On November 6^th, 2017, The Walt Disney Company’s potential acquisition with 21^st Century Fox was first announced, and since then, has been the talk of all major media platforms. Although this sale has been thrown around, on and off, for the past month, CNBC reported on December 5^th that Disney and Fox could be closing in on the $40 billion deal, as early as next week. But despite this acquisition not yet being official, it alone speaks volumes about our current state of the entertainment industry, and the rapid shifts taking place in the movie business today.

“What is striking about this deal is that, presuming it goes through, it is evidence that both Fox and Disney have fully internalized how the world has changed and are adapting accordingly,” said the stratechery. In other words, networks have two options: adapt or boot, even if it means teaming up with your competition.

It is no secret that the internet has changed our media landscape—especially the way in which we now consume most, if not all, of our video content via online and on-demand. This change has been brought on by giants like Netflix and its rapidly growing power. So similar to how broadcast television destroyed printed content, a comparable domination is happening between broadcast TV and internet entertainment, with the latter in first place.

Companies like Facebook and Netflix are “dominating the digital distribution of digital video content,” as stated by CNBC, and Disney must contemplate what’s at stake to remain on top. The mutual factor in possession of power is access to its customers at the lowest distribution cost—this distribution cost has become close to zero thanks to the digital age. And access to customers is a result of providing the best user experience possible, as Netflix does—and once you provide that, you have your users hooked—and more users mean, again, all the more power.

The stratechery explained it best that “[if] selling the rights to a television show to a broadcast network and an international channel and whoever else wants it is good, then selling streaming rights to Netflix is even better! After all, the content still costs the same amount to make, and now it is generating more revenue. This, of course, is exactly what content producers did.” Disney did have its content on Netflix for some time, which was great for added reach and exposure. But they don’t just want to do “better,” they want to be the best.

It is known by most in the industry that Netflix is currently the world’s leading internet entertainment service, with more than 109 million subscribers in over 190 countries. But on August 8^th, 2017, Disney announced that it will pull its movies from Netflix and create its own direct-to-consumer streaming service in 2019. Netflix’s stock dropped over $10, from $181.33 to $169.14, just two days following the news, which shows the power that Disney holds. One reason for this was due to the shareholders’ fear that other networks could follow Disney’s lead and remove their content off of Netflix as well. This announcement acted as a precursor for the Fox acquisition (this acquisition being, a step closer towards Disney’s objective to make their streaming service one that tops Netflix).

So why is Disney even going through the trouble to launch their own service from the bottom-up? This is because, again, Disney is very much cognizant about the changing landscape of media. Entertainment gravitates towards streaming, and while broadcasted television still exists, it is unfortunately dying like the print industry now. Therefore, Disney can’t just continue to do what everyone else is doing by using a source like Netflix, HBO or Hulu to stream their content on. Because Disney is, and wants to continue to be known as the forerunner of the industry, they will not settle for what everyone else is doing.

But this isn’t just about Disney becoming the next Netflix. “From a marketplace standpoint, fundamentally what [the acquisition with 20th Century Fox] does is that it allows Disney to become a bigger player in the cable arena,” said president and co-executive director of national broadcast at Mindshare Jason Maltby—as well as become more accessible and attractive to advertisers. It could “promise one-stop shopping” to marketers and ad buyers, now that Disney has reorganized their ad sales for its entire portfolio, from ABC and the Disney Channel to Freeform and Radio Disney (qtd. in Business Insider)—and with this aquisition, they will only further consolidate their company with additional networks. Also to note, if Disney chooses to dive into the advertising market for their anticipated streaming service, they will have an immense amount of revenue from that alone that Netflix does not have, as a company who is an ad-free service.

And this acquisition 100% aligns with Disney’s trajectory to be the next Netflix. First of all, in terms of success, Disney ranked number one in profitability as one of the six largest studios, with 2016 profits of $2.5 billion. The company currently “owns Lucasfilm, Marvel Studios, and Pixar, [and] already makes almost $1 billion more than its next biggest rival,” Time Warner, profiting $1.7 billion in 2016 (qtd. in The Atlantic). It is also important to note that Disney has not only been around longer than its future competitors (Netflix, Hulu, HBO Go and Amazon Studios), but has had an international presence before them as well. Not to mention Disney provides timeless content that every generation can love.

What Disney is buying is key to understanding their strategy to ensure their streaming company will be a success. They aren’t interested in purchasing 21^st Century Fox’s broadcasting network or Fox News—Disney is only interested in buying Fox’s entertainment assets with an enterprise value of over $60 billion. These assets include Fox movie and television studio, the FX cable network, National Geographic, Star, UK pay-television business Sky, and their share of Hulu. Disney already owns 30% of Hulu. If they acquire Fox’s share, Disney will end up having 60% shares of the network responsible for creating Handmaid’s Tale, which took home the most wins at the 2017 Emmy’s, including in the category, “Best Drama Series.” And on top of Disney becoming Hulu’s majority and potentially full owner, the company also holds 18% of the domestic box office while Fox has 12%, according to Forbes, meaning the House of Mouse could end up with 30% of that sector of entertainment as well.

“It’s all about owning content and pipelines. And if you don’t have both, you might go out of business,”said a marketing professor at the USC Marshall School of Business Gene Del Vecchio (qtd. in Los Angeles Times).

So what else is specifically included in Fox’s entertainment assets? Let’s remember that Disney already owns the Star Wars and Captain America franchises. To put that into numbers, Captain America: Civil War made $1.15 billion in the worldwide box office market, while Rogue One: A Star Wars Story made $1.05 billion in 2016 alone. As part of the deal, Disney would also own Fox’s X-Men, Fantastic Four, and Avatar franchises, giving them control of the entire superhero world (and being able to bring that world to 24 hour, personalized streaming).

“In particular, Fox’s strong television production business would help Disney shore up its own struggling ABC Studios, which recently lost its star producer, Shonda Rhimes, to Netflix,” added The New York Times.

Fox’s logic behind selling to Disney “stems from a growing belief among its senior management that scale in media is of immediate importance and there is not a path to gain that scale in entertainment through acquisition,” according to CNBC. Disney is a company that meets this “scale” that Fox desires, who makes enough money to compete with giants like Netflix and Amazon.

So what’s going to happen to 21^st Century Fox?

Well, their focus will become Fox Sports and Fox News. “[Given] that both news and sports are heavily biased towards live viewing, they are also a good fit for advertising, which again, matches up with traditional TV distribution. What Fox would accomplish with this deal, then, is shedding a huge amount of that detritus,” as stated by stratechery. Basically, Fox is selling off their assets, as well as debt, to Disney, while honing in on what they do so well (news and sports), without having the pressure of competing in the streaming world.

There is concern, though, that this acquisition could be illegal, drawing attention of government regulators like the Federal Communications Commission and going against antitrust laws. Forbes defines the goal of an antitrust law, in terms of acquisitions, as a way to “prevent those that would limit the general public’s ability to make choices and receive products and services at a fair price.” An acquisition between Disney and Fox, two out of six of the biggest studios, would make the House of Mouse even more powerful than it already is. For example, their future impact on the content consumers will consume would be tremendous and potentially, unfair, depending on the company’s beliefs and biases integrated in their stories. Also, the antitrust laws brings up the notion that Disney most likely would have bought the entirety of Fox if it weren’t for legality issues, but one company cannot own two broadcast networks. Regardless, with the assets Disney strategically picked out from Fox, Disney’s already extraordinary portfolio will be bigger than ever.

Another concern is that “[if] a deal closes, marrying the two brands and two very different corporate cultures could take awhile. You have the family-friendly Disney, which doesn’t even do R-rated movies, and Fox, whose movie studio produces unapologetically hard R-rated,” as explained by Deadline. But instead of thinking of this as a challenge, it is again, broadening their portfolio to provide content that anyone and everyone can enjoy.

So if this acquisition does follow through, which seems highly likely as of now, it will be a game changer for the movie industry. First of all, the “Big 6,” six companies that own basically all media, becomes the “Big 5,” eliminating more competition. Basically, “[in] terms of sellers in the marketplace, agents, managers, producers, production companies – they have one less buyer,” said University of Southern California professor Jason Squire (qtd. in Boston Herald). Disney CEO Bob Iger will also likely “stay on past his 2019 retirement date if the entertainment company wins its bid to buy” from Fox, according to The Wall Street Journal. In fact, 21st Century Fox CEO Rupert Murdock has requested that Iger stay if the sale goes through.

Netflix CEO and Founder Reed Hastings has shared sentiments on why he isn’t concerned about how other streaming companies are doing, during a quarter one earnings call this year. He said, in particular about Amazon, that “they’re doing great programming, and they’ll continue to do that, but I’m not sure it will affect us very much. Because the market is just so vast.” Hastings is known to have a “there’s room for everybody” attitude.

It will be interesting to see if Hastings’ room for all attitude will change once Disney is officially in the playing field, or even better, beating them at their own game.

By: Libby Hewitt

As time has gone on, technological advancements have made certain industries obsolete. Many have argued that peer-to-peer payment systems like Venmo may be well on their way to doing this to the banking industry as a whole.

Venmo, a mobile payment service owned by PayPal, came to be in 2009 when two friends at the University of Pennsylvania brainstormed the idea of the app. The two men were in New York City for a weekend when one of them realized he had forgotten his wallet. When they were trying to figure out the logistics of paying one another back, the idea of Venmo was born. The original prototype sent money through a text messaging system, but it has evolved into the platform we know now, where transactions are all done through the Venmo app itself.

In 2016 alone, $147 billion was transferred using peer-to-peer payment systems, which was up from the $100 billion transferred in 2015. These numbers are forecasted to continue growing to as much as $316 billion by 2020, according to an analyst at Aite Group.

To break those numbers down even further, Venmo users alone transferred $17.6 billion of funds to one another through the app in 2016. This was a 135% increase from 2015. While this seems like a massive amount of money being exchanged, Venmo transactions only accounted for 17% of the total peer-to-peer transfers in 2016. In comparison, $28 billion was exchanged on QuickPay, which is JPMorgan Chase’s comparable peer-to-peer payment system. So, while millennials may think that Venmo is the only mobile payment system in existence, some of the big banks in the U.S. are actually still the biggest players in the game on these technologies.

In fact, nineteen of the country’s biggest banks have recently come together to launch Zelle, a new peer-to-peer payment service available through an app. Even though the app has large, recognizable banks backing it like Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and more, Zelle’s Summer 2017 launch did not go as well as anticipated. The following are some of the reviews that can be found on iTunes’s App Store, where the app currently has a 2.6 star (out of 5) rating:

“What a horrendously useless app and payment service!”

“I wish I could give zero stars but it is not offered.”

“If you want your funds to disappear without a trace, count on Zelle.”

“The user experience doesn’t even compare to PayPal or Venmo. There are too many screens/legal hoops to jump through even trying to give someone money.”

Even though Zelle did not have the entrance into the marketplace that it probably hoped for, the app store rating has gone up almost a whole point in the past month. So, maybe the Zelle team is working out some kinks and will eventually have a more seamless user experience.

This lackluster launch of Zelle may say more about the intersection of banking and marketing than the platform itself, however. Senior Vice President of a community bank in Iowa (Clear Lake Bank & Trust), Matt Ritter, believes this is an ongoing issue within the banking industry in introducing new products.

“Banks and their traditional marketing efforts often fail at generating an interest in new technology that is less expensive to offer and transactions that are more efficient to process,” said Ritter.

Even with these challenges upfront compounded with the fact that some people think that Venmo and other payment systems like it may run physical banks off the market, there are some significant ways in which the existence of peer-to-peer payment systems are positive for traditional banks. For example, since Zelle was created by banks, many bankers are optimistic about its invention and actually hope to adopt the system themselves.

President and CEO of Clear Lake Bank & Trust, Mark Hewitt, thinks the innovation of peer-to-peer systems like Venmo are both helping and hurting the banking industry at the same time.

“The proliferation of Venmo has underscored the need to provide a peer-to-peer solution for community banks like ours.  While adding a product like this to our mix was relatively easy, successfully marketing it is much more difficult, especially to users already comfortable with Venmo,” said Hewitt.

As far as Zelle is concerned, he believes that the system is a good way for traditional banks to attempt to compete with these technologies like Venmo.

“Zelle is firmly on our radar, and is likely a product that we will utilize to replace our current peer-to-peer solution.  It’s the product of a mega bank consortium, but is also being made available to community banks via our core software providers,” said Hewitt.

Ritter agrees with Hewitt on this point, adding “Zelle is the banking industry’s best response to date to ensure it is not left out of the payments industry altogether. It will allow banks to compete with Fintech solutions like Venmo.”

Because Zelle is directly connected to users’ bank accounts and is run by the banks themselves, Zelle’s creators are hoping that users will feel more confident using it for larger transactions than they might using Venmo. There is even opportunity to move into more business-to-consumer payment options with Zelle, like insurance companies paying their client’s claims via the app.

Another way the entry of Venmo into the market has been a positive force for traditional banks is that it has motivated them to become competitive in this more technologically advanced space. Banks have been forced to adopt the rapid spread of technology and innovate alongside some of the biggest players in the game to best cater to their customers. The spread of Venmo has also spurred banks to take the peer-to-peer idea beyond just millennials. Of course, millennials are the biggest group currently using Venmo, but banks are hoping to take the momentum that Venmo has created and appeal more to a mainstream audience, directed beyond millennial use.

“We’re hoping that by eventually partnering with Zelle we will be able to target not just our young customer base, but also make it the norm for some of our older customers with smartphones to get on board with,” said Hewitt. “It just makes sense for us to market this easier transactional system to all customers since so many are already so comfortable with the peer-to-peer concept.”

One of the largest complaints from Venmo users that Zelle is hoping to solve is the couple days of delay it takes for money to actually get to users’ bank accounts after participating in a transaction on the app. Zelle allows for more instant transactions because the accounts are directly linked to each user’s bank account, rather than being the third-party platform in the exchange.

Banks are hoping to use this to their advantage and get the message across to users that Zelle may be the fastest option.

“It’s hard for us to break into this space since apps like Venmo have such a head start,” said Hewitt. “Many people don’t realize that many banks already are offering our own peer-to-peer products that have a faster settling rate than Venmo.”

Another thing Venmo is lacking that traditional banks are hoping to perfect is the trust issues that often come with having one’s bank account information on a third-party app. Banks can take that hesitation people have of sharing personal information and make them feel more comfortable doing it on an app that was created or is sponsored by their bank, with whom they have already developed a trusting relationship.

Even though peer-to-peer systems have given banks the push they may have needed to appeal more to today’s customers, there are still things that Venmo is providing that banks worry they won’t be able to keep up with.

The most obvious threat to the banking industry that Venmo presents is the loss of fees and revenue streams that come from regular bank transactions like deposits and transfers.

“Fintech companies engaged in the payments industry are largely unregulated and not required to abide by the same rules as banks, placing banks in a competitive disadvantage,” said Ritter. “Because regulations in the banking industry can often flow down to the consumer, the inconvenience this causes can push consumers into non-banking solutions, like Venmo.”

Because so many people use Venmo for the pure convenience of the transactions, banks are having a hard time reminding customers that they have similar systems already in place that may be even more legitimate when it comes to regulations.

Even so, Venmo was the first to make it possible for a person with a Bank of America account to easily make a transaction with a Chase bank customer. Before Venmo, payments of this type were not convenient or easy. Zelle is attempting to fill this gap for customers transferring between the large banks currently using the app, but for customers at a smaller community bank like Clear Lake Bank and Trust, for example, Zelle may still not be implemented for months or possibly years.

Additionally, bankers are worried about the potential growth of Venmo, as there have been talks of the platform developing its own credit card service. Speculators also think the payment platform may move into more traditional banking roles like giving loans and more. Of course, this has banks worried and wondering how they can compete with such a growing platform and user base.

Another feature Venmo has that a traditional banking experience does not provide is the social aspect. Venmo users are doing more than just transferring money to one another on the app. They are using it as a social site with the ability to like and comment on their friends’ transactions. By requiring a description of what the money transfer is concerning, users are able to have fun with it and connect with their friends, often using emojis as descriptions. In fact, pizza is the number one most used emoji in the description box, followed by the beer emoji. Additionally, users can connect their profile to their Facebook account, and are then able to see their Facebook friends’ payments to one another coming through, like a news feed. While there are various privacy settings that can be activated and the dollar amount of each transactions is kept private to those outside the transaction, the platform is still used socially and as a way to keep up with friends.

“It’s important to remember here that we, as banks, are more interested in the actual deposit, while Venmo is more interested in the customer’s information,” said Hewitt. “That’s where most of the discrepancies lie.”

While the main goal of Venmo may be different than the goal of traditional banks, there is no doubt that each party uses the other to its advantage in the end.

“It is interesting to note that most peer-to-peer solutions still rely on consumer bank accounts, debit cards and credit cards to fund purchases or accounts from which payments are made,” said Ritter. “So, without banks, there really would be no Venmo.”

So, is the existence of Venmo helping or hurting the banking industry, or are the two mutually reliant on one another? It is hard to tell now, but it is clear that peer-to-peer systems are sweeping the nation and are becoming the norm as a payment option. It will be interesting to see how much these systems have advanced in ten or twenty years. Who knows, maybe they will put an end to physical banking structures altogether, or maybe Zelle will catch on and overtake Venmo. We’ll have to stay tuned to find out.

How content might redesign the media industry’s business model

Once upon a time, there were newspapers, radio, television, and movie theaters: well-defined platforms through which content was easily spread and consumed. Distribution and its related issues were not a concern. Then the Internet stepped into this tidy situation, followed by mobile devices, along with the creation of apps that also started working as new kind of platforms. From this point forward, all content, from TV shows to commercials, from music to news, began floating in the complexity of the intricate digital media landscape.

Companies have to deal with hundreds of different platforms, the dominant culture of contents consumed for free, users whose preferences change often, and, last but not least, the giants of Facebook and Google, through which pass all content produced on the web. The question is raised: how can media industries still monetize the content they produce?

With this question in mind, I met with Thomas Jorin, of the Strategy & Innovation department at Havas 18, a research hub of Havas, a French global communication group that provides strategies and solutions to connect companies with their customers. Havas works with large media and entertainment companies around the world such as Walt Disney and Universal Music, that explains why Thomas at Havas 18 is so much involved in studying the ongoing processes around how contents are produced, shared, consumed and monetized.

Working in his LA-based office, Thomas is in charge of conducting research in collaboration with the academic world —most often, the University of Southern California and the University of California, Los Angeles— in order to scout innovative business models that might be applied to Havas’ clients.

Thomas Jorin at Havas 18, Los Angeles

As soon as we started our conversation, he immediately highlighted the biggest issue that the media industry currently struggles with :“The challenging thing is to change your business model because of your content.” Instead, companies are still replicating the same business model for every type of content and platform they handle: for the majority of them, the only thing changing is the type of screen. Thomas stated that, for example, many advertising companies replicate the same type of ad used on TV even on totally new types of platform such as the influencers.

Yet content is not fixed into a single channel anymore. We have to start thinking of digital content as social content, he continued: “By definition, social content is drastically different from, for example, TV content; it has capillarity, it can move from platform to user, from one person to another; it’s shared by consumers, so the value of it is much more defined by the fact that you share the content.” This means an enormous shift in how content value is measured. In fact, the entire media industry is trapped in limbo while it struggles to redesign its business model.

For example, as Thomas said, Universal Music has to constantly deal with how it is paid by Spotify, Apple Music, Amazon, Pandora, and SoundCloud…and news media outlets are not excluded from this difficult scenario either. Indeed, they seem to be the ones suffering most because of the loss of their once-undisputed role of one-and-only content distributors.

Newsrooms have been trying to protect their content with the paywall business model or the subscription model. “I think this is a very old way to think about news, and more in general about content, because it means that content is designed just for one platform or one website and it can’t go out, it can’t be shared. It can’t be viewed differently, it can’t be consumed differently. If you think about today’s most successful media companies, they’re the ones that let their content go out.” Thomas pointed to the example of Tastemade, which produces food videos, that in his opinion is one of the best media companies because it is able to spread its content on every kind of platform, including TV, generating 2.5 million views a month. “If you think about newspapers, that’s exactly what they should do: try to be the best at what they do and let people have access to their content. But in order to do that, you have to be smart in how to monetize every platform.” And here comes the pain-point of the whole question.

“For example, Tatsemade’s CEO said that they generate everyday revenue in fifteen different ways.” Hence, in order to smartly monetize its own content, a company should be open to adopt a different type of business model every time it changes the context where it publishes content: “At some point, you’re gonna to be paid by platforms, at some points you’re gonna be paid by brands, at some points you’re gonna be paid by consumers because you can develop some premium offers… But you need to play with all of that at the same time and find a balance every month, every week, depending on how the market is doing and where it is going. And you can do that if your content is strong enough to attract interest.”

Therefore, the issue of how to smartly monetize each platform is also connected to the audience.

As Thomas stated, the media industry’s problem stems from continuing to use old criteria to look at people, as well as people’s information—that is, data. “As you look at the communication field, everybody has been focusing on male or female, how old you are, what your income is…that’s a very old school approach—especially right now, when you can customize your content for different users.” The old demographic segmentation placed people in a frame that can’t change over time. “A person is going to change every day. We all are different and even myself, I am different from Monday to Sunday, I am different when I am alone or with friends, I will be different in a year…You should not talk to me in the same way.”

For this reason, the audience was the main focus of one of the research projects conducted by Havas 18 in collaboration with the USC Annenberg Innovation Lab, where in 2014 Erin Reilly, Managing Director and Research Fellow, developed a new framework called Leveraging Engagement. Its main purpose was to reveal the right way to look at the audience in order to properly engage with it. The Leveraging Engagement framework was created to discover the types of motivation that, according to different contexts, trigger people’s interest and bring them to engage with a specific content.

Erin told me that for example Walt Disney is going to apply this framework to its show Andi Mak, in order to identify the underlying motivations that bring its fans to watch it. Once Disney has that information, it will be easier to understand how to improve engagement with its audience and how to better monetize the show and other similar content.

Since motivations are driven by situational triggers that reveal why people engage with specific content, the Leveraging Engagement framework  can be applied to many fields, including politics, art, sport, and music. Might it work for the news media as well? Reshaping how news media interact with their audience could help them to develop new ways to earn revenue from their content. As Erin stated, “In any type of media content you can identify the motivation: it’s just knowing the framework and knowing what triggers people’s motivation. If you do that, there are multiple ways to use it to change a company’s  business model.”

The recent news that even the biggest ad-supported news media outlets, such as Buzzfeed and Vice, have not reached the revenues that they estimated, has scared shaken the world of digital newsrooms. It has made clear that a new and solid business model is desperately needed. But the problem, as Erin pointed out, is more complex then we think: “I believe it is hard to shift your business model once you have a company. Newsrooms are established industries with certain business models that have been working forever, and so now we are in a cultural shift, which offers new business models, and yet the people in charge are often afraid of what these new business models could mean. I think they are trying to learn but it’s a big risk to be able to shift to something without having the proof to know that it has been validated and that revenues will come in.”

The crisis that the media industry is facing is leading to the redesign of old paradigms through which companies used to think and value content. Music, movies, articles, video, TV shows…are part of our culture and, in spite of the big changes going on, people will continue to consume them in the future, but media companies must figure out HOW people will do it.

As Erin stated, “It’s a bigger problem than just: let’s do a new business model. It has a lot of moving parts that you have to take into account. And it’s a moving target—it’s not that you can shut down the business and restart; it’s still going while you are trying to change.”

by Mara Pometti

In September 2017, WeWork became the sixth most valuable startup in the world. The co-working company takes on long-term leases for raw office space and builds out the interior into trendy, millennial friendly spaces that are then subleased to Fortune 500 companies and startups alike, one conference room or desk at a time.

To provide a sense of WeWork’s fast-spreading dominance, the startup has dazzled tech investors by portraying itself as a Silicon Valley-style company that serves as a “physical social network” for millennials. It has raised over $8 billion to date, accruing over $4.4 billion through the Japanese tech giant SoftBank’s Vision Fund in 2017 alone. Additionally, it was valued at $20 billion this year, which is the largest valuation in New York City and the third biggest startup valuation in the United States after Uber, Airbnb and SpaceX.

The impressive valuation of a startup – which coincidentally encourages the startup lifestyle – is worth more than Twitter ($12.96 billion), Box ($2.44 billion), and Blue Apron ($1.54 billion) combined, Business Insider reported. Yet, industry experts, professors, and the general public has been left scratching their heads whether the co-working giant can justify its grandiose appraisal. With a $20 billion valuation that is eight times that of a traditional leasing company with a similar business model warrants a major question: is WeWork overvalued?

First, let’s take a look at how WeWork came to be the highly talked about startup it is today.

CEO Adam Neumann was born in Isreal and moved to the United States in 2001 after serving as a naval officer in the Israeli military. “Before I started WeWork, I owned a baby clothing company based in Dumbo, Brooklyn,” he said in an interview with Business Insider. The company, called Krawlers, sold clothes fit with padded knees for crawling babies. “We were working in the same building as my co-founder Miguel McKelvey, a lead architect at a small firm. At the time, I was misguided and putting my energy into all the wrong places” he said.

McKelvey and Neumann noticed that the building they both worked in was partially vacant. With the combination of their individual architectural and entrepreneurial expertise, they came up with the idea to open a co-working space for other entrepreneurs. Although it took tremendous convincing of their landlord, McKelvey and Neumann opened the first floor of a co-working startup called Green Desk in 2008 – the early incarnation of the company that would contrive WeWork. The “green” in the name was inspired by the company’s focus on sustainable co-working spaces featuring recycled furniture and electricity that came from wind power.

Despite Green Desks near-instant success, Neumann and McKelvey eventually sold the business to their landlord, Joshua Guttman. The WeWork co-founders recognized the importance of being green, but felt the focus of their business should revolve around community. The two founders knew they were onto something and possessed a strong concept. After pocketing “a few million” from the Green Desk sale, the two men founded and launched WeWork.

WeWork, in its current iteration, opened its doors to New York City entrepreneurs in April 2011 and has since expanded to cities across the country and worldwide.

At WeWork offices, options include a single desk in an open floorplan, dedicated private offices with doors, and full floors for more established companies. Amazon.com Inc. and International Business Machines Corp. have both taken advantage of the entire-floor leasing option. Common spaces feature comfortable couches, fun and interactive amenities like foosball tables and beer kegs to encourage meetings and socializing, and various office events take place frequently.

Moving on, we must raise another question: what industry is WeWork in exactly?

Neumann has blatantly denounced defining WeWork as a real-estate company or tech company. The “We Generation,” as he calls it, strives to encourage sharing and collaboration rather than isolated office places. Neumann instructed the WeWork Public Relations representatives to push back against any characterization in the media of WeWork as a myopically defined real-estate company and instead encouraged the description of WeWork as a “lifestyle” or “community-focused” company.

In an interview with the Wall Street Journal, Artie Minson, WeWork’s president and chief financial officer said, “we frankly are our own category. We use real estate and services to empower our community.” Minson supported the company’s sky-high valuation, stating it made sense because investors are looking to WeWork’s plans for growth and confident in the acquisition of millions of members in the future.

The WeWork client is “coming to (the company) for energy, for culture” Neuman stated at an event this summer, aiming to breakaway from a pigeonholed industry classification. The Wall Street Journal reported that Neumann and other WeWork executives described the company “at various times… as a community company, a lifestyle company and a platform for entrepreneurs.”

Neumann went on to add, “we ourselves are still discovering what is the best type of company that we want to be. We’re taking the best practices out of the for-profit world and best practices out of the nonprofit world.”

Skeptics continue to question whether WeWork should receive the tech company treatment, especially in valuation, when real estate is so integral to its main product and subsidiaries. In addition to co-working space, WeWork dabbles in communal housing, early education, and, strangely, a wave pool business.

WeLive, WeWork’s attempt to infiltrate the residential real estate industry, features shared expansive kitchens, large laundry rooms with ping pong tables and other interactive amenities, and free WeWork cocktails on rooftop terraces and in mail-room themed bars. That’s right, what serves as the WeLive mailroom during the day is converted into a happening bar at night designed to bring the inhabitants together to socialize and expand their network.

Bloomberg Technology noted that “WeWork wants to parlay its success with co-working into a “we” lifestyle brand that incorporates not just work but living and wellness for community-minded people.

Similar to other tech-giant influencers like Facebook’s Mark Zuckerberg, the WeWork co-founders have taken a keen interest in early education. In Fall 2018, the company is set to open a private elementary school for “conscious entrepreneurship” inside an New York City WeWork space. The experimental school was tested via a pilot program of seven students, including one of the five children of WeWork Co-founder Adam and Rebekah Neumann.

The project is being spearheaded mostly by Rebekah Neumann, who attended the prestigious New York City prep school Horace Mann and received a bachelor’s degree in Buddhism and business from Cornell University. She told Bloomberg the school will “(rethink) the whole idea of what an education means” but is “non-compromising” on academic standards.

“In my book,” she stated, “there’s no reason why children in elementary schools can’t be launching their own businesses.” Can anyone say, “Baby Boss?”

The most peculiar industry expansion for WeWork, however, was the purchase of a “large stake” in Wavegarden, a wave-pool start up. It remains unclear how Wavegarden’s technology, which can produce up to eight-foot-high waves for surfing at various water facilities, fits with WeWork’s common-space persona. A company spokesperson told the Wall Stret Journal that WeWork has “made meaningful investments to significantly enhance (the company’s) product offering.”

Throughout the various expansions and acquisitions of the WeWork brand, one narrative has remained the same: “the “we” brand promotes a seamless integration of meaningful work and a purpose-driven existence.

The “We” model has proved popular. As of October this year, WeWork established itself in 172 locations in 18 countries, granting its 150,000 a variety of locations to work from. The workspace provider employs over 3,000 people. The startup is rounding out the year with an impressive purchase of the social network company Meetup which strives to connect individuals during their off-work hours based on common interests. WeWork hopes the acquisition will help establish a sense of community in its shared workspaces, Inc. reported. The most valuable component of the purchase, however, is Meetup’s 35 million user base.

Some Silicon Valley investors and others in the real-estate industry say the company’s well-crafted image belies the unremarkable nature of its business. For instance, let’s consider WeWork’s competitors. With an indeterminate identity, it is hard to say just who WeWork’s competitors are or if the company even has any contenders due to its multitude of market engagements. IWG PLC, an office-leasing company with a similar business model to WeWork, manages five times the square footage and has approximately one-eighth the market value. Boston Properties Inc., the United State’s largest publically traded office leaser, owns five times the square footage that WeWork leases and manages while boasting a market capitalization of $19 billion.

Barry Sternlicht, who runs Starwood Capital Group LLC with more than $50 billion of real-estate assets under management, said, “if you had positioned (WeWork) as a real-estate company, it wouldn’t be worth (its valuation).” Neumann “dressed it up and made it into a community, and that turned it into a tech play” he said.

One argument against WeWork surrounds it’s “expanding” clientele base. A large portion of WeWorks client base is comprised of startups. If there were to be a downturn in the market, it would become increasingly difficult for startups to raise funding. If startups don’t have the funding necessary to sustain themselves, WeWork might run into trouble staying profitable with a decrease in leasing demand as its clients wouldn’t be able to pay the rent for the office space.

WeWork was swift to negate any doomsday arguments, stating that only a small fraction of its client base are other tech startups. “Venture capital-backed companies only makeup mid-single digit of the total population of our WeWork member companies,” a spokesperson told Business Insider. “The membership is very diversified across multiple industries and our fastest growing segment is larger, more mature companies who have joined for the value proposition of more affordable space, community, networking, and flexibility – as well as services (healthcare, payment processing, etc.)”.

Despite the company’s efforts to assuage any skepticism, many academics and industry experts remain unsold. Consider the passionate words of Scott Galloway, a marketing professor at the NYU Stern School of Business and the founder of business intelligence firm L2, said in a Business Insider presentation, “WeWork is arguably the most overvalued company in the world. WeWork is now getting a valuation equivalent of $550,000 per customer… In some instances, WeWork – if you do the math – the floor that the WeWork (office) leases in a building is worth more than the building hosting the WeWork.”

Galloway went on to compare the co-working space to other tech companies like Snap, Inc. and Twitter, “Snap is incredibly overvalued, WeWork is incredibly overvalued, and a company that’s off (its market estimation) 70%, Twitter, is still massively overvalued. (Twitter) is a stock that will be trading for between five and ten bucks within six to 12 months. Two and a half years ago, when it was at 55 (dollars per share), I said it would be below ten, and I was wrong, it’ll be below five.

It is unclear whether WeWork will have a similar rocky post-valuation experience to Twitter and Snap, Inc. with so much tech industry confidence balancing out the vocal skepticism.

From WeWork’s commencing days, Neumann would preemptively boast about how he was building a $100 billion business to his friends. With a $20 billion valuation under WeWork’s belt, the co-founder’s brag might not be terribly outlandish after all. Does the company actually deserve its high appraisal? Will WeWork be a startup that simply dazzled the tech industry in its 15-seconds of fame? Only time will tell, but for now, WeWork is confidently looking towards the future and not letting criticism get in its way.

About 10 years ago, it was obvious that one should never sit in a stranger’s car. In March 2009, Uber Technologies Inc. sought out to change that norm and disrupt the taxi industry. 8 years later, they have reached complete dominance over the industry through their transportation app, Uber. Founded by Travis Kalanick and Garret Camp, the app was originally an effort to create an affordable black car service, which soon transformed into a massive ridesharing platform. Today, they operate in over 80 countries and over 670 cities worldwide (Uber). However, they are still growing. They now offer a low-cost ride program, rides in black cars, food delivery service, and more. According to Kalanick, the Uber app has more than 40 million active riders worldwide (Vanity Fair). Yes, that is 40 million people actively using 1 platform.

Although those numbers do sound sexy, the company is actually not making any money. During their past four quarters of operations, Uber experienced losses exceeding $3.3 billion. With this outrageous number, Uber has become the most loss-making private company in tech history. Simultaneously, the company has also become the highest valued private technology company. According to Bloomberg, Uber is valued at $69 billion (Bloomberg).

At this point, you might be thinking, “How does a company that continues to make no profit get such a high valuation?” Before understanding how a company gets valued, it is important to grasp the intentions of an unprofitable company. It is comprehensible for a startup business to not make any money within their first year or two in business. However, Uber has been around for more than 7 years, has raised over $11 billion, and still is unprofitable (Crunchbase). It may sound counterintuitive to stay in business after making no profits for such a long period of time, right? In fact, companies can become very successful and attract many investors even without making profits for lengthy periods of time.

There are three core principles that companies follow in order to survive without any profits. The first method is to continuously reinvest in the company. According to Uber’s release to Bloomberg, the company’s net revenue was $6.5 billion, excluding revenues from China (Bloomberg). Therefore, earnings are significantly large, but Uber is choosing to reinvest that money back into their company. The purpose is to continue their growth and boost future revenues. This intentional reinvestment strategy has been proven to work with Amazon, which irregularly reported a profit throughout more than twenty years in business to focus on growth. Amazon obviously has the ability to allow profits, but argues that they must constantly reinvest into the company in order to compete in different fields.

Another way a business could continue to operate without any profits is the expectation of potential expansion. Twitter was a great example of this, as they acquired Vine, Periscope, and other platforms in an effort to expand its social media presence. However, they are dealing with significantly large expenses due to the compensation of stock options. Other companies that used this method include Yelp and Spotify. Although Yelp reached profitability in 2014 through expansion, Spotify is still in the process. Similar to Uber, Spotify has consistently experienced increasing revenues, but still has continuously shown upwards of a billion dollars in losses. Their strategy is to increase their number of users on their free service to potentially convert them into subscribers.

Lastly, an unprofitable company can remain in business because of its speedy growth in its early stages. Tech companies that can show a rapid increase in user growth will secure the backing of venture capitals. Through the investors’ perspectives, they see massive potential due to their user base and disregard the early revenue drought. Uber is definitely the leading tech company in this category. As mentioned earlier, Uber’s valuation is extremely high, surpassing many established car-rental companies and airline companies, and it is exactly because of this reason.

All three of these categories play a crucial role in generating a valuation of an unprofitable company. In the case of Uber, their valuation is driven by the tremendous confidence investors have in the company due to its user base. However, the large size of the backing will make it challenging for Uber to deliver long-term. It is very important for Uber to continue to convince investors that profits will begin to unfold. It is very easy for investors to lose confidence in the company’s abilities to generate future profits. So why do investors continue to invest in Uber? Obviously, they trust the company’s growth models that will keep their stock high. They also have faith in the company’s ability to reach their large goals.

Usually, when evaluating a firm, one would pay close attention to the price-to-earnings ratio. This ratio suggests how much an investor would have to put into the company in order to get $1 in return. However, this ratio is irrelevant for many tech companies, such as Uber, as they do not have any profits to show in its early stages. Also, tech companies do not have many assets other than the software, which is extremely hard to value as is, so the price-to-book ratio is also out of the equation. Instead, investors of Uber, and other unprofitable tech companies, would look at their price-to-sales ratio to determine the company’s valuation. This ratio compares the stock price of the company to its revenues. This is an indicator of the value placed on each dollar of a company’s sales or revenues. Uber’s valuation of $69 billion and its net revenue of $6.5 billion in 2016 gives the company a price-to-sales ratio of 10.6. This ratio is much higher than the S&P 500 Information Technology Index price-to-sales ratio, which is the highest compared to all other S&P 500 sectors.

The technology industry is known for its overgenerous valuations. Even based on the technology industry standards, Uber’s valuation is still very high. However, if Uber was treated as a transportation company instead, they would be nowhere near their current valuation. The price-to-sales ratio of the S&P 500 Transportation Index is 1.5. Therefore, Uber’s value would have to fall by 86% to associate with the average transportation company. However, it is obvious that Uber enjoys being in the technology category.

Regardless of the industry, a company’s valuation also reflects their business plan. For Uber, investors are paying very close attention to the company’s path to make money and if they seem attainable and realistic. Although it is not possible to accurately predict when and how the company will become profitable, Uber must be very convincing to deserve such a high valuation. They have somewhat modeled themselves after Amazon, which had successfully completed the process after years of net losses. According to Mike Walsh, and early Uber investor, “There are many companies, Amazon as an example, that invest heavily in the early years and hit profitability only after a company IPO.” (CNN). However, the most Amazon lost in 1 year was less than $2 billion, even at the peak of the dot-com boom.

Uber generates revenue primarily by charging clients for the rides, taking around 20% of the total fare. The company has reached such enormous growth because of how convenient and affordable it is for consumers. This resulted in Uber stealing market share from taxis and other traditional transportation methods. Even drivers began to switch, realizing that driving for Uber would allow them to make more money than driving a taxi. This is largely because of the fact that Uber allows drivers to better optimize their time and services. However, these drivers are responsible for the depreciation of their own cars, which is not factored into the ride.

The affordable prices for users and high incomes for drivers are all part of a long-term strategy. Uber is essentially subsidizing each trip. The plan is to dominate market share and drive taxis and other competing rideshare companies away. The prices are expected to increase as the initial process of acquiring customers begins to slow down. Currently, drivers for Uber are essentially donating the use of their own cars in exchange for the company’s growth. This does not get factored into Uber’s actual cost of operation.

Is Uber’s business model sustainable? Will they eventually become a profitable company? How long will that take? These are obviously very important questions to consider. Clearly, Uber is significantly unprofitable as of right now. However, you can make the argument that the company’s losses are diminishing over time. As seen through the chart, Uber has the ability and control to accelerate or slow their spending to become more or less profitable. This is important evidence to deliberate when making the case that in the long run, Uber does have potential to become profitable. Many optimists argue that the company is so large that people are just not used to the losses on such a large scale. Their revenues are also massive, and are quickly growing. However, they might be taking a longer time getting their global business under control, whereas a smaller business, such as Snapchat, would not take as long. This could be due to their attempt to break the norm, as well as the need for actual drivers and app awareness.

However, recent headlines have given Uber a tough time throughout their road to success. Earlier this year, Uber got caught up in allegations of prevalent sexual harassment throughout the workplace. Not to mention, the company even experienced a #deleteuber campaign throughout social media, and accusations of technology theft. As controversies added up, investors began to question Travis Kalanick, the current CEO and Co-Founder, and his ability to run the company. Kalanick had become a massive liability to the company due to his unclear business practices, poor management skills, and concerning lawsuits. Therefore, Kalanick resigned as CEO of the company back in June of this year.

After a couple months of searching for the perfect candidate, Dara Khosrowshahi was hired as the new CEO in August to get the company back up on its feet again. Khosrowshahi’s resume includes being the former CEO of Expedia, becoming one of the highest paid CEO’s in America, and being a board member of BET.com and the New York Times Company. He believes that although Uber is unprofitable as of right now, the “math is working” in certain countries, and that they are currently focused on subsidizing other investments. In an interview by Andre Ross Sorkin, a New York Times columnist and CNBC anchor, Khosrowshahi mentioned that Uber will not be profitable in the U.S. for the next six months, depending on the performance of their rival company, Lyft (CNBC). He has inherited a company that has been hit with a public scandal, the faction among its board members, an investigation into workplace harassment, and many other lawsuits. Therefore, he has not been given an easy task.

So, how do these public-relations woes impact the Uber’s road to profitability? Ultimately, they take away from the company’s primary focus – growth. Instead of concentrating on expansion, reinvestment, and strategies for profitability, they are forced to deal with fixing their public image.

However, it has been announced that Uber does have big plans for the future. They are currently in the middle of negotiations with SoftBank Group for a multi-billion-dollar investment deal. The Japanese-based company has global ties that could potentially help Uber in its constant international expansion. Also, Uber has recently agreed to a deal to purchase thousands of self-driving cars from Volvo. Last year, Uber and Volvo joined together to develop autonomous vehicles that will potentially become the future of Uber. Additionally, Uber’s project, Elevate, is set to bring “flying cars” into the market by as soon as 2020. They have partnered with NASA to sign a Space Act Agreement that will allow these low-flying, possibly self-flying, aircrafts to become a reality.

Uber has already begun taking steps to prepare for an IPO. Khosrowshahi announced in an interview that the company plans to go public in 2019. This will be a big day for investors, and a brand-new chapter for the company. Uber has the chance to live up to its extremely high valuation. It is clear that they have big plans for the future that can potentially allow the company to generate massive amounts of profits, but only time will tell.

https://uberestimator.com/cities

https://www.vanityfair.com/news/2016/10/travis-kalanick-uber-ipo

https://www.crunchbase.com/organization/uber

https://www.bloomberg.com/gadfly/articles/2017-03-16/uber-needs-to-get-real-about-that-69-billion-price-tag

https://www.bloomberg.com/news/articles/2017-04-14/embattled-uber-reports-strong-sales-growth-as-losses-continue

https://www.cnbc.com/2017/11/09/uber-ceo-dara-khosrowshahi-speaks-at-nytimes-dealbook-conference-2017.html

https://techcrunch.com/2017/11/09/uber-ceo-says-2019-is-the-target-for-ipo/