication it will.
You mention that WeWork could change its business model to get better scalability. Of course they could change it but so could a well-funded startup. So could AirBnb. Frankly, it's a hypothetical that isn't proven out. Basing a valuation on a what-if that isn't a natural extension of what they're already doing is extremely risky. To do what you're saying, WeWork would basically have to start from 0, maybe with some expertise about what customers want. AirBnb could immediately launch the same service with 10,000 locations by leveraging their existing hosts.
How they got a $50B valuation seems deceitful and ridiculous. They conflate using technology and modern appeal with technology business models. Currently, WeWork does not have any business model that could be considered $0 margin customer cost. Maybe one day they could find one. Probably not.
- fl0wenol 7y agoWould you consider a company like Ticketmaster a tech company in that case? What about pre-merger DirecTV? (In the former case I think it pretty much meets the definition but is not traditionally thought of in this way; in the latter I think they are very dependent on low-margin but non-zero scaling but clearly tech-enabled in the same Netflix has become)
- dumbfoundded 7y agoHonestly, I haven't done any research on Ticketmaster so I'll spell out my thinking more hypothetically. Ticketmaster has a $0 marginal additional customer cost. That's great. That's the model of a tech company. The real question is where the ceiling is for scaling event offerings. I don't know if Ticketmaster has enough dominance in negotiation to basically get listings for free and 100% penetration of events. I'm sure Netflix doesn't get shows/movies for free. Most tech companies have a ceiling. Generally, that ceiling is defined by the market. If ticketmaster already has monopolistic dominance in event tickets, there's not really a way to increase the size of the business. At that point for valuations, you start using a discounted cash flow model with some risk built in for the competition. The reason companies like Facebook and Google show enormous multiples is because the size of their market is basically the internet. When pricing the stock, people expect Google and Facebook to continue growing. Once everyone is online, the multiples should decrease substantially.
- mrtksn 7y agoSo the tech in "Tech company" doesn't stand for technology but for "scalable"?
- dumbfoundded 7y agoFrom my understanding, software tech companies were the first companies to have near $0 marginal cost customers. Generally, I don't think people refer to GE, Boeing, any energy company or any auto company as "tech" companies. These companies develop significant technology. Tech seems to be branding for modernism, software, and rapid low-cost expansion. Lots of businesses are scalable in some sense. There are a lot of MacDonalds out there. I would say the primary difference is adding a new customer costs virtually nothing. This seems to be a relatively unique property of software companies.
- maehwasu 7y agoYup. It’s a metonym that’s getting at the idea of “bits, not atoms.” Plenty of companies use extremely impressive tech to manipulate atoms, but, by convention, we call the ones that manipulate bits “tech companies.”