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Friday, May 24, 2024

What Would It Take for Peloton to Keep Being Peloton?

Earlier this week, on the day of its fiscal second-quarter earnings, Peloton CEO and cofounder John Foley announced he was stepping down. Foley had been running the pioneering fitness-tech company since its earliest days, but pressure from activist investors proved to be too much. Barry McCarthy, the former CFO of Spotify, will take Foley’s place.

Foley’s resignation was the inevitable culmination of a series of unfortunate events. Peloton is best known for its expensive, internet-connected stationary bikes and treadmills, as well as the exuberant instructors who lead its video classes. But it poorly handled a product recall last year after a child was killed in a Peloton treadmill accident. Then Peloton’s big-screened pedal machines hit the small screen in a bad way: Two popular TV shows featured characters who suffered heart attacks while on the bike.

More concerning to investors was Peloton’s stock dropping 76 percent in 2021 as people started emerging from pandemic lockdowns and the demand for new bikes waned. According to this week’s earnings report, the company is still slowly growing its subscriber base, and its churn rate is low. It's still valued at around $12 billion. It just isn’t growing as much as Peloton once expected. Foley always appeared confident that the company would be just fine, as exuberant as the internet-personality instructors he hired. Of course people would continue to buy $2,000 bikes and pay $39 per month on top of that. That thinking may have been the result of Covid complacency.

Now bigger players are kicking the Peloton tires, according to a recent report in The Wall Street Journal. Amazon has been floated as a possible acquirer. The Financial Times reports that Nike and Apple are in the mix as well. But as much as some investors want a sale, many customers may want Peloton to, well, keep being Peloton. 

Spinning Out

With only 2.77 million subscribers, and a total of 6.6 million members—anyone who uses Peloton through a connected fitness machine or the mobile app—Peloton is by no means a massive company. But it has an outsize influence on the exercise industry. Calling it “fitness tech” doesn’t encapsulate it; Peloton has eclipsed the NordicTracks of the past, marrying compelling programming with premium hardware and, yes, capitalizing on the fact that people have been stuck in their homes for two years. Even before the onset of the p-word, Peloton had become the coveted c-word: Many software service providers boast about their online “communities,” but Peloton had achieved full-on cult status.

So what would it take for Peloton to survive entirely on its own, to not become Peloton Prime (Amazon), Peloton+ (Apple), or Pelotown (Nike)? First, it needs to adjust its cost structure and generate more cash, analysts and entrepreneurs say, to weather the storm. It’s already working on that, to a point. This week Peloton announced a “restructuring program” (tactlessly laying off 2,800 employees, some of whom learned of their status when their Slack access was revoked), reduced its planned capital expenditures for the year, and said it would wind down plans to build and occupy a $400 million manufacturing plant in Ohio. But the company also lost $439 million in its most recent quarter, and both its scrapped factory plans and its acquisition of equipment-maker Precor last year were costly.

“When you look at companies like Ring, Eero, Anki, and Fitbit, they were all large enough to be visible but not large enough to have a cash stockpile to make it through hard times,” says John MacFarlane, the cofounder and former CEO of wireless audio company Sonos. “Companies like Sonos and Roku—and Peloton—all got large enough that they can survive a crunch. Hardware-software companies just need a lot of cash.”

Eric Min, the CEO of virtual cycling platform Zwift, says Peloton mistook a temporary increase in demand for an established trend. “When a company ebbs and flows like that—not just the stock, but more like people’s habits—you have to consider how you’re going to sustain a business through changes in consumer behavior.”

Min says Zwift, which plans to introduce a “major hardware product” within the next 12 months, has differentiated itself from competitors by supporting user-generated videos in the app. “If it’s just instructor-led video content, it’s not scalable. It’s just not creative enough.” 

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Peloton customers might not necessarily want to create their own videos as much as they want to just follow along with Cody, or Ally, or Emma (all hugely popular Peloton instructors). But Min’s comment points to what may be one of Peloton’s vulnerabilities: its relatively limited line of products. Peloton sells a couple of bikes, one treadmill, and two subscription tiers. Recently, it started selling a $90 heart-rate band, and said that a $495 Kinect-like fitness tracking camera, called Guide, will be shipping this April. It’s also working on an in-app video game that could make a bike ride or running class more immersive.

Still, Peloton doesn’t yet have enough products or partnerships to deliver what major tech companies are offering as part of their push into services: the all-important bundle. Frank Gillett, a vice president in the Future Consumer category at market research firm IDC, points out that with Apple One, or Amazon Prime, or even tie-ups between wireless providers and streaming media companies, consumers are now able to get “six [different] services for five bucks less per month,” Gillett says. “These companies are able to subsidize or discount some of these streaming memberships.”

Apple already has an Apple Watch Connected program that rewards customers when they use their Apple Watch at certain gyms. But “at what point will Apple partner with a big fitness chain to offer a reduced membership and say, ‘You can have it both—you can access a physical gym and then do the at-home stuff when it works better for you’”? Gillett says.

Nt Etuk, the founder and CEO of FitGrid, which sells software to boutique fitness studios, says that in order for Peloton to thrive, it needs to build a moat around itself. “What is the thing you’re creating next with your cash cushion? How do you not become TiVo, which became obsolete?” Peloton did well in that it developed a tremendous business with its bikes, Etuk says. But its next step should have been building something that couldn’t be easily replicated—not a treadmill, he says.

Etuk also believes that Peloton got caught up in what he calls the “sugar rush.” This is something that his own startup experienced at the start of the pandemic, when gym owners were scrambling to get their services online and FitGrid experienced a “staggering” increase in sign-ups. He says he told his own team to stay focused and keep their cash burn relatively stable.

“I’m not saying we’re brilliant at it,” Etuk says, “We just wanted to create products that might still exist on the other side of this.”

Peloton will almost certainly still exist on the other side of this. The question is whether it will thrive, which sounds like something one of its instructors might shout about during a livestreamed class. And the bigger question is whether it can go it alone or will wind up like so many high-profile hardware companies before it—as another feather in a tech titan's cap.

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