You have to be living under a rock to miss all of the punditry & chatter about WeWork’s IPO filing. If you haven’t read their S-1, it’s a piece of work: it’s the most audacious tech IPO I’ve ever seen, by far. (And if you make it through before giving up in (a) shock, (b) confusion, or (c) both…good work!)

While the public market will be the ultimate judge, Ben Thompson (Stratechery) analyzed the essence of their business as:

First, my primary point in comparing WeWork to AWS was to emphasize just how valuable it is to convert fixed costs to variable costs; this not only provides benefits to existing businesses, it also capitalizes on and fuels new business creation. However, the comparison should not go much further than that; there plenty of other important differences between AWS and WeWork.

(Emphasis added). But for a scalable & sustainable fixed-to-variable cost arbitrage business, we must consider the entire product-market fit equation. Ironically, Ben’s AWS analogy neatly highlights the missing parts.

First, is the supply of the “fixed” resource defensible, with economies of scale? Unless WeWork can be creative about sharing their “variable” revenue with their “fixed” landlords (as Blockbuster did with DVDs), they’re just another tenant negotiating wholesale office space. They’re not surfing an underlying technology wave, and scale economies are limited: N existing lease agreements aren’t that much leverage for lease N+1.

Second, does the market value “variability”? It’s not always worth a lot; consider the number of past “Rent A ________” startups that struggled & failed. WeWork’s offering is closely linked to a relatively slow-moving variable: employee headcount. Certain types of startups value variability at certain stages and WeWork has done a fine job laying claim to a meaningful fraction of aggregate annual venture investment.

But when headcount becomes stable & predictable, the cost and control advantages of having one’s own space outweigh WeWork’s model. And there are many alternatives; when I visit a Panera mid-day, I sometimes wonder if they are WeWork’s biggest real competitor!

My bet: WeWork, assuming they make it public, becomes yet another roughly zero-sum stock market poker table for the hedge funds. Their super-complex org structure and internal business “model” certainly provide a lot of nooks and crannies for traders to attempt out-bluffing each other. For the company itself, they’ll eventually scramble (a la Groupon) to pivot into something sustainable.