Peloton: A Good Investment.
The Possibilities Seem Endless (and the Motley Fool’s Analysis of Peloton is Wrong)
My husband and I were just having a conversation about investing in Peloton. So, when I saw “The Reason I'm Not Investing in Peloton Interactive, I noticed it has nothing to do with the fitness equipment maker's product and whether it will remain popular" posted in the Motley Fool, I had to read it.
The piece opens, “Earlier this month, it was Datadog, the fast-growing data analytics software, that got off to a hot start, but has since begun dropping.” I immediately thought, "Oh great! The author's going to do a comparison and analysts of similarly situated companies and present his argument."
The piece continues, "This week, it's Peloton Interactive..., maker of connected fitness equipment and an accompanying app."
And I thought, "Huh… that's an interesting way to describe the company."
I have a Peloton. Yes, it's accurate that they're the "maker of connected fitness equipment and an accompanying app” but that's not what Peloton sells, that's not what people buy.
The author compares Peloton to Uber, Lyft, and Slack because of their post-IPO performance as tech companies. Then he questions if Peloton should be compared to Netflix because it "also had generally declining gross profit margins its first decade as a public company" but says he doesn't think it should be because Netflix defined an industry, streaming video, and he doesn't think Peloton defines an industry. He then expands that argument by pointing out that Fitbit is a subscription fitness service, Apple Watch, and other wearables are fitness trackers, and Planet Fitness and other cut-rate gyms add to the saturation of the fitness space insinuating that it's nearly impossible for Peloton to capture the market due to over-saturation. Then finishes by saying there are other connected fitness devices spearheaded by companies like Nike, thus making the industry not only crowded but crowded by players in every area of the market.
Not considering the marketing blitz against their recent holiday ad (which I think is completely ridiculous).
Here are my thoughts about Peloton and its future.
We need to clarify what Peloton is and what it is not. I’m only making the following comparison because these are the companies that were mentioned in the Motley Fool post.
Fitbit (Subscription) vs Peloton
Fitbit is a data company that creates fitness devices and mobile trackers to collect and sell data. They sell membership and provide an online community to create increase usages, so they collect and sell more data.
Peloton is an experience company, which increases its membership by enhancing the users' experience. They do this by making quality equipment and scaffolded fitness experiences.
Uber/Lyft vs Peloton
Uber and Lyft are technology platforms with transactional that have a when it comes to the services they provide. Uber and Lyft must pay their independent contractors every time they receive money. Money in: money out.
Peloton, I assume, pays their instructors once for facilitating a class. The instructor creates a reusable asset that can be accessed an infinite number of times for their on-demand feature, adding value to the user's membership experience at no additional cost to the company. The recurring stream of revenue, single payout, and perhaps a minimal royalty makes their business model distinctly different than Uber and Lyft. Pelton receives a return on the assets created even if the instructors are no longer with the company. Money in, (mostly) stays in.
Apple Watch/ Fitbit (Fitness Trackers) vs Peloton
Apple Watch, Fitbit, or other fitness trackers function as a private system of personal accountability platforms and digital encouragement. They are, however, void of public acknowledge. Also, they hope to increase retention and accountability with the primary purpose of acquiring and selling data. For these platforms, data comes first; the users' experience is secondary, at best. Whereas Peloton leverages its fitness tracker to acknowledge members of their communities publicly. The built-in digital trackers serve as a system of private encouragement as well, again, all within a scaffolded fitness experience.
EXPERIENCE. ENDLESS POSSIBILITIES
What makes Peloton unique in the fitness space is that it is positioned to do what few fitness companies are ever able to do, and that is to remain where they are--in the case of Peloton, that's in the mid-level markets while also moving upmarket and moving down market, and dominating the three spaces.
MID-MARKET (It’s current position)
Peloton dominates the streaming cycling space with their bike. That sentence almost seems silly. The streaming cycling space is so small. Who cares if they dominate it? Why does it even matter? In the beginning, almost every multinational company dominated a very niche market. The telephone was considered a toy for its ability to communicate over short distances in comparison to the dominant player in the space--Western Union’s telegraph, which allowed people to communicate over long distances. Barnes and Noble scoffed at the notion of people buying books online. They believed people wanted books on demand, wanted to feel the books they were buying, per rouse the aisles, and that a brick and mortar store was the way books would be sold from now till millennia. Amazon, which sells convenience, said: "hold my beer." Blockbuster thought something similar about movie rentals. Netflix said, "I see you and raise you."
Amazon wasn't selling books; they were selling convenience. Netflix wasn't selling DVD; they were selling stress-free entertainment (remember those trips to Blockbuster and stress of having to plan the return to avoid late fees. Fuck that. Skip it.).
In the same respect, Peloton isn't selling fitness memberships; they're selling quality and scaffolded fitness experiences within a community that acknowledges each other's efforts. And it happens to be cheaper, more convenient, easily accessible, and simpler to use and do than existing models out there.
For that reason, Peloton will continue to dominate the connected fitness space.
Because Peloton values the quality of the experiences it scaffolds, it can seamlessly move upmarket into the luxury fitness space--without alienating its current member base.
In New York City, there is essentially one luxury fitness brand--Equinox. Its gyms are all located in high net worth areas of the city. Its pricing model is targeted to high net worth individuals, and the quality of its offerings are designed to meet their high demand. An Equinox membership Is about $3,000 a year and these folks are willing to pay for access to a gym that essentially has the same equipment as any other gym--weights, cardio area, locker rooms. A significant portion of their members purchase personal training sessions, which can cost upwards of $20,000 a year on top of their membership fee.
Why would anyone choose Equinox over other gyms?
"It's not fitness. It's life."
That's Equinox's tagline and it could not be more accurate. The reason people choose Equinox over the YMCA, Crunch, L.A/Reebok Sports Club, NHRC, NYSC, or cut-rate gyms Equinox fits their lifestyle. They choose Equinox over other options because their life is such that they can afford to splurge on the best in every area and 1) they want the world to know that's the case and/or 2) they rather not diminish this specific aspect of their life when every other aspect clearly demands and displays the best.
Equinox makes traditional fitness luxurious and elite and, in doing so, attracts and retains members that feel the same about themselves (or at the very least, want to project they feel that way about themselves). In essence, Equinox sells its members the experience of being elite, being a part of the best.
Peloton creates quality, scaffolded fitness experiences.
There's news that Peloton is opening a 35,000 square feet location in Hudson Yards, one of the newest luxury developments in the city. If they want to dominate the luxury fitness space, Peloton--with its innovative service and exceptional branding--can create an elite scaffolded fitness experience that would have high net worth individuals experience themselves as being a member of a state -of -the -art franchise. While Equinox is the best luxury fitness brand out, it's also been around for a while. Nothing about it is innovative. SoulCycle was its latest success and Peloton is now dominating that space. Being a part of a new innovative scaffolded fitness experience--a part of a high-end Peloton--would truly make Equinox's member-base experience themselves as luxurious and part of something truly state of the art.
This, like all disruptive innovations, could be a business model that is cheaper, more convenient, easily accessible, and simpler to use/ experience.
Here's how I imagine that to look.
Because Peloton is an innovative scaffolded fitness company focused on their customers experience, I see their new locations being 20% traditional luxury gym (think Equinox), 40% studios for streaming classes (think more Peloton cycling and tread studios), and 40% premium Crossfit or parkour with a little American Ninja Warrior/ Spartan Race built-in (kind of what Crunch goes for with their functional areas, but on steroids).
I see there always being a group fitness classes taking place--multiple ones--at each area, particularly the Crossfitty-style area and the traditional gym space. The studio classes can run on a slightly more complete schedule and during downtimes, members can simply access on-demand classes. Peloton will scaffold every aspect of their gym experience to ensure the quality of the experience, while also leaving some areas open for people to have autonomous experiences.
The The Price
I see the gym membership coming with unlimited access to all in-studio classes, a Peloton digital account (obviously), and the actual space in Hudson Yards members will have access to all scaffolded group Crossfitty-like experiences and scaffolded traditional fitness experiences. They will never offer personal training sessions, tiered pricing, or try to upsell members on anything. They will never create an experience of different levels of membership at their locations. Once you're in the door, you're in. You have access to all of it.
If they do this, I believe they will attack members who would otherwise have an Equinox membership but don't feel like burning money and not getting the results they want, and if the pricing and experience are right, they may even pull some people up-market.
All markets face pressure to continuously add value to their customers, who overtime have increasing demands of the industry. That's why you see car companies releasing new models every single year with a new feature--rearview camera, self-parking, lane departure warning, zero to sixty in one second, etc. That's why cell phone companies offer to buy you out of your contract, give you the latest phone free, offer family plans for what it used to cost for a single plan. That's why more and more colleges are offering online courses, short degree programs, professional certificates, and so on. That's why more and more networks are creating digital streaming services for their content. Every industry moves upmarket. Companies will either move with the industry up market or get disrupted. Not to beat a dead horse, but that's why cereals are always coming out with a newer sweeter, chocolatier, fruiter cereal--from Opps All Berries Cap 'n' Crunch, Krave, or Raisin Bran Crunch, Cinnamon Apple, and Omega-3. Cut-rate fitness companies are no exception.
Planet Fitness is the dominant player in this space, but they haven't really innovated or moved upstream since its major expansion. Yes, they've created an innovative business model in that it sells the franchise rights and fitness equipment (and as well as has its own corporate companies). Still, the member experience has been relatively stagnant. One could argue, yeah, but they're only paying $10. Who cares? Whatever members are paying, they will eventually want something more.
If Peloton could swing it, I can see a world where they partner with a company like Planet Fitness. When franchise owners buy Planet Fitness' fitness equipment, specifically their treadmills and bikes, it would be something remarkable if they would come with access to Peloton Digital. Planet Fitness could then charge their franchisees a bit more for the equipment and pass on the additional cost to their franchisee.
Or, Planet Fitness can entertain up their pricing from $10/ month to $15 for a single location, $20 to $25 for all-access and every member would have an account included with every membership. Or Planet Fitness can create an add-on tier for those that want Peloton memberships - $10 single location, $20 all locations, +$5 for Peloton Digital.
While Planet Fitness franchising and leasing model drives their business, it's the members that serve as the source of recurring capital for the company.
My challenge with the suggestion of the pricing change is that Planet Fitness's pricing model may be the best model for their members because as we know, their franchise business model is heavily based on member retention, not usage. For that reason, changing the price wouldn't make sense because $10/$20 memberships are simple and clean numbers that most people are okay with spending without giving it a second thought. If the price were to change/ increase the franchises may lose members.
A change in Planet Fitness' pricing model would be one way to have a partnership work because Peloton can take their cut from the additional revenue being brought in (again, with usage not increasing as much). But a partnership between the two companies may be better serviced if Planet Fitness came on as an equity partner. They could then add Peloton digital services to all of the cardio equipment it sells to its franchisees, innovate in the cut-rate gym member experience, attracting and retraining more membership and more franchisees, and expanding both Peloton and Planet Fitness reach.
Blink could never do this because they're owned by Peloton's competitor--Equinox/ SoulCycle. SoulCycle doesn't have the digital market that Peloton has so that wouldn't be attractive to Blink members. If Planet Fitness & Peloton did something like this, Blink would fall further to the background while waiting for SoulCycle to attempt a successful streaming service. But that won't happen.
The reason I'm particularly fond of this possibility is because I grew up in a home with both parents and four (4) boys and not enough space for anything and certainly not enough money to buy a bike or treadmill. This possibility would make it feasible for customers who want to have access to Peloton's equipment and experience but either don't have space in their homes or the resources to do so. This partnership will make change that and make access possible by going to their local cut-rate gym.
Further downmarket, I can see a world where Peloton offers a similar service to colleges and universities. Alumni of participating colleges would gain access to their digital platform at a discounted rate, and be able to purchase their equipment at a discounted rate. This would create a continuous funnel of users and potential customers. Peloton can offer the same to employees of any company by partnering with Employee Assistance Programs providers agency.
These are just a few of the endless possibilities with Peloton. There are many more. The point of this article is this--the Motley Fool and others painted a bleak picture for Peloton. That's just not the case.
Other players are entering the live streaming fitness space. NordicTrack just released its version, there's Echelon, FlyWheel, Soul, Tonal, Mirror, and others. Here's the challenge those folks face.
1) Playing Catch-up.
While it seems cheeky to say, all of these other brands will be playing catch up to Peloton. While it seems like that's something that can be easily overcome, it's not. First-movers advantage is very real. Not always, but for a company with a good vision, business model, and team, it can make all the difference. While catch-up is not the end all be all, it does put all other companies at a disadvantage because they're all one step behind trying to identify how Peloton created this market so they can find similar customers, then they're trying to distinguish themselves from Peloton while also replicating Peloton's success. To do that, they'd have to give people a reason to pull their product and service into their lives over Peloton, which has become the de facto brand for this service.
I don't see that happening. Here's why:
Echelon is relatively unknown, and its claim to the market is offering a lower-cost copy cast of Peloton. To gain significant market share, it will have to pump boatloads of money into marketing in hopes of people believing a copycat at a lower cost can do the job better than the market creator, Peloton. That's going to be a hard sell, particularly since the quality of their equipment and experience seems significantly weaker then Peloton.
While Flywheel and SoulCycle have more of a brand, their brand is associated with in-person experiences. Those who don't already have a Peloton, those who continue to go to live in-person classes, don't want a Peloton or at-home, on-demand classes. They enjoy/ prefer the in-person experience. It would be hard to anticipate a world where Soul and Flywheel have members flocking over in droves, which is a real problem for them. If they invest in the digital space, they'll be pulling resources from their in-person experience and weakening both experiences in the process.
NordicTrack, however, is best positioned to encroach on Peloton's space. They have a long history of being a solid in-home fitness brand. If anyone is going to drive the market down in price while attracting a customer base that's not as demanding as Peloton's base, it would be NordicTrack. But again, like any of the above folks, including NordicTrack, are going to have to pump so much money into marketing themselves as a significant player in this space to compete. NordicTrack's good news, unlike Echelon, is that they have the resources and in-home brand to do it.
2. Adoption is Evidence of Disruption
Peloton created a new market innovation in fitness using their platform to attract customers who would otherwise not use the existing options--SoulCycle, Flywheel, disconnected home stationary bikes, and so on. Just because these customers didn't use any of the existing solutions (before Peloton) it doesn't mean that their wants and needs just vanished. They had a need. Peloton came up with a solution--an in turn entirely new market was created. Now with the popularity of Peloton (and them proving the market) all of these “me too” companies are popping up. That act (adoption of the innovation) is evidence that Peloton has/is disrupting the group fitness model. Disruption doesn’t mean destroying or eliminating. It simply means it’s eating enough into the existing traditional business model to claim a significant market in the space, and — in my opinion — soon (if not already), it will dominate the majority of the market.
An FYI about “new market innovations” — They happen in two phases:
When Peloton introduced quality live streaming cycling classes that can be accessed from the comfort of one's home, they introduced a new fitness experience to the market. Phrase one is introducing an innovation (technology + business model) to the market that's cheaper, more convenient, easily accessible, and simpler.
The second phase of a new market innovation is the adoption of the innovation by others. Once others adopt the innovation, the innovation is a full-fledged new market innovation. Considering SoulCycle, Flywheel, NordicTrack, Echelon, Tonal and others have taken on a similar business model with this innovation, consider it adopted.
Live streaming scaffold fitness programs are here and will be here for a while (so long as they remain affordable).
Acknowledgment -vs- Encouragement (aka The Cherry on Top)
This brief section is about a culture of acknowledgment that Peloton has built into its classes.
Scaffolded fitness programs aren't new. We've been Sweating to the Oldies with Richard Simmons since the 80s; Thighmaster'ing since the 90s; Zumba, P90X, Shaun T'ing in the 2000s; group fitness classes; personal training session; CrossFit; etc. are all forms of scaffolded fitness programs. This type of workout has been around for a while. The accountability system offered Peloton’s fitness dashboard is not new. We’ve had fitness journals; digital logs; fitness tracker communities like Fitbit, Apple Watch, etc.; accountability buddies; and so on. Again, tracking workouts isn't new. Encouragement during a workout also not new. Every time I do my 20 minutes Winsor Pilates with Mari Winsor gives me words of encouragement exactly 1:44 seconds into the workout and throughout a session, personal trainers encourage their clients all the time to “keep it up” and “do one more rep.” Not new.
What Peloton offers that is somewhat new, and built into the culture of Peloton, are its individualized public acknowledgments, that live forever in their on-demand offerings.
An acknowledgment is a recognition of someone's genuine efforts. It's noticing someone and expressing gratitude for what they've done. It's validation.
Whenever I hear, "Congrats, MamaBear579 on your 100th ride! We see you. Keep it up, gurl." (That was in Cody Rigsby voice btw) I imagine her smiling, feeling proud of her accomplishment, and being grateful for the public acknowledgment. Hearing someone else be acknowledged for a milestone makes most people taking a class happy. It makes me want to strive for more and move closer to a milestone, and has me wanting to coordinate upcoming milestones with a live streaming class so that I may possibly be acknowledged. Yes, while there are those for who pretend like acknowledgment doesn't mean anything to them, it's just not accurate. Everyone-- EVERYONE--desires to be acknowledged, particularly when they've made a significant effort to accomplish something. For some, getting on the bike is an accomplishment--and milestone that Peloton instructors acknowledge publicly. For others, it's their 10,000th ride. Wherever you stand on the spectrum of effort, there's a milestone that seems worthy of acknowledgment. The fact that Peloton's acknowledgment takes place publicly, are specific to each individual, and lives online forever, is incredibly encouraging. And that is the cherry on top of the Peloton experience.