Peloton Concerns

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I’m a big fan (and owner) of the Peloton bike and can’t argue with the tremendous unit economics and growth so I own a small position in the stock as well.

However, I have one main concern with Peloton’s business model. Since Echelon or Schwinn can’t compete on content because of Peloton’s economies of scale, they may want to open up their ecosystem to integrate with third-party content providers. Eventually, more and more content providers will enter the market like in streaming. Apple has been moderately successful in music streaming, although Spotify has more personalized content, better podcasts, some people prefer the UI, etc. the core content is the same. It’s different with Apple TV+ because the content is highly differentiated. I think fitness content fits between the two. People may have an attachment to some instructors and larger services can offer more frequent and a wider variety of classes but the core content is pretty similar. Apple also already has the tracks and integrations and could pay a lot for the same great instructors.

This has parallels with the dynamics between Roku and Netflix: https://twitter.com/ericstromberg/status/1309208260591919105…

People say that Netflix has power over Roku because you wouldn’t buy Roku if it didn’t have Netflix but over time, content is only going to proliferate. Netflix needs to be Roku otherwise Disney+ is going to steal market share. And why wouldn’t it want to be on Roku? If it’s a concern about Roku getting too big and they move off the platform, then the next cheapest platform (Fire TV) is going to gain market share and then they would be faced with the same problem. So, content providers will inevitably lose leverage over time to the hardware providers (or demand aggregators).

What does this mean for Peloton? Well if the content becomes commoditized, then there is no need to pay for the higher priced bike. One can expect that over time the value of third party content >= Peloton’s proprietary content. And if no one buys the expensive bikes, then Peloton won’t be able to make money off the content because third-party hardware providers that compete with Peloton too don’t want or need Peloton on their bikes. There are a number of caveats including the premium brand, the established community, and gamification (Leaderboard) but I don’t think that warrants the significant premium they charge on the bike. They can also open up the platform to third-party content providers as this tweet suggests: https://twitter.com/ericstromberg/status/1313537578767917058…

This doesn’t mean I would sell Peloton but I also would be very cautious about making it a larger position.

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Richard (or others) -

Isn’t Peloton already offering its app for use with non-Peloton equipment? In that case, wouldn’t Peloton already be preemptively doing the same in the other direction?

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Yes You can use any bike with the Peloton app, I do. I don’t get to compete with other riders and many of the advantages to have a Peloton bike while riding are lost like exact cadence and rpms, but with an iPad and earbuds it’s still a very good experience.

Apple Fitness is pushing hard into this space and the Iwatch plays a big role in their plan.

TMB

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Yes, I believe that the Peloton Digital App works with a bunch of devices that you can then connect to a third-party bike that’s bring-your-own-device. I don’t think it comes on any of the bikes that are already integrated like the Echelon EX5S though. https://echelonfit.ca/collections/connect-bikes/products/con…. And I wouldn’t expect it to be because it would replicate the Peloton experience too much, hence reducing the value of buying Peloton’s hardware. This is where my concern lies as they may never be able to match Peloton’s content but certainly can match the quality of their hardware over time I would think.

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  1. There will always be ‘Premium’ ecosystem vs everyone else. ~Apple vs Android
  2. Just like Apple, they will continue to own full ecosystem - Content, Instructors, Hardware & Software for a superior customer experience. For competitors it is easy to replicate one of these not everything together
  3. Peloton will keep creating premium, licensed content like the recent Broadway Series/Hamilton. Copycats cannot pay through the nose to do this
  4. Looks like they are creating partnerships with employers, insurance providers, telehealth, high end gyms and hotels
  5. Based on some blog articles and job postings, looks like they will eventually come out with wearables that integrate into the ecosystem

I think the reason they’ve put out stand alone Peloton app(subscription) is to lure people into the ecosystem and upsell. Not for the app to be used with 3rd party h/w.

As it stands now, I don’t see any one company with the ability to take on Peloton.

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PS: My daughter and I use the poor man’s version - CycleOps Trainer + Regular Bike + GCN on iPad + Wahoo BT sensor. For the folks whose butler has a butler, nothing less than Peloton will suffice.

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I heard the CEO talk about 2 years ago. He made a point that a goal for Peloton is for people all over the world to use their subscription app on any old stationary bike (or treadmill etc) they may have. I think this is where they saw growth potential. Not sure how this stacks up with their financials and current outlook. He also made it a point that they invested heavily in their content studios, in their trainers and their content in general etc. How does their content compare to competitors in the space? I’m not a Peloton user nor do I own their stock. Just figured I’d share.

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Anything is possible, no one can predict the future. But keep in mind, all of these scenarios would take years to play out. It took Netflix two years to scale from 300,000 users in 2000 to 600,000 in 2002, and it was a digital-only product. Right now, Apple is the only real threat on the content front against Peloton and they are years away from achieving scale. Nike has something as well, but it’s a distraction from their core shoe business. The Roku comparison is only valid in the low-cost commodity television market. Which is not who currently buys Peloton products. The brand matters.

Peloton is my second-largest holding and I think all the competition has only proven that their model has the potential to scale much bigger than everyone originally believed. It just gives them more awareness, free of charge.

Will I hold this for 5 years? No idea. The next big test for Peloton is the launch of the lower cost treadmill next year. If successful it should sustain another year or two of strong growth into 2022 as the momentum from the pandemic pop starts to subside as the lockups loosen next year.

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Keep in mind that the app also has non-bike related workouts. It would be interesting to see some metrics on that from the Peloton team. Also, it would be great to see them build on that with a product like ‘Mirror’ or perhaps use those non-bike related classes to create a program for users to follow.

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I have one main concern with Peloton’s business model. Since Echelon or Schwinn can’t compete on content because of Peloton’s economies of scale, they may want to open up their ecosystem to integrate with third-party content providers. Eventually, more and more content providers will enter the market like in streaming… What does this mean for Peloton? Well if the content becomes commoditized, then there is no need to pay for the higher priced bike.

This is a fair concern, but I do not think it is one that should prevent you from building out a larger position in PTON. Let me try to explain why.

Peloton, in my opinion, is currently the undisputed leader in digital/home fitness. The experience they provide is unmatched from everything I have read and heard from others. Their net promotor score sits at 91, which is above Apple and Netflix. They are so far ahead of all their competitors who are scrambling to try to catch up to offer a similar experience.

Maybe you are correct and the content will become commoditized. The reason this does not scare me is because of the strength of the Peloton brand. I believe people will continue paying up to receive the whole kit and caboodle. I think the majority of people will want the all-in-one experience. If it is a matter of cost, Peloton is starting to sell certified pre-owned bikes which come close to the price of other ‘cheaper bikes’ found on Amazon. However, to get the full Peloton experience, you must own the bike. No other company can provide the quality of the hardware AND content together, not to mention the name brand recognition. For this to change, it will take time, likely several years before another company can offer the quality of both to match Peloton. And all the while, Peloton is not sitting still. They are rolling out new content like Barre classes and expanding their hardware offerings.

Personally, I do not see another competitor coming close to matching what Peloton offers anytime soon. If it does start to happen, I think we will start to see this show up in KPI’s such as retention rates, monthly church and average monthly workouts per sub. Until then, what you have in Peloton is a company firing on all cylinders. Peloton guided for revenue growth of 218% for Q1, I assume it will be closer to 250%. In addition to this, I expect Peloton to grow above 200% for the following two quarters after this as well.

We are entering the best part of the year for this company, the holiday season. They sold a ton of hardware last quarter as evident by the breakdown of subscription revenue. It had grown every single quarter YoY until last quarter as people bought the bike while stuck at home. I expect we are going to see sub revenue explode over the coming year as all these new bike owners begin their subscriptions.

Sub % Revenues

			
2018	25.4%	12.7%	15.8%	25.3%
2019	28.3%	14.2%	16.1%	27.3%
2020	29.5%	16.5%	18.7%	20.0%

The bike is still heavily backordered from everything I have read on Twitter. The company cannot keep up with demand as it is exploding. I am expecting an absolute monster quarter when they report on November 5.

I know I got a bit off track here while answering your question, but I am just really excited about this company and how strongly their fiscal 2021 year is shaping up to be. Will the content become commoditized? Maybe, who knows. I personally do not think it will be anytime in the next few years as Peloton is so far ahead with their platform it will be difficult for competitors to catch up. We are still so early in the transition to home fitness and Peloton is just getting started. Outside of Zoom, I cannot think of a company riding a bigger tailwind who is executing so well. For these reasons, I have had problem making it my third largest holding as I feel confident the best is yet to come.

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Also, it would be great to see them build on that with a product like ‘Mirror’ or perhaps use those non-bike related classes to create a program for users to follow.

The Peloton App already has a large number of classes for non-bike / non-tread activities. I have had a bike for 3+ years (my wife surprised me with it for Christmas originally - I had looked at it but was not keen on the $40 monthly subscription fee). Fast forward to now, and I have been using it regularly during the pandemic, and don’t mind the fee. I do the cycling classes on the bike, complementing them sometimes with upper body (arms) workouts.

For the other classes, I have setup a workout area in the basement, where I have an iPad connected to external speakers, plus a workout mat and weights, to do the floor classes, both stretching and weight training (I did one Yoga class during one of the “events” held to increase engagement). I typically ride five times a week, and will tend to do some of the other classes twice a week. They have a number of “bootcamp” programs and strength training programs (related classes to step through in sequence) available already.

Catering to this audience is one of the “upgrades” that comes with the new bike, as the screen now can be moved around (mine is fixed, with only a viewing angle adjustment).

I’ve seen some pretty high numbers on the participants for the non-bike workouts, but don’t have any real statistics.

David

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I don’t think I have seen it mentioned on here yet. Besides the bike, subscription, there are the clothes! My wife has ordered 5 different peloton pants and top at $150 a pop. I’m not sure what those margins but I’m sure it will continue to add to the revenue numbers…

Cobra :snake:

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I think these are important longer term concerns to keep in mind, but probably years away. These are the 2 big interesting factors to me when it comes to subscription growth and retention:

  1. This is reality-show content creation we are talking about. To some extent I think of them as a Netflix of exercise content and look to that industry for some examples of how competition can play out, BUT…

  2. …Instructors can have a following and class sizes are unlimited. I’m starting to think of this aspect like a sports team. What are the contracts like? Will we see the rise of super-star-athlete-instructors that become free-agents when contracts expire? If you are a subscriber, don’t own Peleton equipment, and love tuning in for a specific instructor, and then Apple+ signs that person up for an exclusive 2 year contract, would you follow the instructor over to Apple+? Probably. BUT…

  3. …One thing that counters point #2 is the social/meta aspects of Peleton. If you are part of a community with stats and such it is less likely you will leave the ecosystem to follow your favorite celebrity trainer.

For now I’m just interested in next quarters numbers to add some more detail to the picture.

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David, I think fitness involves several things but mostly Cardio and Strength. The latter is stuck back in the 60’s not much new. Boring weights and elastic bands. Does the Pelton offer anything new in this field, is it a better experience?
The only thing I can think of offhand that does both is rowing, which could be competitive,and is a good fit to Pelto type machines.

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I apologize but I forgot to add a key point about the peloton workout gear. The INSTRUCTORS are basically walking clothing models. My wife has told me she liked what an instructor wore and then went out and bought the outfit once they were released. That’s pretty powerful…

I think subscriptions are big but we shouldn’t overlook their clothing line…

Cobra :snake:

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Just some small comments since I was heavily into Zumba Fitness for the past 10 years.

– It’s not just the holiday season that is a tailwind for Peloton, the New Year’s Resolutioners should be good for heightened interest throughout January and February. In my work in fitness centers, they start to clear out around here in May, when the weather gets nice (in normal times). As I live in the Northern states, winter hibernation + Covid concerns should be a push for quite a while. Hopefully they can keep up supply.

– Apparel is a good possibility. I have seen Zumbawear explode over the past 10 years. If you want to be a part of a tribe, you want to identify and look the part. It was easy for Zumba to sell out of $70 pants and $30 tank tops. It has become a big add on to that business an I am not surprised that Peloton is seeing success in this area.

– Instructors do become like stars, but there is no shortage of talented people out there. I’ve seen over the years that some instructors come and go, and there are newer (and younger) up and comers, as well as international instructors who joined the Zumba field as time went on. Peloton should have no problems having a very high quality team, but also, any competitors will also be able to find talented people. So it’s more about the style, the attitude, the culture, etc. etc. etc. that will differentiate the brand experience. Zumba has very high standards for people who represent their company and their way of doing things and I’ sure Peloton will be similar.

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