I Want to Ride My Internet-Enabled Bicycle: The Peloton Story

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S1: My name is Matthew Coffey and I am a peloton rider now for about a little over a year.

S2: And you’re my brother in law.

S1: Also true, I’m your brother in law.

S2: After my brother in law, Matt, got a peloton that fancy home exercise bike that has an Internet connection and a touch screen. He started raving about it. It was a super fun workout. He was getting in great shape. He was battling with friends over who could post the fastest times.

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S1: I got competitive enough with it that I started buying headbands because I would start sweating and the sweat would hit the screen and turn off certain features like, you know, you can toggle this feature onto this feature off so few times I’m beginning to the end of the ride. Some sweat would hit the screen and the clock, for example, would go off

S2: Madoff and chooses his peloton classes based on the music. He carefully examines the posted playlists, always wanting to finish his rides with a real banger. What was your best ever like, final song? Like you were just in sync and you just started crushing it because the final song was hitting you just right.

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S1: It’s Queen. Don’t stop me. No. No question about it. You can’t do a better find a song that, you know, he’s been having a good time. You know, it’s just getting faster and faster. Stop.

S2: Pelton’s instructors stream classes live from the company’s studio for thousands and thousands of people all over the world. There’s a devoted peloton community with all the bonding and all the trash talking happening online. The company’s developed its huge customer base by combining the best things about a group exercise class with the ease of never having to leave your house. So should Jen and I get one?

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S1: Absolutely, you guys should definitely get one. You’ll never beat me. So that part, you know, will be disappointing for you, but you will have a lot of fun.

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S2: Pelton’s mostly riding high these days, but things around the company have sometimes gotten bumpy at the end of twenty nineteen. The company suffered a one two punch. First, it had a Soso IPO, which raised a few concerns among investors. Then it released a very unfortunate holiday TV commercial. OK, now

S3: Palatine, give it up for first time. My first ride the recipient excited. Let’s do this five days in a row.

S2: The ad shows a wife whose husband surprises her with the gift of a peloton, perhaps not so subtly demanding she get in better shape. This commercial earned peloton a lot of attention and not in a good way.

S3: It’s the commercial for a trendy exercise bike that is head spinning. Critics were quick to pounce, some calling the ad creepy and sexist.

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S4: The company’s stock appearing to take a hit as well on Tuesday, dropping nine percent, shedding nearly nine hundred forty two million dollars of market value in a single day.

S2: But then 20/20 arrived, and with it a whole different way of life. And a dramatic comeback for peloton as gyms closed and people look for ways to exercise at home, peloton fortunes have lately climbed faster than a Tour de France cyclist. How did this one exercycle come to dominate the very physical fitness market? Can peloton continue to thrive even after gyms reopen? And one more important question will my wife and I become two more members of the peloton horde strapping on special bike clip shoes and panting through sweaty workouts in our basement? Stay tuned to learn the answers to all these questions and more. I’m Seth Stevenson. Welcome to Drilling Tales of Modern Capitalism. Today on the show, I want to ride my internet-enabled bicycle, the peloton story. John Foley had worked in e-commerce for Barnes & Noble in 2012, he founded his own company.

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S3: He had young kids and he and his wife were really into fitness and they lived in New York City. So they really liked the wave of boutique fitness classes that were happening. But once they had kids, it’s very hard to get out of the house for those things and to keep those appointments. And they came up with an idea, well, what if we could bring exercise of that level into the house?

S2: Amy LaRocca is a writer with New York magazine who’s working on a book about the wellness movement. She’s also a peloton enthusiast.

S3: If you are someone who has kids at home, you could say like, oh, I would like to take this exercise class at such and such time tomorrow. And the odds of making it there are, you know, negligible. But then if it’s just in your house, it doesn’t matter if you’re 15 minutes later or an hour later or you get to do it in the morning and you ended up doing it at night. It’s just there. So the convenience, which is really what they had in mind when they started it, really has been what has spoken to me.

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S2: The product was an exercise bike with a big touch screen connected to the Internet. You’d buy the bike for a flat fee and then take classes by paying for a monthly subscription. You’d get instructors as good as the fanciest New York City gym could offer, but you wouldn’t need to live in New York or even leave your house and you could do it on your schedule, not theirs. This seemed like a winning idea, but at first John Foley struggled to raise money from investors. He had trouble convincing them that the big upfront price of the bike around a couple of thousand dollars wouldn’t be a problem.

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S3: What he understood because he was in the world of boutique fitness as a consumer was that people who do that kind of thing spend an incredible amount of money on it. So actually amortised out one soul cycle cost is thirty six dollars or something like that, and your monthly peloton is forty dollars so the bike can amortize out pretty quickly.

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S2: Fully ended up going to Kickstarter instead of to venture capitalists for his early funding. He began selling his first peloton bikes in 2014 and something interesting happened. People pretty quickly began to develop communities around this piece of exercise equipment, which came as a bit of a surprise to Pemberton’s management team.

S3: They didn’t even have community on their minds. They basically had the desperation of young parents on their minds, like, well, what if you just can’t get out the door? So I think investors became more interested when they started seeing the devotion of the riders.

S2: Part of the appeal of Pelton’s community dynamic was the competitive aspect, with multi thousand person leaderboards updating on your screen in real time so you can see who’s ahead of you and behind you as you take a class. But there was a social dimension to Facebook. Groups for peloton riders started appearing and they subdivided into different themes, often unrelated to cycling.

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S3: Pellow Moms’ is very popular. Then there’s Peloquin Moms’, which is like similar to moms, but with more wine and like actually online community was user generated in the beginning. Of course, once Pellekaan realized it was happening, they did all sorts of things to facilitate and grow that community. But it really was the users finding one another and connecting in these meaningful ways.

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S2: Pelton’s early, rapid success turned it into the first fitness unicorn, a startup company valued at over a billion dollars. It was becoming apparent that customers just loved their pelton’s.

S3: Someone I was interviewing told me that she knew about eight people with Pellekaan tattoos, and Amy was not a lot of people, just eight people, but like eight people to have palletizing tattoos, like something that felt like a lot of people.

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S2: That’s eight more people than I would have expected to have. Peloton tattoos.

S3: Exactly.

S2: The two most crucial elements to staging a successful exercise class are probably the instructor. And the music peloton could hire the very best instructors because it only needed to hire a few of them compared to a fitness chain with in-person classes all over the country.

S3: You can only get 60 people in a solar cycle room at once. So the solar cycle celebrity teachers had pretty modest followings, but peloton teachers have thousands of people logging on

S2: peloton instructors like Alex Toussaint, lesson one. The hardest thing to do is to wake up and motivate yourself.

S4: I applaud people to find motivation when it’s not that I applaud that shit. Right. And Cody Rigsby is going to be like this cardio up in here, OK? And I hope that work let me means worked so hard that our necks are going to hurt some. I love

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S2: it. Managed to become household names among a certain slice of fitness obsessed Americans.

S3: I would say their level of fame is like above reality show contestant like are they as famous as someone who got like eliminated quickly from The Bachelor? Yeah.

S2: As for the music played during classes, that became a bit of an issue for peloton.

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S3: If you’ve got a little spin studio in Park Slope and you want to play Beyonce all day, no one cares. But if you’ve got thirty thousand people doing your ride, you can’t just let Beyonce. So they’ve had a lot of licensing problems with music and ended up being much more expensive than I think they wanted it to be.

S2: Peloton. It’s been working out deals to pay royalties to music licence holders to make sure that instructors can play the hits that people want to work out to. Among Pelton’s recent music partners, Beyonce herself, the brand announced a deal with her that has resulted in several Beyonce themed classes by twenty eighteen. Peloton, still a privately held company at that time, was being valued at four billion dollars. But then Peloton hit a couple of snags. It went public in the fall of 2019 and that didn’t go perfectly. The stock quickly dipped below its IPO price, raising some concerns that the company was overvalued. Maybe a competitor could swoop in and do something similar stealing away business. Peloton also had a little trouble getting its marketing pitch just right past. One run of TV ads drew some eye rolls because, according to Amy LaRocca, they made Pelton’s customers all seem ludicrously rich.

S3: The Pellekaan ads always had the bike like in some sort of gorgeous setting, and it was like you had this kind of timber edition put on your house looking out over the Rockies or Hong Kong in order to write your Peladon. And so that was the first thing of making fun of people putting their bikes in these really expensive places and just talking about what sort of jerks people who could have this. Must be so there was already like a kind of Peladon hating universe out there, and then there was the horrible Christmas ad, totally worth it. Let’s go right to Boston. Fifty five percent of

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S2: people describe the woman’s facial expressions in this ad as looking like she’s in a hostage video. A year ago,

S3: I didn’t realize how much this would change me. Thank you. This holiday, give the gift of Balaton, I mean, it’s horrible, right? I mean, it was just so terrible. I mean, it’s it’s a whole culture and an idea that is just so ripe to make fun of. And then they show a kind of montage of her riding the bike all year. And it’s really hard, but she looks great and she’s thin and she stays thin. I mean, it looks just like, oh, rich people being rich.

S2: And then it can be hard to know exactly why a stock price does what it does. But at the height of the backlash to this TV ad, peloton stock nosedived. The company lost nearly a billion dollars in value in a single day, but 2019 was about to end and a whole new kind of world was around the corner.

S3: They have just done so much better than anyone could have anticipated because everyone is trapped in their houses, it’s perfect for them.

S2: More on that when we come back.

S4: I live in Marin and we have a mall nearby and you see the Apple store, the Tesla store and right next door was the peloton store

S2: just in Post analyzes Internet companies for Bank of America. One of those Internet companies is interestingly peloton because so much of its value is wrapped up in its Internet subscriptions. By the way, Justin, like Amy LaRocca, is a peloton user.

S4: I think it’s invaluable to use the products you talk about with investors and try to understand them as well as you can. Sometimes I’m a little older than some of the prime demographics of some of the products I use, but peloton fits perfectly for me and I really enjoy using it.

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S2: At the end of twenty nineteen, Peloton was a highly valued, promising company that had a few problems it was dealing with and then covid happened, which at first was viewed as yet another potential problem. When the pandemic started, was it like immediately apparent that peloton was going to benefit from it?

S4: No, it wasn’t. And the thought and the concern right off the bat was they’d have to close some of their studios. And so the production value of some of their classes was actually in question. Do people want to keep watching reruns of old workouts? Would that affect usage?

S2: Peloton filled the gap at first by having its instructors stream from their homes before they were able to get back into the company’s studios with better lighting and sound. Meanwhile, news of a deadly pandemic crowded out any lingering talk about Pelton’s yucky holiday ad. And as it became clear that Americans might be stuck at home for quite some time. Sales of home exercise equipment began to soar. A bike that lets you workout in your garage but feel connected to other people seemed perfectly suited to the times. Peloton 20 revenue was one point eight billion dollars, about double what it had done the year before, and it recorded its first profitable quarter. Peloton orders ramped up so fast the company failed to keep pace. Delivery delays got bad enough that the company eventually started flying its bikes over from factories in China instead of floating them on ships, a move that Peloton says temporarily boosted its transport costs tenfold. Peloton has recently tried to develop some more domestic manufacturing, in part by acquiring another exercise equipment company for 400 million dollars to prevent issues like this in the future. The thing that maybe excites Wall Street most about peloton is its hybrid business model, a combination of a hardware business with a subscription business. Justin Post says that when Peloton sells a bike at a price of around 2000 to 2500 dollars, depending on options, it basically just breaks even once you figure in the cost of manufacture the bike and market it. But that’s only the starting point for Pelton’s relationship with its customers

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S4: on the subscription side. That’s where they have potentially attractive margins and they can range from 60 percent today. And I think the long term targets around seventy five. And it should be a very high margin business. The costs are the studios, the instructors and the music content, the music licensing, which they’ve solved now and have longer term agreements with the music industry. But that growth in subscribers is very important for the model, and that’s where a lot of the profit generation will be in the long run.

S2: Recurring subscription payments are the dream for lots of companies. Peloton hits up a bunch of people’s credit cards for about 40 bucks each month. Automatically, the subscription part of Pelton’s business is so important that the company doesn’t even really mind if you buy a used peloton bike at a discount because that means you’ll become another subscriber. Right now, Peloton has fewer than two million paid subscriptions in just a handful of countries, but their target is significantly higher than that, which will require all kinds of expansion.

S4: Building up that subscriber base is their big, long term ambitious goal for the company, which is to get to 100 million subscribers. That is a, as they call it, an audacious goal for them. And we’ll see if they get there. But, you know, for the stock to work, in our view, 30 million would be a nice place for them to get to and 10 to 12 years.

S2: Justin says the number one obstacle to bringing in new customers is the cost of a bike. Peloton is offered zero percent financing a layaway plan where you pay for the bike in chunks each month on top of your subscription fee. When you look at it as no cost up front and one hundred dollars a month for bike and subscription, it’s not dramatically different from the monthly cost of membership at a high end gym. There are lots of threats on the horizon for peloton, though. One is the end of the pandemic and a return to normalcy. Consider that peloton stock price went down 25 percent when news of a vaccine came out. The big worry, of course, is that when gyms reopen, people won’t want to exercise in their basements and spare rooms anymore. But Justin Post thinks the homebody culture we associate with the pandemic was actually an acceleration of existing trends, which won’t go away

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S4: in a lot of categories. There’s been a shift in home and you can think about watching movies at home. You can think about getting restaurant delivery and home.

S2: Another threat to peloton is the competition, particularly future competition, because fitness is fickle. Remember Tibo across it, lots of people kind of bounce around and do whatever workout is trendy. At a given moment, Pelton’s branched out with a treadmill line in addition to its bikes, and it’s trying to offer more at home strength cardio and yoga classes on its touch screens to appeal to a wider audience, even people who don’t want to buy bikes and treadmills. It’s also acquired some companies making other kinds of hardware and software like wearable devices and interactive yoga mats. But what if somebody else just builds a better mousetrap?

S4: One company that people do think about a lot about is Apple. If they would ever make hardware equipment, obviously they have quite an installed base of devices out there and a very big user base. And fitness has been a target for the company and they’ve talked about it and they have apps for it. So could they come up with hardware? Definitely something people have asked about.

S2: If peloton continues to thrive and survive a battle with a better funded competitor, it might be because of the community it’s built up during the pandemic. All these people stuck at home looking for ways to stay active, but maybe more important, looking for a connection. Amy LaRocca says this might be the real appeal of peloton. It’s a sort of church of self-improvement.

S3: When you start looking at what people don’t get from organized religion and what people do get from these new types of exercise classes, it’s kind of alarmingly similar, right? A shared place, a shared community that meets regularly catharsis. Right. Singing music movement is a huge part of a lot of religious ritual. So the similarities are greater than you might want to think at first.

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S2: And now I know you’re wondering, did my wife and I ever get a Peladon listener? We did, and I’m writing it right now because maybe you can tell it from my labored breathing. I’ll give you my early review. I kind of love it. I’ve been taking classes with playlists of strictly 80s music so far. There’s one the other day that started with this level forty two song I Love and ended with a Phil Collins song I love. And in the middle as I pedal to the beat of Pat Benatar as we go along and the instructor started talking about how hard it can feel to not long now we can get through the pain of this workout together. Well, part of me worried I was about to have a heart attack and kill over, still clipped into the peloton paddles. But part of me felt really good about myself. And like, this expensive bike was totally worth it, at least until the next exercise comes along. Can I feel compelled to put our peloton on Craigslist and buy a new Internet connected trampoline or something? OK, I’m about to do a whole condom. Resistance increasing. I better wrap this up. That’s our show for today. This episode was produced by just Miller and Cleo Levin, editing from Jonathan Fisher Technical Direction from Merritt. Jacob Gabriel Roth is Slate’s editorial director for audio. Alicia Montgomery is the executive producer of podcasts at Slate. June Thomas is senior managing producer of the Slate podcast network. We’re going to take the next few weeks to dig up some more thrilling tales from the business world. If you have an idea for us or you just want to give us some feedback. You can email us at thrilling tales at Slate dot com until next season. I’m Seth Stevenson, and this is thrilling tales of modern capitalism.