Peloton

The Peloton journey has been one seriously wild ride. From can’t raise money to one of Tiger Global’s first venture investments, to pandemic darling to the stock being down 85% in 6 months... there’s never a dull moment in this company’s history. And guess who’s leading the pack for its next chapter: that’s right, THREE-TIME ACQUIRED SUPERHERO, the one and only Barry McCarthy. We had to tell this story. This episode has video! You can watch it on YouTube https://www.youtube.com/c/AcquiredFM. Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC Links: Barry’s Hill School interview on YouTube: https://www.youtube.com/watch?v=9uwcSbe6YoEEpisode sources: https://docs.google.com/document/d/1Qs4DwVFBTMCyEt7Xxlby6iRCpOs0aRTOWPLjrbFQO8Q/edit?usp=sharing Carve Outs: Barry’s planning framework from the Hill School interview: https://www.youtube.com/watch?v=9uwcSbe6YoESwitched On Pop on James Bond’s Spycraft Sound: https://switchedonpop.com/episodes/james-bond-spycraft-sound-billie-eilish-hans-zimmer-daniel-craig ‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  Ride to greatness.

• 0:03David Rosenthal?

  We're not here to work out. We're here to outwork.

• 0:08David Rosenthal?

  I said that to Jenny the other day and she was like, what are you talking about? Outwork.

• 0:14Ben Gilbert?

  Just internalize all the Peloton instructor slogans. David, just make sure you live, learn, love well. See you next time.

• 0:40Ben Gilbert?

  Welcome to season 10, episode two of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures.

• 0:55David Rosenthal?

  And I'm David Rosenthal and I am an angel investor based in San Francisco.

• 1:01Ben Gilbert?

  And we are your hosts. Well, listeners, we have been waiting to do a Peloton episode for a long time, just searching for that, that right moment, you know, we, we didn't do it at the IPO and then there was the big stock run up and we thought about that and we got a zillion listener requests and of course, the pandemic hitting and David and I both becoming customers and these crazy commercials and like somehow none of these ever felt like the right moment. So we figured, well, how about this wild company changing news? We just scramble over 24 hours to prep and have done basically nothing in the last 24 hours, except learn everything we possibly can about this company that we are so intimate with already.

• 1:42David Rosenthal?

  Well, I mean, anytime Barry McCarthy gets involved, like we were texting, Ben texted me the news and I was like, that's it. We gotta do it. Emergency pod. Acquired superhero, Barry McCarthy, literally riding again.

• 1:58Ben Gilbert?

  Yes.

• 1:59David Rosenthal?

  Oh, just so excited.

• 2:01Ben Gilbert?

  And you know, there's this fun thing too of like, I've seen articles that are like, John Foley stepping down as CEO. Technically, technically, people are saying he's staying involved. He's staying very involved and we'll definitely dive into sort of how this duo is going to conquer the road ahead together.

• 2:20David Rosenthal?

  Indeed.

• 2:21Ben Gilbert?

  Well, first, we want to say we're recording this on February 9th. And that is important because yesterday, February 8th, was the day that the news broke about all of this Peloton stuff. Today, February 9th, was Barry McCarthy's first day in the CEO seat. And I think he frames this better than we ever could have. In his email to the company this morning, he wrote, "And now that the reset button has been pushed, the challenge ahead of us is this. Do we squander the opportunity in front of us? Or do we engineer the great comeback story of the post-COVID era? I am here for the comeback story."

• 3:00David Rosenthal?

  We are here for the comeback story.

• 3:02Ben Gilbert?

  Indeed. All right, well, we spent the last 24 hours getting everything in order, all of our thoughts. I've done 167 workouts since January of 2020, when I got my Peloton bike, to make sure we are as knowledgeable as possible. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF. Then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 3:36David Rosenthal?

  Yep, your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT. And your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this "shadow AI" running with no security review at all.

• 3:57Ben Gilbert?

  Right, and that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 4:19David Rosenthal?

  In half? Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor and Snowflake all stay audit ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 4:37Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V A N T A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. Other things, you all know the drill by now. If you want to join the Slack, you should. Acquired.fm/Slack. You should listen to the LP show to get the nerdier stuff like our updated thoughts on the markets and a little bit less us and a little bit more the excellent

• 5:21Ben Gilbert?

  NZS Capital guys. We talk about all of that and semiconductors in our latest episode. You can search Acquired LP show in any podcast player or you can become a member at acquired.fm/lp if you want those two weeks earlier or to join our LP only Zoom calls, one of which is tonight if you are listening the day that this episode comes out. So LP is excited to see you in there.

• 5:45David Rosenthal?

  The LP show has been on fire recently. We've got like, I'm just so pumped about the guests we're getting and-

• 5:51Ben Gilbert?

  10K diver. That was really fun, too. Pseudonymous interview.

• 5:55David Rosenthal?

  We've got some great founders coming up.

• 5:57Ben Gilbert?

  Yep.

• 5:57David Rosenthal?

  It's awesome.

• 5:58Ben Gilbert?

  Listeners, as you know, this is not investment advice, very much not investment advice this time.

• 6:03David Rosenthal?

  It may be product advice, though. I've got some, I definitely want to discuss Peloton's product lineup because I have some thoughts.

• 6:09Ben Gilbert?

  I bet you do.

• 6:10David Rosenthal?

  But it's not investment advice.

• 6:11Ben Gilbert?

  I bet you do. We may have investments in these companies that we discuss. The show is for entertainment and informational purposes only. And before I hand it over to David for history and facts, we do want to acknowledge that a big part of the news yesterday in the restructuring is that Peloton laid off 2,800 people, including-

• 6:30Ben Gilbert?

  20% of their corporate office and as fascinating as it is to dive into this business and the strategy and of course, some of the drama, this is a super tough day, a super tough week for those 2,800 people who had a really, really terrible Tuesday, reading this news, talking to their managers, all that and our hearts go out to those folks.

• 6:53David Rosenthal?

  Yeah, layoffs are tough. Have you, uh, there probably weren't layoffs when you were at Microsoft, were there?

• 7:00Ben Gilbert?

  Like two months after I left, it was a massive round. Yeah.

• 7:03David Rosenthal?

  Yeah. Yeah. There were layoffs at UBS in my first job out of college during the financial crisis. Ultimately, gosh, I think like close to 50% of the company was laid off while I was there. It's hard. It's so hard. It's, I mean, layoffs are just no fun. They're just, I mean, that's obvious statement, but it's hard.

• 7:21Ben Gilbert?

  Yeah. And to transition us in of thinking about our previous episode with, well, one of our previous episodes with Barry McCarthy, he was a part of that big sort of like company changing moment at Netflix where they had to restructure the whole thing. And I think that also had a huge round of layoffs before they sort of committed to a new, a new plan going forward when Netflix was on the ropes and about to die.

• 7:46David Rosenthal?

  Yep. 40%, 40% riff, but.

• 7:50Ben Gilbert?

  So he's, he's kind of clearly good at, uh, at sort of taking a bare bones team and making the most of it.

• 7:57David Rosenthal?

  Indeed. Well, with that, history and facts, I think that is the perfect transition. Barry McCarthy, the acquired superhero, we talked about him on the Spotify episode. We talked about him on the Netflix two parter, both parts of the Netflix episodes because he ended up staying for 12 years at Netflix through all the crazy, that is such an amazing story. Like going back, reading the transcripts of those episodes, the Netflix journey is amazing.

• 8:30David Rosenthal?

  But we haven't talked about him too, too much since until today. And I thought in preparation for today, it would be fun to dive a little more into his background. First off, Something that just like is wild. He's 68 years old.

• 8:47Ben Gilbert?

  The spring chicken coming in to turn this thing around.

• 8:50David Rosenthal?

  It's unbelievable. He's the same, roughly the same age as our parents. If not, if not, maybe slightly, slightly older, I think than yours, right?

• 8:58Ben Gilbert?

  Definitely older than mine, meaningfully older, about a decade. But yeah, as, as other people ease into retirement, Barry accepts his first ever public company CEO job.

• 9:09David Rosenthal?

  I know. Oh, amazing. He's like the Sean Connery of tech. Like he's, he is James Bond, like he will always be James Bond. So great. Well, a few quick things about his background. There's not a lot on the internet about or with Barry McCarthy himself. In fact, as far as I could find, and I looked pretty deeply, the only like dedicated long form interview with Barry McCarthy on the internet is on YouTube with the headmaster of his high school that he went to, a school called the Hill School.

• 9:45Ben Gilbert?

  It's a boarding school.

• 9:46David Rosenthal?

  It's a boarding school in the Philadelphia area. It was when I went to Tower Hill School in Wilmington, Delaware, also in the broader Philadelphia area. And people would always get the Hill School and Tower Hill School confused. We had a little chip on our shoulders, but.

• 10:00Ben Gilbert?

  Your upbringing is somehow like related to every episode these days. It's like, are we only selecting for people in the southern, southeastern Pennsylvania region?

• 10:09David Rosenthal?

  Totally, totally the mid Atlantic region.

• 10:12David Rosenthal?

  Well, this interview is actually amazing. It's an hour long. We'll link to it in the show notes. As of yesterday, it had like a hundred views total on YouTube.

• 10:21Ben Gilbert?

  Now it's up to like five or 600. It's still super small.

• 10:24David Rosenthal?

  If you do nothing else from this episode, go watch this interview with Barry and you will get a sense of, you know, this man and his experience.

• 10:32Ben Gilbert?

  It's also six months ago, so it's like very recent. I mean, for a very long time, he had basically no public appearances.

• 10:39David Rosenthal?

  And very, very relevant to this news today that I was going to save this for later in the episode. But one of the final questions that the headmaster, who's a wonderful interviewer, asked him is sort of like, well, you know, Barry, are you bored in retirement now that he's retired from Spotify fully at this point? And his answer is yes, I'd like to think that I have another game in me. And how prescient that would prove to be. So we all know that Barry becomes the CFO of Netflix when the company is very, very small, still a startup. I think there are only about 40 people at Netflix when he joined and it was certainly pre-IPO, pre there being a real business there, which we'll

• 11:24David Rosenthal?

  get into. But how, you know, this was also not early in Barry's career. How did he end up becoming the CFO of Netflix? Well, he had been the CFO previously to Netflix of another company, actually a digital music streaming company. Did you know this, Ben?

• 11:45Ben Gilbert?

  Really? No.

• 11:48David Rosenthal?

  He was the CFO of a company called Music Choice. Music Choice, do you remember back in like the early days of digital cable and satellite TV? There used to be those channels, like we had DirecTV growing up. I think they're in like the six or 700s.

• 12:02Ben Gilbert?

  It was sort of like Sirius XM in a way. It was like each one was a genre.

• 12:06David Rosenthal?

  It was, it was exactly like Sirius XM, but just on your cable box or your satellite box, you'd go to XYZ channel and they'd have some crazy, you know, like 90s era visualizations.

• 12:16Ben Gilbert?

  Yes. You still see them in hotel rooms sometimes.

• 12:19David Rosenthal?

  Totally. That was Music Choice. Barry was the CFO of Music Choice. And what is like, it's a, it's a cable channel, a couple like it's subscription, revenue, music streaming, music, right? Like what, how prescient?

• 12:34Ben Gilbert?

  Well primed for the ultimate Spotify gig that he would take when he took them public.

• 12:38David Rosenthal?

  Some other things that I learned most of this from that interview. How did he end up? So he had been a management consultant at Booz Allen, I think, early in his career, and then an investment banker for a long time. And it's a well trodden path from, you know, senior investment banker to going and becoming CFO of, of a company. Music Choice may have been public at that point in time. How did he find his way out to California Netflix? He got fired as CFO of Music Choice. I don't know if it was part of a riff and if there were layoffs or if he got fired directly, but he's very open about this.

• 13:12Ben Gilbert?

  I mean, most riffs don't include the CFO unless it's performance based.

• 13:16David Rosenthal?

  Right. Usually the CFO is the one orchestrating the riff. Yeah, he got, he got fired and he was 45 years old. He had already had this sort of long career as an investment banker and then as a CFO, been fired and like, what an inspiration to go from that to having so many more chapters to come, even now to a new chapter at 68 years old.

• 13:43Ben Gilbert?

  Like, yeah.

• 13:44David Rosenthal?

  Gosh, I hope my life is that interesting.

• 13:46Ben Gilbert?

  Label it what you want, growth mindset or learning from your mistakes or anything like that. It does feel like this guy is compounding knowledge.

• 13:53David Rosenthal?

  And I wonder if also, you know, again, we talked at the top of history and facts about how this was a hard week for so many people at Peloton and, you know, our hearts are with them and it's hard. It's like Barry went through this himself.

• 14:05Ben Gilbert?

  Yep.

• 14:06David Rosenthal?

  So how does he end up going out to Netflix? Netflix was recruiting for a CFO and like, nobody wanted the job because, and I think we talked, we may have talked about this a little bit in our Netflix episode, but the early days of Netflix, like it was not a hot startup in Silicon Valley.

• 14:25Ben Gilbert?

  No.

• 14:25David Rosenthal?

  It was far from it. You know, Mark Randolph had originally started it. Reed got involved a little later and I also did not know this, or at least I didn't remember it from the Netflix episode. It was not a subscription business. The original business of Netflix was you paid per rental. It was literally like Blockbuster and that is not a good business.

• 14:50Ben Gilbert?

  Oh, I don't think I knew that either, or at least I didn't, didn't remember that. The other like crazy Netflix thing that I always sort of forget about until I reread it is that they sort of timed it with DVDs becoming more widely distributed. And when they were starting the company, like they sounded extra crazy because it not only was kind of a crazy idea, but it was a bet on DVDs and DVDs weren't popular yet. And it's like, what do you mean? You're going to mail discs or no one has a player for those discs yet.

• 15:22David Rosenthal?

  Totally. So this was not, this was a tough role to recruit for. And, and that's how Barry ended up becoming a candidate. And then he and Reed immediately hit it off. And, you know, he joined and obviously sort of, you know, in many ways, the rest is history there. But also I think it's important, it wasn't a subscription business. Barry was, you know, alongside Reed, part of architecting the true, you know, incredible business model of Netflix of becoming a subscription business. So they had done before he joined, just about a million dollars in revenue on the like pay per, pay per rental model. He joins, this is all pre-IPO. They implement the subscription business model. It goes from one million to five million in revenue that year.

• 16:08David Rosenthal?

  The next year, 35 million and then hundreds of millions, you know, after, after that. And then they IPO, there's the fight with Blockbuster, all that, that we talk about in the part one of the Netflix story. And 2003, it's a public company. Barry tells Reed, you know what? This has been an incredible journey. I'm ready. I think he was, had been there for maybe five years at that point, five or six years.

• 16:36David Rosenthal?

  I'm ready for my next challenge. I want to go be CEO of a company next. I've realized I'm really operational. I love this. He talks with Reed, he talks with the board. They announce on an earnings call, public earnings call, that Barry's going to be stepping down. He's staying an extra year throughout the year of 2003 to manage the transition. Do it right. Find his next challenge.

• 17:00Ben Gilbert?

  Netflix is boring. It's, it's done. Like everything's going to be smooth sailing and successful from here on out. So I'll go do something else.

• 17:07David Rosenthal?

  And then Amazon, I don't know if they ever publicly announced, but like sort of word got out that Amazon was going to enter the market and compete directly with Netflix, which of course they did in a different way, much later in history. The stock gets hammered. It dropped literally, the stock price dropped 60, six, zero percent. Shades of what's happening with Peloton now.

• 17:36Ben Gilbert?

  And 60 is a modest drop compared to what happened with Peloton.

• 17:39David Rosenthal?

  Yeah, right. And it's, it's crisis mode. It's, it's wartime again at Netflix. And Barry, in one of the most, was just like, One of the many reasons why we love him here at Acquired and his story is he says, "I can't, I can't leave. I gotta stay through this fight." He literally, word for word, on a public earnings call, announces that he's staying, he's not leaving, and his reason is, quote, "You don't leave your friends in the middle of a knife fight."

• 18:10Ben Gilbert?

  It's just so good. Barry is Mr. War Time. Like, in the parlance of Ben Horowitz's peacetime CEOs and wartime CEOs, this is Mr. War Time. When things kind of feel easy and like they're gonna keep growing year over year and we don't have a existential crisis in front of us, that's when he decides like to, you know, "Okay, you guys are good without me now, but by all means, if we're in battle, like, put me in, coach."

• 18:37David Rosenthal?

  I mean, he literally, in the Hill School interview, he says, quote, "You gotta ask yourself, are you a wartime fighter or not? And I've always gotten my biggest thrills being in the fight." And then, of course, there's the Carl Icahn battle and the Price Wars and all the, all the stuff that happens at Netflix. He ends up staying until 2010. So, many, many more years than he originally expected. And when he finally does announce that he is leaving Netflix in 2010, he could totally retire at this point. He's in his mid-50s. And he announces it at an investor conference. This is just also amazing, amazing

• 19:19David Rosenthal?

  quotes here. He's telling the street, quote, "You can infer from the record in 2004 that I wouldn't be leaving unless things were in very good shape. There is nothing that I know that you don't know that would cause you to be sleepless about your position in the stock." And if Barry is saying that, you can take that to the bank. And then, bent in what you were saying, this is also from the Hill School interview, about him really being, getting fired up by wartime and peacetime is not as interesting to him. The headmaster asks, you know, "Why did he leave Netflix?" And he says, "I got bored. The more successful the business was, the fewer the challenges there were for me."

• 19:58Ben Gilbert?

  Fascinating. And listeners, as you can tell, we're spending a lot of time here on Barry, in part because I think it's really important to know, as we think about the future of Peloton... You know, what is his MO? Who is this guy? And why, you know, to the extent where you're excited about the future of the company? Why? And what's the track record of this person? So what's he likely to do when he comes in? And of course, he is, uh, he has an amazing way of instilling confidence. Like he has a way with words and especially a way with words to investors to bring a sense of calm.

• 20:39Ben Gilbert?

  And I think there is nothing more necessary for Peloton than that than, than right now.

• 20:45David Rosenthal?

  Well, and I think the other thing, you know, that's sort of one half of the magic of Barry McCarthy. To the extent he has magic, which I believe he does. You know, I think the, the other half is what he learns from this Netflix experience. And frankly, going all the way back to music choice before that. And then compounds, you know, with Spotify that we'll get into in a sec. Which is like, he is probably the number one world expert in managing subscription businesses. Like he helps architect the OG internet subscription business of Netflix. And then, uh, you know, again, go back and listen to our episodes. So much of what he was doing during those wartime years was modeling out

• 21:31David Rosenthal?

  in incredible precise detail, the economics of not only what Netflix's subscription business was, but Blockbusters and what Amazon could do. And like, they had to make company, uh, you know, decisions with the whole company on the line about how low they were going to cut prices and how long they were going to hold them low to fight Blockbuster and Amazon. And so they had to understand the financing ability of those two other companies in addition to their own and their access to capital for how they were going to win that war. Like there are, if there are other people in the world who have done this to the degree that he has, they are few and far between.

• 22:13Ben Gilbert?

  He is in the dictionary under the definition of strategic finance.

• 22:17David Rosenthal?

  Yes, particularly subscription business, strategic finance.

• 22:23David Rosenthal?

  So then, you know, when he retires from Netflix, he goes and joins TCV, which of course has a storied history of investing in Netflix and helping them through, through all of their challenges as a financing partner.

• 22:36Ben Gilbert?

  And we should say TCV stands for Technology Crossover Ventures, which while it seems like everyone is doing this now, investing in both private and public companies, this, I mean, this was a unique enough strategy when they were formed that they named themselves after it. I mean, that says a lot about how long TCV has been doing that.

• 22:55David Rosenthal?

  So he joins them as a venture partner. And I don't know if he was thinking that he was just gonna sort of be on boards and be an advisor for the rest of his career. But in 2014, he joins the Spotify board. And he's sort of so taken by both the Spotify business and Daniel Ek and the opportunity ahead. And they need someone like him to really come and transform that business. We should revisit Spotify at some point because when we covered their direct listing, which he architected, very like invent, you know, didn't invent, but modernized the direct listing and everything that's happening now.

• 23:30Ben Gilbert?

  Yes, taking a page out of the Ben and Jerry's playbook.

• 23:34David Rosenthal?

  Indeed, indeed. So he goes and joins Spotify as CFO and not just CFO, but also eventually he would add, add head of their free business, the advertising supported business at Spotify. So not just the subscription business of Spotify.

• 23:52Ben Gilbert?

  Oh, I didn't realize he's like an operational leader of the ad supported business.

• 23:56David Rosenthal?

  So originally he moved to Stockholm and was, was CFO of the business in Stockholm and then moved to New York to set up and really drive the free portion of the Spotify business, which is what Taylor was so upset about. And that now that they've built, built out since he, when he took that over, they built that into a real business and working with artists and making that actually work for, for the company and for all the stakeholders. So he had this incredible chapter there, the DPO, everything. And then in January of 2020,

• 24:31David Rosenthal?

  He retires, presumably fully at this point in time because he's 66 years old and rejoins the board of Spotify and spends, you know, thinking he's going to go spend the next few years joining boards again. He joins the Instacart board and reestablishes his relationship with TCB.

• 24:53Ben Gilbert?

  Didn't he also join the board of Pandora, if I'm remembering right? Speaking of music subscriptions?

• 24:58David Rosenthal?

  That was back before Spotify.

• 25:01Ben Gilbert?

  Okay, got it. But like, just to add yet another credibility, a piece of credibility on music-related subscription businesses.

• 25:09David Rosenthal?

  Totally. So now let's, let's switch over to the Peloton track of the story here. Peloton, as many folks probably know, was founded in 2012 by John Foley, who, and this is where, you know, the connections just go so deep here.

• 25:23Ben Gilbert?

  David, I think it's inappropriate to start the Peloton story in 2012. I just have to say, I know you're usually the one who goes back. This story starts in 2006 with SoulCycle. And I think, without going into the whole SoulCycle story, by the way, there are two awesome episodes of How I Built This. One on SoulCycle, the founder, founders there. And then another one, actually interviewing John Foley on Peloton, which is great. And this, we don't think about the narrative of Peloton that much this way right now. But if you think back to when you first heard about Peloton, it was SoulCycle, but on a screen in your living room. And SoulCycle was this massive dominant brand.

• 26:06Ben Gilbert?

  If you were touchy feely, and then there was Flywheel, which if you were more numbers-driven, you know, Flywheel was more your shtick. So I guess it was more of a Flywheel than a SoulCycle, but it had the prestige brand of a SoulCycle.

• 26:20David Rosenthal?

  And I actually don't know the history on this. You may know, but there's, there's very intertwined history with SoulCycle and Flywheel, right?

• 26:28Ben Gilbert?

  There is. We will get to that and what would have happened otherwise.

• 26:32David Rosenthal?

  Ah, okay, okay. We'll save it for later. We'll save it for later.

• 26:35Ben Gilbert?

  It is totally inappropriate to like, be, think about Peloton in a vacuum. You know, the, the moment in 2012, and I think even 2011, when there was ideation happening, was totally. You know, I'm John Foley. I live in New York. SoulCycle is totally taking off and this, you know, not yet connected fitness, but sort of

• 26:55David Rosenthal?

  Boutique fitness.

• 26:56Ben Gilbert?

  High-end group boutique fitness is taking the world by storm. And of course, there's, there's John, who's not really the most numbers oriented, schedule oriented, disciplined person. More of a visionary product leader type person. And he's thinking, you know, I, I can't commit to five days from now, making sure that I schedule that spot in SoulCycle. What if I could decide last minute and there was an infinitely scalable version of SoulCycle, where the room wasn't bound by four walls?

• 27:30David Rosenthal?

  Totally. Well, we'll get into who John is in a, in a sec, but I was gonna do this second, but you're absolutely right. To start with SoulCycle and Boutique Fitness and Flywheel and Barry's Bootcamp and, you know, all the other similar businesses out there. Yeah, so John and his wife Jill lived in New York, which is the epicenter of all of this. And, and there's so many great, great instructors at these places that have cult followings. People fly from all over the world to come to New York. That's where you want to be if you are in this, you know, an instructor, an up and coming instructor in this burgeoning sort of new category. And this is what's just brilliant, you know, A, it's so, like

• 28:12David Rosenthal?

  you said, it's so hard to get spots in those classes. Like you gotta, the instant they become available. Like you even had to do this in Seattle, I remember, but like in New York, it's impossible.

• 28:22Ben Gilbert?

  It was a meme to buy the shirts and the shirts said noon on Monday, because noon on Monday is when you had to stop whatever you're doing and scramble to reserve the spots.

• 28:31David Rosenthal?

  So anybody, it's hard to get spots with the best instructors in these classes. John and Jill, his, his wife, they were super into this. They had two little kids. Like, I can't, I've got one little kid. Like, I can't, it would be, obviously, we live in a different era now, but even if we didn't, like, there'd be no way I could do this. Like, there were a lot of people out there that were just, wanted this product and couldn't get access to it. So the Peloton idea, like, it was, it was revolutionary on a whole bunch of dimensions. You know, one was

• 29:10David Rosenthal?

  Democratizing location, like you didn't have to be in New York to get the best stuff. Two was, like you said, elastically scaling access to the best instructors, not the average instructors or the low quality instructors, like literally only the best and infinite class size.

• 29:28Ben Gilbert?

  And so if you think those two vectors alone, infinite class size and geography agnostic, that's massively TAM expanding, you know, the theoretically the TAM for connected fitness should be way bigger than boutique fitness, but then there's even a third layer of icing on the cake, which is time shifting. So what if you can't make it to that 5am class?

• 29:47David Rosenthal?

  So to feather back in preview, a little Barry element here, you know, one of the things that he talks about, to the extent he does talk publicly and learned deeply from Netflix, but has just become kind of ingrained in him and I think is now an obvious insight, but definitely at Netflix and at this point in time, when Peloton was getting started, not obvious, is his quote is, "Everything linear dies, everything on demand wins." And it's so true, like, you know, the being able, this, this element of being able to access best in the world content on your schedule, when you want it, like, that's

• 30:30David Rosenthal?

  what makes Netflix awesome. That's what makes Spotify awesome. That's why podcasting is better than talk radio. That's why music streaming is better than listening on the radio. That's why Netflix is better than linear TV programming.

• 30:44Ben Gilbert?

  Yeah. Which is mostly true, but not entirely true. You got like sports is probably the notable exception.

• 30:50David Rosenthal?

  Right. And that Barry always says, you know, sports is sort of the one. There are a few categories out there, but here is this concept being applied to something, a whole radically new market like fitness. Who would have thought? Like it's, it's absolutely. Brilliant. And like, we can't give enough credit to Peloton and John Foley for innovating on this.

• 31:09Ben Gilbert?

  In fact, you could even argue Slack is indicative of this trend, work going async instead of synchronous, pulling out of meetings and going to chat-based or document-based forms of collaboration. That is a on-demand-ness of something that was previously linear.

• 31:27David Rosenthal?

  Totally. Yeah, like, how many, people still obviously have work phone calls and whatnot.

• 31:32Ben Gilbert?

  The number of Slack conversations that used to be a meeting, or the number of document reviews that used to be a meeting is just awesome.

• 31:38David Rosenthal?

  Yep. And to then create a product that is like native to that, you know, like email existed, right? But like, it's slow and it's not, you know, anyway, that's what Peloton was. So who's John Foley?

• 31:51David Rosenthal?

  This is like, it's such a small world out there. He had been, prior to starting Peloton, he had been the head of Barnes & Noble's Nook business, their e-reader business, which is based in New York. And like, actually, Barnes & Noble was a great company and then eviscerated by Amazon. And the Nook business and the Nook product, I think was probably a decent product, but it was just sort of too late.

• 32:17Ben Gilbert?

  And they were really a fierce competitor in this market. I mean, they outlasted Borders.

• 32:21David Rosenthal?

  Totally. But you know, it's interesting too, thinking about the book and e-reader market relative to Peloton too, and maybe some lessons that Foley learned from that. You know, you could have the best hardware in the world, but you needed the books. Like, the content was what really mattered. It didn't matter if the Nook hardware was better than the Kindle or not. Like, Amazon had the biggest selection of books, the easiest buying experience, and had the most lock-in.

• 32:48Ben Gilbert?

  Okay, I do have to pull forward that thing from what would have happened otherwise, because it's, we can save that analysis for later, but I should share what actually happened. So you might be giving Foley a little bit too much credit here. When he was starting the business, they wanted to build the best bike, beautiful piece of hardware, like Apple. They wanted to build software that was equally elegant and Really differentiated that bike. The original vision actually was a connect your own iPad vision. They did not want to unify it, but sort of learned over time that we really do need to unify it to control more of the experience. But here's the interesting thing. They actually didn't want to produce their own content.

• 33:30Ben Gilbert?

  They thought if we have a bike, even if it's, you know, like a bike with our software, that's interesting enough to people and we can partner with either SoulCycle or Peloton.

• 33:43David Rosenthal?

  Or Flywheel, you mean?

• 33:44Ben Gilbert?

  Or Flywheel, yeah, to get access to their instructors, their content. That's the thing they're good at is the content. We'll just make this elegant device. And they actually got to term sheet with Flywheel. I think SoulCycle sort of gave them the cold shoulder as sort of, you know, they were so hot at the time and so big and so dominant. But Flywheel, they actually got to terms on what would it look like to make this thing, not only content partner, but I think also like a go to market partner. Like this was going to be the distribution strategy. But Flywheel ended up pulling out and walking, walking away from the deal. So Peloton were sort of forced to do their own content and pivot to a really vertically integrated strategy.

• 34:27David Rosenthal?

  Oh my gosh. Talk about history turning on a knife point. Wow, what a like, just like the echoes of the blockbuster Netflix situation. And Amazon, remember Netflix tried to sell itself to Amazon?

• 34:42Ben Gilbert?

  Yep.

• 34:43David Rosenthal?

  Oh, amazing. Okay, so that's what Foley was doing immediately before, before starting Peloton. But before that, he had been a long time IAC guy, Interactive Corp., working for Barry Diller. Like, oh my God.

• 34:57Ben Gilbert?

  The original tech media conglomerate. I mean, like, I'm kind of annoyed at the number of people that try to characterize John Foley as someone who, you know, was breaking into the industry or didn't have a tech background. Or no, he was in the middle of this stuff in the late 90s, early 2000s.

• 35:17David Rosenthal?

  We should do an episode on IAC because it is fascinating. Barry Diller and media and tech and him being really the first person to integrate all that. But for a long time, sort of the jewel of IAC was QVC and the Home Shopping Network. And what is that? That is like literally streamed media out via television with an interactive component that people at home were buying and calling and inter like, ah, the DNA is just like so, so perfect.

• 35:52Ben Gilbert?

  So what was John doing at IAC?

• 35:54David Rosenthal?

  I believe he was working on part of the city search team. And then he also, they had a business called pronto.com. I think, I'm not sure exactly what that was doing, but he had bounced around. And I think a lot of people at IAC go between a whole bunch of their properties.

• 36:10Ben Gilbert?

  Yep. And I think, I'm not sure if this was IAC or his, his next gig, but he ended up taking over the post bubble Evite team that had shrunk from like hundreds and hundreds of people down to this like very small group and grew it to like, I think you grew it from like a million bucks to 25 million in revenue or something still relatively small and compared to the grander scale, but had, had sort of done this, take a startup and rehab it and build it bigger. So he hadn't actually done a startup from scratch, but had built something meaningful with a small team.

• 36:45David Rosenthal?

  Man, Evite, that's like the cockroach of the internet. You just, it just won't die.

• 36:51Ben Gilbert?

  Yes.

• 36:52David Rosenthal?

  Amazing. So you would think like, you know, gosh, we're telling this story now and hindsight is 2020, like incredible vision, proven demand for this product. Like, yes, it's going to be hard to build a full stack company around this, but like financing, hard stuff, like that's what builds moats. Like this should be an easy fundraise. And Ben, as you referenced, the John's episode on, on how I built this is great around all this, so we won't rehash all of it, but it was incredibly hard to get this funded. Like all the VCs passed again and again and again, they end, he ends up raising $400,000 to start from friends and family at a $2 million post-money valuation.

• 37:40David Rosenthal?

  Oh my gosh. And of course, you know, folks probably all know now, uh, I think it's later in my notes, maybe what the current market cap of Peloton is, but at its peak, it was a $45 billion public company.

• 37:52Ben Gilbert?

  IPO'd at 8 billion, went all the way up to, I think, 49 billion. Uh, and then today is floating a little above the IPO price between nine and 10 billion.

• 38:03David Rosenthal?

  Wow. I mean, from a $2 million post-money valuation for that first round, and that's 20% of the company he sold for $400,000.

• 38:13Ben Gilbert?

  Yep. All from individuals, 25K and 50K checks.

• 38:17David Rosenthal?

  And then did a three and a half million dollar round, I believe also all from individuals after that.

• 38:24David Rosenthal?

  They do a Kickstarter in 2013. I had forgotten this.

• 38:28Ben Gilbert?

  I can't believe this thing was a Kickstarter.

• 38:30David Rosenthal?

  Until it got pointed out in the acquired Slack, like it was a Kickstarter and it was like essentially a failed Kickstarter. Like it didn't technically fail, but it was not good.

• 38:40Ben Gilbert?

  So here's the thing. I just pulled it up. We'll, we'll link to the Kickstarter page in the show notes, which by the way, has basically the bike exactly as it is today on there from eight years ago.

• 38:50David Rosenthal?

  Aside from what like the weights holders and they, they tweaked.

• 38:53Ben Gilbert?

  The water bottle, uh, location.

• 38:55David Rosenthal?

  The same bike.

• 38:57Ben Gilbert?

  Yeah. So they raised 307,332 dollars in the Kickstarter. Their goal was 250 and John says on the how I built this episode, that half the people who backed the Kickstarter were already investors. So it's a very interesting thing here where we all know Peloton is a killer product. I mean, you and I rave about it. They have these ludicrous NPS scores. And yet, when they laid out the vision and they showed a very well-produced video with like a very, you know, you get a sense of what the experience is like from this video. It was not enough to communicate to people that this thing is going to be awesome.

• 39:41Ben Gilbert?

  And so I think it's worth pointing out that until you actually tried it.

• 39:47David Rosenthal?

  Yeah.

• 39:47Ben Gilbert?

  You didn't know it was going to be good, which makes it a pretty hard thing to sell.

• 39:52David Rosenthal?

  Totally. We're going to get into this more in a sec, but yeah, this is not, at least in the early days, things may be different now, although maybe not, we'll discuss.

• 40:03David Rosenthal?

  Yeah, this product is not something you can really just sell over the internet. Like you got, like you said, you either got to try it or you got to have a bunch of friends who are using it and be like, this is awesome.

• 40:15Ben Gilbert?

  Right. There needs to be sufficient social pressure or your own experience.

• 40:19David Rosenthal?

  Well, let's go right in. So like, how do they start and end up selling it? They make the, especially at that point in time, completely orthogonal decision to how, you know, tech companies and startups were supposed to sell. They go to the Short Hills Mall in New Jersey and they rent a store in the mall and set up a mall store and they start selling these by hand in the mall.

• 40:50Ben Gilbert?

  It's a beautifully contrarian bet to say our strategy is to go to malls, which by the way, they continued to do like hundreds and hundreds of in mall stores as malls across America are declining, but they did have the realization, I don't know if it was super explicit as a strategy, but the, the realization that, hey, until you try this thing, like you actually don't understand how awesome it is. Like you can hear it described to you, but it's not compelling enough to buy, especially at this high $2,000 a bike plus a subscription fee price point. And so the mall was sort of necessary and they have these anecdotes about how people actually weren't in the market to go buy gym equipment, but they're walking by, they try it, you know, they, they have someone size the bike for you, you throw

• 41:35Ben Gilbert?

  on the headphones, their, their goal, their sort of KPI is get you in the experience as soon as possible after stepping in the store. And this is by the way, how I bought mine. And it is like you wander in and

• 41:46David Rosenthal?

  You bought it in the mall?

• 41:47Ben Gilbert?

  I did. Yeah. I had intent beforehand, but it is this experience where they're like, do you want to try it? And they make it easy and fun to try. And then once you're in and you've like got headphones on and typically people are together. So you look at your partner or whoever, and then you're like, whoa. And like, it takes all of three to five minutes before you're like, oh, I see why this could be cool. And they needed the mall store as the way to sort of do this.

• 42:12David Rosenthal?

  Yeah, I'm just remembering my own experience before I bought the Peloton, which I didn't get until this summer. So it was not like a pandemic purchase per se. But I'd been hearing from you and plenty of my friends like how much they love it for years. And, and that wasn't even enough to put me over the edge. I, I had, I got a digital subscription. So I was just, I had a crappy old bike in my garage that I was using it with. And I was like, oh, this is pretty good. And then we went on vacation. We went on a baby moon before our daughter was born and the hotel had Pelotons there. And I was like, well, I'll try, I'll see what the actual bike is like. And I was like, oh, this is awesome. And my $200 Amazon bike in the garage, it's night and day compared to this.

• 42:53Ben Gilbert?

  It really is a great bike. It's the sort of magnetic resistance. It's the belt instead of the, the chain. I mean, everything about it is, it is a nice piece of hardware.

• 43:03David Rosenthal?

  It really, it really is. But yeah, yeah, you gotta, you gotta try it.

• 43:07Ben Gilbert?

  Which it's, it's interesting. You're describing that how you got hooked into it. That's like, sure, you want to sell bikes to hotels because it's nice to sell bikes. But I think a big part of the, we need to be in hotels strategy is just more and more ways for people to experience it and want to buy one.

• 43:24David Rosenthal?

  But yeah, okay. So you mentioned price, $2,000 bike. So

• 43:31David Rosenthal?

  at the Kickstarter, I think they priced it like 1,500 on the Kickstarter, I think, as early. But then when they first tried to start selling these things, they priced it at $1,200 and it wasn't selling. This is like fascinating. This is a fascinating little detail. And then they talked to some people about this. So you're getting customer feedback. And what they realized was that for $1,200, like they're thinking like, hey, the strategy is to sell the hardware at cost or at a loss. It's like the video game console strategy, like get the video game consoles in there. And then we've got this awesome subscription business that we're gonna layer on top of it. And that's where we're going to make our money. People thought it was, the hardware couldn't be that great if it was $1,200.

• 44:15David Rosenthal?

  And they realized that if they raised the price, they raised the price up to $2,245, that then in people's minds, this becomes this like jewel, premium, expensive, aspirational luxury product. Like I'm treating myself to this splurge because it's so awesome and I'm gonna like love it. And at the $1,200 price point, it was, it was hurting that. It was, it was preventing that from happening.

• 44:44Ben Gilbert?

  That's absolutely fascinating.

• 44:46David Rosenthal?

  So they didn't change a thing about the bike. They just raised the price by a thousand bucks.

• 44:49Ben Gilbert?

  You know, in the Buffett parlance of price is what you pay, value is what you get, they're using price to signal value.

• 44:56David Rosenthal?

  And that's supposedly another one of the big things that really helped, really helped sales take off.

• 45:03Ben Gilbert?

  Well, yeah, so I'm going to pull forward a playbook theme here. So the second order thing that I don't think they realized by jacking up the price is that now they're picking their customers and they're picking affluent customers. And in particular, they're picking customers who have extremely low price sensitivity. And what happens when you pick people with extremely low price sensitivity and you select for only people who are willing to throw $2,300 post-tax at an exercise bike, they're pretty unlikely to churn, even if your fitness subscription is pretty expensive. And so even to this day, their annual churn, if you sort of take their monthly churn and annualize it, is

• 45:48Ben Gilbert?

  something like 9%. This is an unbelievably sticky business. When you look at most consumer businesses, they're like 50% annual churn.

• 45:58David Rosenthal?

  Yep. As of last summer, so they're on a June 30 fiscal year ends when they reported their last full year fiscal end, I believe churn was like 0.6, monthly churn was like 0.6%, worked out to about 7% annual churn.

• 46:15Ben Gilbert?

  Wow.

• 46:16David Rosenthal?

  Which like that's, those are Netflix numbers there.

• 46:18Ben Gilbert?

  I'm not sure. Yeah. I think it's meaningfully better than Netflix. I should look at what Netflix's churn is, but I think that that is the best I've ever seen. So on the one hand, it's hard to acquire customers because you got to go sell them a $2,400 bike. On the other hand, once you get them, boy, is that sticky.

• 46:33David Rosenthal?

  So I don't know what revenue was for 2014, uh, which is their first kind of full year of sales and they implement some of these strategies. I believe it was $10 million ish. In 2015, though, they do $60 million of revenue. And ahead of that, at the end of 2014, they are able to raise their first institutionally led round of capital. This is 2014, led by the legendary, you know, early stage investor. It is technically a series B, but the, the seed was the 200 or $400,000 round. And then the, the A was the, you know, still individuals, three and a half million dollar round, led by the legendary seed investor. They are quite

• 47:17David Rosenthal?

  now a legendary seed investor, among others, Tiger Global. Get out of here. This is amazing.

• 47:26Ben Gilbert?

  It's an unbelievable bet by Lee Fixell in 2014. It was a $10 million total round on a 35 million post where Tiger put in 5 million. Tiger would go on to become the largest shareholder at IPO, owning just under 20% of the business.

• 47:45David Rosenthal?

  Amazing. Amazing. Like, there's so many little things about this story that just sort of, you know, presage everything that would be to come in, in tech over the years, uh, and in venture. Yeah, Tiger leads the first institutional round.

• 48:02Ben Gilbert?

  I do think, by the way, this is one of the things that gave, among many other very successful investments, but was a big part of the story for Lee to, when he's left and started addition and wrote and raised over a billion dollars for addition's first fund. Peloton was a big, big part of that.

• 48:19David Rosenthal?

  Yep. Yeah. For Lee, for addition, you know, and for Tiger itself, too. I mean, yeah, got to imagine that that was a big part there notoriously tight lipped. Our friend, Mario Gabrielli, wrote, I think, the best piece out there on them, uh, which was still without, without insider access, um, but shaped their strategy too.

• 48:37Ben Gilbert?

  Yep.

• 48:38David Rosenthal?

  So $60 million in revenue in 2015. 2016, they do $170 million in revenue.

• 48:45David Rosenthal?

  2017, there is 325 million at a $1.3 billion valuation. And this is where I think Silicon Valley really started to wake up, be like, oh my God, we missed this. How did we miss this?

• 48:58Ben Gilbert?

  Yep, because he pitched everyone, everyone.

• 49:01David Rosenthal?

  Literally everyone. 2018, they introduced the Tread product, the treadmill, and the digital app subscription. It'd be fun to talk about that. The, you know, I started as a digital app subscriber and then-

• 49:15Ben Gilbert?

  Which is how, it's like $13 a month?

• 49:17David Rosenthal?

  Yep, it was $1,299. I think I originally started because I think there might have been like a, some, a deal with Apple or somebody, like a first free month trial or something like that.

• 49:28Ben Gilbert?

  Were you a part of the COVID offering, the three-month COVID thing?

• 49:32David Rosenthal?

  Yeah, I think that might have been.

• 49:33Ben Gilbert?

  So that, that was totally nuts. So John Foley talks about this. He says about the beginning of COVID. He said, "Six months ago, we had about 100,000 digital subscribers for the business. And within 45 days of COVID hitting, they, they gave this deal that said, you're not getting a month free, you get three months free because people need to work out at home. And within 45 days, we had close to 1.2 million people who had jumped on the trial. So call that a 10x increase in weeks."

• 50:03David Rosenthal?

  Wow.

• 50:03Ben Gilbert?

  So that was a very, I mean, again, we'll get into the unit economics of it later, but at least from a customer acquisition perspective, that was a great way to spike the number of subscribers they had.

• 50:15David Rosenthal?

  Totally. And the digital app experience is like surprisingly full, full-featured. You know, I used just that for quite a number of months before I, before I got to try the actual hardware at a hotel.

• 50:30Ben Gilbert?

  And for people who are wondering, you know, why can't, why isn't it as good? If you, if you haven't ridden the Peloton, like, why can't I just mount an iPod, an iPad on an old exercise bike? The biggest difference is that when the bike is not feeding information into whatever device you're using, you know, your iPad or something, it doesn't know what the resistance is and it doesn't know what your cadence is. And so you don't know things like your current spot on the leaderboard, your- It knows you're doing the ride and it knows how far into the ride you are, but it doesn't actually know, you know, anything about how you're doing in the ride.

• 51:02David Rosenthal?

  Leaderboard. And then I think also there's just like, it is a really good bike. You can, you can hack together, you can do a hack a Peloton and get some of the integrations with third-party sensors. But I think to get like a similar quality bike, you're going to be spending roughly the same amount anyway. And so like, why wouldn't you just like, that's what I kind of decided is like, well, I'll just get the whole ecosystem.

• 51:25Ben Gilbert?

  Why wouldn't you get one anyway? Because the connected fitness digital only subscription is $13 a month. And once you have a bike, you're, it becomes $40 a month.

• 51:34David Rosenthal?

  You're paying $40 a month.

• 51:37David Rosenthal?

  Okay. So I know you've got some fun stuff on this. 2019, people start talking about, everybody in Silicon Valley knows this is a great business now. People start talking about an IPO going public, which happens in September 2019. But leading up to that, there's kind of an issue with the business that got to sort out, which is earlier in 2019, they get sued for first $150 million and then they up it to $300 million by the music publishers, National Music Publishers Association. Because they're obviously using all this music as part of the classes at Peloton, and they didn't have the proper sync licenses.

• 52:18Ben Gilbert?

  Yes. So this is my, one of my larger bear cases for Peloton. So music licensing and gross margins, a treacherous tale. Well, if you look at Peloton's income statement today and across recent quarters, so we're at sort of a relative point of maturity here. About a third of the revenue that comes from subscription, so not like the physical bike sales, but if you just look at the subscription revenue, a third of that goes to cost of revenue. And while we don't know for sure, it's very likely that the majority of this goes to music licensing. So even though investors love a good subscription business, this is

• 53:03Ben Gilbert?

  not 86% gross margin like SaaS is, it's more like 66% gross margins. So a little examination, why do we think that this mostly goes to music? Well, in part, the variable cost for everything else should be pretty low. I mean, maybe bandwidth is probably the next highest cost for streaming video. I have some particular beef as a pedantic person with the video that they do stream. I find it to be too low frame weight, too low frame rate, to have some motion blur, to be a little bit compressed. But all that aside, it's still expensive to stream video.

• 53:42David Rosenthal?

  Now, do you know, do they put content production cost in variable cost here too?

• 53:48Ben Gilbert?

  I don't know if that is in the cost of revenue for the subscription. I would guess not. I would guess they would put that down in either GNA or...

• 54:01David Rosenthal?

  I don't know. It might be in there. But you know, and I don't, I don't know. I haven't dug in deep enough to know. But I don't think it's that expensive relative to the amount of subscription revenue they get. We'll get into powers later and scale economies and all that. But my understanding is that the top Peloton instructors make like 500K to a million.

• 54:23Ben Gilbert?

  Yeah, I think that's about right.

• 54:25David Rosenthal?

  And then obviously, you've got all the production costs around that, but like still compared to, you know, hundreds of millions of subscription annual revenue, that's a drop in the bucket.

• 54:35Ben Gilbert?

  Totally. So, okay, let's assume that the largest part of this, 33% of cost of revenue is to pay for music. So why is the music so expensive? Well, if you remember from our Taylor Swift episode, there's a bunch of different types of licenses. And unlike Spotify...

• 54:50David Rosenthal?

  I knew you were gonna get into this.

• 54:52Ben Gilbert?

  Or the radio, Peloton actually requires multiple licenses for the particular way that they use the music. So first, Peloton, I think, is technically, just like the radio, a live performance. So, live performance royalties must be paid out. And if you are curious for how those are paid out, go listen to the Taylor Swift episode where we talk about the difference between the publishing rights holder and the performance master right holder. But they also need a sync license in addition to synchronize those songs with the video content. If you're gonna, you know, use a license in-

• 55:30David Rosenthal?

  A commercial or a movie.

• 55:33Ben Gilbert?

  Exactly. And just as a quick aside, an aside from an aside, the interesting bit about sync licenses is they require the approval both of the songwriter, the person with the publishing right, and the performing artist who owns, or whose label owns the master right. So there's a lot of people who can say, no, I don't grant you a sync right, which is why in this lawsuit that you're referencing, David, when Peloton did end up pulling a bunch of stuff off of the service, which a lot of people were really upset about, it was weird. Because so you're like, wait, but some of this artist's songs are on there, and some rides with those artist's songs got removed. And that's because those songs had different songwriters behind them.

• 56:16David Rosenthal?

  Yeah. So many people with veto power. What a Byzantine industry.

• 56:21Ben Gilbert?

  Crazy, right? Okay, but back to sort of this gross margin problem. So according to a piece from Tricordist, which is a music industry site, Peloton pays out 3.1 cents every time that you are on a ride and hear a song. That number should actually sound pretty high to you, because that's meaningfully larger than what we talked about on the Taylor Swift episode per stream. So let's take that 3.1 cents. If you ride every day, and people don't ride every day, but I think people ride about 20 days, or they use the product about 20 times per month. But let's say you ride every day, and assume there's about 10 songs per ride, and I went back through my recent rides and looked, that's about

• 57:02Ben Gilbert?

  right. That's $9 of your subscription revenue that is going straight to music. So if you're on the bike subscription, that's like 23% of your subscription that you're paying to Peloton goes immediately to the labels. Which kind of checks our math above that the biggest part of that, that, you know, one third of the cost of revenue is actually for music. Now, of course, if you're on the digital only subscription, that's really high because that's only $13 a month. If you're actually using that thing every day, I assume the royalty structure is similar. It may be the case that Peloton is large enough that they've negotiated a specific

• 57:44Ben Gilbert?

  revenue share, you know, somewhere between 15, 25, 30%, something like that with the music labels rather than needing to pay out a fixed amount per song. Because if it's a fixed amount per song, then they could get underwater pretty quick on that digital only subscription.

• 58:02David Rosenthal?

  God, the parallels to Spotify are just like amazing with like the two different tiers of customer experiences and like vastly different implications of that for their backend costs.

• 58:12Ben Gilbert?

  100%. I mean, it is, uh, okay, you're leading the horse to water. I'm the horse, here's the water. So because there are very real marginal costs in this business, just like Spotify, at the end of the day, this actually does have the same incentives that a gym membership would have, like an old school gym membership, which is sign you up, keep you subscribed, but really no incentives for you to actually go to the gym all the time. They kind of want you to do the minimum amount, like to stay subscribed, like stay engaged enough with us, but don't cost us any money.

• 58:56Ben Gilbert?

  You know, we want to like minimize the amount that we have to pay the music labels on your behalf, which is interesting. So I was thinking about this, you know, like prepping for the episode and I slept on it. When I woke up this morning, I kind of realized because they're bragging about in their, all their earnings stuff, increasing user engagement over time and having internal KPIs around, we want people to use the service. I sort of came to this conclusion that they have to have a pre-negotiated revenue split with the music labels rather than paying per stream because.

• 59:32Ben Gilbert?

  Peloton could end up in a really tough position if their own incentives are for you to stay subscribed but not ride. So I bet they did some kind of like blanket license type thing where, you know, 20% or 25% or whatever it is, ends up of all subscription revenue, no matter what, ends up going to the labels.

• 59:53David Rosenthal?

  Well, if they don't have that, they probably have a new CEO who could help make that happen.

• 59:59Ben Gilbert?

  Very much so. Very much so.

• 1:00:02David Rosenthal?

  If they don't, they should, and now they probably can.

• 1:00:05Ben Gilbert?

  Yes. One last, like, quick piece of math, just to underscore the gravity of this. I ran the math on what it would cost Spotify to pay the labels for the same amount of music listening time, based on the data that we used in the Taylor Swift episode. So, you know, 15 hours across a month. So I was thinking the same as like, you know, 10, a 30 minute ride every day for a month. And instead of the $9 that I sort of estimate that Peloton has to pay, Spotify is closer to like a buck 20.

• 1:00:36David Rosenthal?

  Wow. That's massively different.

• 1:00:39Ben Gilbert?

  That sync rate and the performance licenses, very expensive. So, you know, Barry is definitely used to the Spotify world of we, we pay a pittance to, to, you know, the, the labels and the artists. And in this world, because of the license structure, it's a meaningful part of COGS.

• 1:00:59David Rosenthal?

  One way to look at it is it's a meaningful part of COGS and sort of in the, the bear lens. Another way to look at it is like, artists should really embrace Peloton.

• 1:01:09Ben Gilbert?

  Yes, very much so. What you got to wonder, is that part of what's driving like the Taylor ride series and the Beyonce ride series? And Peloton is notoriously very collaborative with the most popular artists.

• 1:01:21David Rosenthal?

  So, September 2019, they've settled this lawsuit. They've figured things out, at least with the sync licenses.

• 1:01:31David Rosenthal?

  They go public, the IPO happens. S1 hits fiscal year 2019. So fiscal year ends June 30th, as I've said. So for the 12 months leading up to June 30, 2019, it did revenue of 915 million for a five-year-old company. That is, or a five-year-old product that's been in market for five years. That is impressive. That is up over 100% from 435 million the year before. Of that 915 million, 181 million is subscription revenue, which is up from 80 million the year before. So growing even faster. We already talked about the margins on the

• 1:02:13David Rosenthal?

  subscription revenue. Interestingly, the hardware revenue, connected fitness products is the segment they call it, also about a 40% gross margin. So there, this is the benefit of raising the price $1,000.

• 1:02:30Ben Gilbert?

  Right, right. They actually make pretty good margins on selling the bike itself. So I couldn't find this mostly because I was scrambling for just the last day to put together everything we did learn. If you have data on this, please come and share it with us. acquired.fm/Slack, and we would love to talk about this. I remember around the time of their IPO, seeing some analysis that said that they basically were break even on the bike if you add in customer acquisition costs. So the cost of manufacturing the bike and delivering it and all that, plus the, the cost to acquire, which was really expensive. You know, they're in these malls, they're sending you a ton of social media ads, they're really trying to convince you,

• 1:03:12Ben Gilbert?

  you know, they're putting on Super Bowl commercials, which we'll get to. They're putting on other commercials where people are in these multimillion dollar homes, riding in fancy places. It's expensive to, you know, convince people to do this new behavior. And I think the, the plan at the time is like, okay, just don't lose money acquiring a customer when we sell them a bike. And as long as we're kind of break even on that, then we can make a lot of money on the subscriptions.

• 1:03:39David Rosenthal?

  So I actually did do a little modeling on this. Now, this is, don't take this as gospel because I'm mixing time periods here and it's hard to, hard to know exactly. So this is not like a sharp pencil. This is back of the envelope modeling and these are pandemic numbers. So may not be, may not be applicable anymore. But in the most recent full fiscal year, which ended June 30, 2021, they spent $730 million on sales and marketing and they added about 1.4 million gross ads on subscribers. So now I'm assuming that like all those are bikes, obviously not. A lot of those are digital subscriptions, et cetera. But let's just make

• 1:04:20David Rosenthal?

  it simple. So CAC on that is $521 per gross subscriber added. That is, to your point, a lot of money. That is a lot, is a very, very high CAC, $521 per new subscriber.

• 1:04:38Ben Gilbert?

  Not in the B2B world, but it's almost unheard of in B2C. Like I'm getting a consumer, like paying $500 for a consumer, like no one does this.

• 1:04:47David Rosenthal?

  If you go out and, you know, put that in your pitch deck around Silicon Valley, like, you're gonna have to have a very high LTV. Well, now, at the 1895, $1,895 price point for the bike, which is what it was until they started doing crazy stuff with their pricing. But they had lowered it from the 2245 to 1895. At a 40% gross margin on that hardware, that's $758. So they're more than making their money back.

• 1:05:19Ben Gilbert?

  Right. They're making, they're making a little, maybe a hundred, a couple hundred bucks total on each bike.

• 1:05:24David Rosenthal?

  Yep. They're making, they're making some amount of contribution margin on the bike.

• 1:05:29David Rosenthal?

  But then you attach the subscription, which, you know, with the crazy low churn rates that they have, the implied lifetime-

• 1:05:36Ben Gilbert?

  $40 a month.

• 1:05:37David Rosenthal?

  Is over 10 years.

• 1:05:39Ben Gilbert?

  66% gross margin.

• 1:05:41David Rosenthal?

  Right. Let's cap it at five years for a customer lifetime because 10 years is too crazy. Let's assume that that's not going to happen. At $40 a month, that's $2,340 in subscription revenue over five years.

• 1:05:55Ben Gilbert?

  Wow.

• 1:05:56David Rosenthal?

  So, yeah, it's a- Pretty dang good business. Interestingly, at the IPO, happens right after the whole WeWork debacle, which we covered on this show with Dan Frymac, also a big Peloton fan. At the time, that was, that was fun. The IPO is not a good one. Prices around $8 billion, but then trades down 11% on opening to a $7.2 billion market cap. So we're talking like 7X trailing 12 months revenue, but like this company's growing over 100% a year.

• 1:06:34David Rosenthal?

  So, you know, 3X forward revenue with pretty good unit economics that we just discussed, like, interesting.

• 1:06:44Ben Gilbert?

  Yeah. And this is in an era too, where you don't have a lot of busted IPOs. So this is, you know, before COVID, but it was still pretty go-go times for these tech businesses. A little disconcerting that they traded down from their IPO price.

• 1:07:02David Rosenthal?

  Indeed, indeed. And then they don't really help things shortly after the IPO and the holiday season 2019 rolls around.

• 1:07:09Ben Gilbert?

  Wait, wait, wait. Before we, before we get to the Peloton ad, can I clarify something on, can you give me the numbers again on the cost to acquire a customer and their LTV? Just because I want to hold that in my head as we continue through here.

• 1:07:20David Rosenthal?

  Okay. So rough, rough numbers. 500, 520 bucks to acquire a customer. And let's say they are break even to slightly profitable on that with the hardware. And then $2,340 of lifetime revenue, assuming a five-year

• 1:07:40Ben Gilbert?

  Okay. So 20

• 1:07:41David Rosenthal?

  Customer lifetime.

• 1:07:42Ben Gilbert?

  2,300 of LTV. And is that contribution? Or is that?

• 1:07:46David Rosenthal?

  That's revenue. So then two thirds of that per your analysis is contribution.

• 1:07:52Ben Gilbert?

  Okay. So we're looking at something in the neighborhood of like $1,500 of contribution on the subscription, even if we cap it at five years. So every single person they acquire, not only are they break even, or probably a little profitable just by selling them a bike, but then they make another 1,500 plus dollars in pure profit by retaining them over time.

• 1:08:17David Rosenthal?

  Yep. Yep. So you understand why this company and management and the board would be like, we should advertise.

• 1:08:26Ben Gilbert?

  Yes, we should go and pull forward as many new customers as we can. We should take out, you know, an infinite amount of debt. Not that they did this, but we should raise an infinite amount of money so that we can spend on marketing, so that we can go get as many people to buy this thing and get hooked on it. Because, oh my God, what a business we have on our hands.

• 1:08:49David Rosenthal?

  And thus we end up with the holiday Tony 19 Peloton Wife commercial.

• 1:08:55David Rosenthal?

  Which kind of is a funny story. I mean, like, you know, it's a, does it end up being bad for Peloton? Or is this just good marketing in the end?

• 1:09:01Ben Gilbert?

  I think it was good marketing. I think it was good for everyone. It ends up being good for that actress.

• 1:09:05David Rosenthal?

  Yep. Good for Ryan Reynolds.

• 1:09:07Ben Gilbert?

  Oh, my God. The aviation gin thing that came out the next week is just genius. We'll link to it. But people, go Google Peloton Wife Aviation Gin and watch that, that commercial. I also thought the Peloton Wife commercial thing was like, pretty overblown. I mean, it feels like every year, stuff gets more and more insane. So, uh, this commercial at the time, I think, had a lot of people up in arms. But you're like, this is not that scandalous.

• 1:09:36David Rosenthal?

  Yeah, right. Compared to everything that's happened since. Also, it was probably great for Peloton because I didn't go back and watch it, but my recollection of it, put the controversy aside, is that the commercial itself was like, yeah, fine, you know? Like, but then they got so much hype out of it.

• 1:09:55Ben Gilbert?

  But this sets Peloton's track record for, uh, they can become a dominant trending topic in a pop culture-y way, which it, uh, every time they would come to dominate headlines after this, it's not really good for them. Other than the one, which is like, hey, now that the pandemic hit, Peloton has perfect product market fit. But every single one other than that, which we're about to talk about, the shipping delays and the... Consumer, what is it?

• 1:10:27David Rosenthal?

  The treadmills.

• 1:10:28Ben Gilbert?

  The treadmill recall and the, yeah, like it basically was never good again.

• 1:10:33David Rosenthal?

  Yep.

• 1:10:34Ben Gilbert?

  All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

• 1:10:48David Rosenthal?

  Yeah. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 1:11:02Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI Control Tower.

• 1:11:12David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 1:11:30Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise, the workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 1:11:46David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 1:12:03Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 1:12:12David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you.

• 1:12:23Ben Gilbert?

  All right. So David, uh, tell everyone why I was the most fortunate person in the world to, uh, in January 2020, have just so happened to have bought a Peloton at that moment in history.

• 1:12:38David Rosenthal?

  I didn't realize you, you bought it before the pandemic.

• 1:12:41Ben Gilbert?

  I bought that and my car in January of 2020, totally randomly and by happenstance, which both ended up being unbelievable assets to have.

• 1:12:51David Rosenthal?

  I actually bought a, uh, Olympic weight set off Craigslist right at the same time. So not as, not as high value as you, but like stuff that like immediately became unavailable.

• 1:13:01Ben Gilbert?

  Gold.

• 1:13:02David Rosenthal?

  180 bucks, maybe for like a full Olympic weight, weight set.

• 1:13:06Ben Gilbert?

  Which now is like a thousand dollars.

• 1:13:08David Rosenthal?

  Yeah. So great. So the pandemic hits, you know, like you said, if Peloton had very good product market fit with a certain narrow customer segment before the pandemic was a great business. The pandemic made it have instant product market fit with many, many more segments. They add roughly a million subscribers in the next year. Revenue in, uh, the fiscal year ended June 30th, 2020 is 1.8 billion. In the fiscal year ended June 30th, 2021 is $4 billion. The stock trades up as we've talked about to a peak of over $150 per share at a 49,

• 1:13:52David Rosenthal?

  I believe, billion dollar market cap. People think this is going to the moon and like rightly so. I mean, it's amazing product. Uh, if, you know, fitness has now become fully digital. They are the leader in the category. Uh, you know, so much, so much to love here.

• 1:14:09Ben Gilbert?

  That there's a zillion copycats, not just in the like, you know, Nordic track and target making black and red bikes and making up Peloton like sounding names for them and.

• 1:14:19David Rosenthal?

  Oh yeah. There's like Echelon out there.

• 1:14:21Ben Gilbert?

  That's crazy. But also pioneering this category of connected fitness, which says, sure, Peloton is going to do a tread and a. And a bike, but they're not going to do a mirror and a, you know, band based weight set and, uh, you know, and a yoga thing like there's all these brands that are saying like, ah, Peloton does a little bit of that, but that's not their core competency and they're never going to take it seriously. So there really is this super real category of connected fitness that Peloton totally pioneered.

• 1:14:50David Rosenthal?

  I'm curious your thoughts. Connected fitness, both within the Peloton suite of products and competitors, is it a broad thing? Or is this something that just works really, really well for spin classes?

• 1:15:06Ben Gilbert?

  Great question. I've done a bunch of the Peloton strength stuff. I think that works well. And I think that the Peloton strength, uh, classes definitely appeal to a crowd who is not going to buy an Olympic weight set in their garage or is not going to go to a gym. Um, I know people with the mirror who are very happy with that. I think it's pretty broad. I think the bike is, is the first and best instantiation of it. Interestingly, Foley and, and I think he's right on this. I think this isn't one of his sort of like grandiose statements that ends up not being true. Thinks that the tread market is like 3X what the bike market is because running is a much more, like treadmills are a bigger

• 1:15:50Ben Gilbert?

  thing, I think than stationary bikes.

• 1:15:52David Rosenthal?

  Well, they also sell the treadmill for a lot more money.

• 1:15:55Ben Gilbert?

  That's true, too.

• 1:15:56David Rosenthal?

  It's interesting, right? Like the running, it's different though. Like the, I'm sort of halfway in between on this. I agree with you. I both have an Olympic weight set in my garage, but I use the Peloton strength stuff more often, especially as I like get a little older and the idea of, you know, squatting and bench pressing is less appealing to me. Um, uh, I think the strength stuff is pretty good, but I can't imagine buying a treadmill or using a connected fitness for running.

• 1:16:23Ben Gilbert?

  It's so true.

• 1:16:24David Rosenthal?

  We're lucky. We live on the West Coast. We can run outside year round. There's plenty of places where that's not possible.

• 1:16:31Ben Gilbert?

  Yeah, I mean, it says a lot that like ultimately all connected fitness is a digital facsimile of a real world experience. And there was a very, very popular real world experience of spin classes. And it's interesting that that behavior never really existed in the real world for running. I mean, there's like Barry's Boot Camp, but that is not a sweeping, well, part of it is like one, a third of it is, or half of it is. But there's not like a sweeping international movement, the way that there was with spin, where it's running to an instructor.

• 1:17:10David Rosenthal?

  Yep, yep.

• 1:17:10Ben Gilbert?

  So to maybe, maybe to like, super simplify your question, my answer to your question, it's anything that's instructor led, that is a big market on the offline world can be an instructor led, large market in connected fitness.

• 1:17:28David Rosenthal?

  I agree with that. I'm just not sure that running, maybe there will be some innovation at some point that is an instructor led running class. But, you know, as a runner, like, I don't really want an instructor. Like, the joy of running to me is to be outside in beautiful places and just kind of go.

• 1:17:45Ben Gilbert?

  And you have a bias there. Like, I'm the exact same type of runner. But, you know, the hardcore cyclists wouldn't say the same thing. They're like a spin class, but the beauty of cycling is that, you know.

• 1:17:57David Rosenthal?

  Right, right, right. And then the beauty of spin classes, like, these are two different products.

• 1:18:01Ben Gilbert?

  Yes.

• 1:18:02David Rosenthal?

  Anyway, September of 2020, this is where I think things start to get a little wonky with Peloton. They introduced the Bike Plus in September of 2020.

• 1:18:12Ben Gilbert?

  And we should say, by, by September of 2020, it's basically impossible to get one of these, the Peloton bikes at all. There's like a four month backlog. Pandemic hits, and unless you're getting one in the first week or two, you're out months before you can get one, because Peloton doesn't make any of their own bikes. They certainly don't make any in the US. So we're at the whim of international shipping, supply chain partners. They really haven't ramped any in-house manufacturing capability. And so, good luck.

• 1:18:42David Rosenthal?

  Right. Which makes all of this even a little more puzzling. You would think a reaction that would be to raise prices. Like they certainly, they have a total pricing power now to their philosophy. And like we've been talking about, they want as many people to access Peloton as possible, blah, blah, blah. Okay, great. But so they introduced the bike plus. They price it at $24.95. The original bike, remember, had been $22.45.

• 1:19:09Ben Gilbert?

  And David, you, you bought a bike plus, so you know the differences of this product firsthand.

• 1:19:14David Rosenthal?

  So they lower the price of the original bike to $18.95. Like, why would you lower the price of this right now? Like, there's insane demand for it. And why would you introduce the bike plus at only $24.95? When you're selling treadmills for $3,000, $4,000 plus? Clearly, there's like appetite for your core segment to buy expensive products here. And they're not that price sensitive.

• 1:19:41David Rosenthal?

  So the bike plus, yeah, after when I decided to buy a Peloton, I was, I don't know if my experience is universal, but I was like, you know what? I'm really going to invest in this. This is awesome. I want the best. I'm going to buy a bike plus. And I didn't even really think about pricing or how much it was relative to the bike. It arrived, and I gotta say, like, this is only my experience. It was a super crappy product.

• 1:20:06Ben Gilbert?

  The bike plus?

• 1:20:07David Rosenthal?

  Yeah, I thought it was actually a worse product than the bike and cost more. And many of the like key features were irrelevant, like the auto follow feature, like it'll auto change the resistance to the instructor. Well, I never actually want my resistance exactly what the instructor has. So that was actually like a negative for me, you know?

• 1:20:30Ben Gilbert?

  Not to mention that there's like a bigger screen, but it's the same resolution. So it's actually a lower DPI on the screen, which as someone who already has beef with the video quality, that would drive me up a wall.

• 1:20:41David Rosenthal?

  That was, I was gonna get to that last, but yeah, a few other things like the, uh, my garage is a little bit sloped. And the bike plus only has four feet, like the front only has two feet and it was impossible for me to align it. Whereas like the regular bike has three feet in front and is way easier to stabilize.

• 1:21:00David Rosenthal?

  It's just a whole bunch of like really weird little things like that.

• 1:21:02Ben Gilbert?

  The main gimmicky feature is you can flip the screen out sideways. So you can do these bootcamp rides where you're on the floor for part of it. You're on the bike for part of it. Did you ever try that?

• 1:21:10David Rosenthal?

  Yeah. A, I don't use that that much. Usually when I'm doing strength, I'm doing strength than when I'm doing the bike I'm cycling. But B, there's like a $40 little bracket you can buy that I did for the original bike. That you can install pretty easily to then have the screen swivel. And it's like, wait, why would I pay a thousand dollars more for that? Anyway, but yeah, what you said about the screen, that was the, that was the dagger for me. I was like, this is a worse experience because they have a higher, a, a bigger screen, but they're using the same 1080p crappy video on it and it looks way worse. It's just like, it just didn't make any sense to me. So I returned the bike plus. So now let's think about me as a customer for Peloton.

• 1:21:55Ben Gilbert?

  By the way, I love that in these episodes, like where we have personal experience, like half the Airbnb episode was my experience as a host. And now here's, here's David's Peloton buying experience.

• 1:22:05David Rosenthal?

  People are probably like, okay, this is irrelevant, but no, I think this is, this is illustrative. I think of some of the problems with Peloton. The product was not quite right. The pricing was weird that they did with the product suite here. So they, they roll a truck to do the delivery for me as a customer for the bike plus.

• 1:22:23Ben Gilbert?

  Which is crazy expensive.

• 1:22:24David Rosenthal?

  Crazy expensive, right? But they're selling this.

• 1:22:26Ben Gilbert?

  They own all their own distribution and they're driving around neighborhoods all over America and.

• 1:22:30David Rosenthal?

  Yep. They roll, they roll a truck in old cable parlance of a truck roll for a customer service. They install the bike plus for me. The shoes that come with it, the cleats didn't fit, so they had to send me new cleats. So, all right, that's another, you know, shipping costs, customer service, et cetera. Customer service call.

• 1:22:52David Rosenthal?

  I used the bike plus for a little and I'm like, this is not that good. I return it because they have 30 day, you know, return policy. They roll a truck, they pick it up. I bought the original bike, which by that point in time, the price had dropped to 1495. So I had just, I had spent 20495. They've rolled a truck twice already. Now I just spent a thousand dollars less. I got the bike, they rolled a truck. There were some problems with the pedal. They rolled the truck to do another customer service for me. So four truck rolls, a purchase, a return, a restocking, mailing me new cleats.

• 1:23:29Ben Gilbert?

  Wow, they're probably not profitable on you until like maybe year three as a subscriber.

• 1:23:34David Rosenthal?

  Absolutely, like it's a

• 1:23:36Ben Gilbert?

  Year four.

• 1:23:37David Rosenthal?

  And I can't imagine that my experience is wholly unique here.

• 1:23:41Ben Gilbert?

  I wonder, I've, yeah, we only had the person come out once and it all thankfully worked, worked really well.

• 1:23:47David Rosenthal?

  So I'm a very happy customer, but yeah, to your point, like, how long do they have to retain me to even break even on me now?

• 1:23:52Ben Gilbert?

  Right, right.

• 1:23:54David Rosenthal?

  And I think a lot of this could have been avoided with some different product decisions and some different pricing decisions.

• 1:24:00Ben Gilbert?

  There's a trend that they need to follow over the entire lifetime of their business, which is dropping the price point so they can keep attracting that next concentric circle out from the core affluent customer. If they're actually interested in continuing to grow the business, they need to do that. But even though that's true over the long period of time, this probably wasn't the right time in history to do that. Like, given what happened with the pandemic and with demand, the, and let's not talk about supply chain and inventory and stuff yet. Because I think that made their business really not resilient, all the, the things that they did there.

• 1:24:40Ben Gilbert?

  But they probably should have, easy to say in hindsight, but not shipped the bike plus and not dropped prices yet, even though they need, know they need to do both of those things in the longer term.

• 1:24:50David Rosenthal?

  Yeah, the bike plus was a product that needed more work before shipping. And then, and then in terms of like cannibalization of their existing customer base. And I think they really. Hurt themselves a lot on some of the aspirational aspects of of the Peloton brand around this. Also, simple things like the bikes that the instructors use in the classes are the original bikes. If they really want to push the bike, like, why don't they

• 1:25:14Ben Gilbert?

  I've always noticed that. Totally.

• 1:25:17David Rosenthal?

  I thought that was so weird. Like, I don't think that hurts anything. And that's just great merchandising for higher margin products.

• 1:25:23Ben Gilbert?

  I wonder if there's custom software that's written for instructor bikes that they didn't want to invest in porting to the new bike pluses.

• 1:25:31David Rosenthal?

  That could be. Anyway, there's just a bunch of puzzling decisions here. And perhaps the most puzzling is in December 2020, they announced that they're buying Precor for $420 million in cash.

• 1:25:49Ben Gilbert?

  In cash. And you and I both went and looked this up because we were like, I remember the $420 million Precor acquisition, which is a Washington-based company, by the way.

• 1:25:57David Rosenthal?

  That's right.

• 1:25:58Ben Gilbert?

  And

• 1:25:59David Rosenthal?

  Windmill, right?

• 1:26:00Ben Gilbert?

  Yep. And I was hoping they use some stock to pay for it, given their stock was, you know, trading ludicrously high at the time. But alas, they spent the the rare assets they have on hand there, the cash, and primarily bought Precor for their manufacturing prowess to have some, you know, US-based manufacturing to alleviate the supply chain stuff and to just have in-house capacity, because at some point, maybe they want to take this fully in-house. A secondary benefit that comes with it is Precor is really, really good at selling in commercial distribution channels. So Pelotons are then can inherit all those relationships with all the hotels to get more more Pelotons in there and eventually

• 1:26:44Ben Gilbert?

  maybe merge these two product lines. But for now, they're running it as a totally separate independent business unit and starting to do some work leveraging Precor's manufacturing to hopefully start manufacturing some some Peloton bikes.

• 1:26:58David Rosenthal?

  Right. That feels like kind of a.

• 1:27:01David Rosenthal?

  I want to say pipe dream, either a pipe dream or a very, very far out investment. The idea that you would retool precourse manufacturing to manufacture bikes. The commercial relationships, that that makes a little more sense to me, but still it was a little puzzling at the time. Then they announce in the spring of 2021 that they are going to build the Peloton Output Park to in-source their own manufacturing in Ohio.

• 1:27:30Ben Gilbert?

  So this is now both, both of my homes, they're trying to manufacture in.

• 1:27:34David Rosenthal?

  That's right. That's right. We'll come back to that in a bit.

• 1:27:37Ben Gilbert?

  But that's another 400 million that they announced they're breaking ground on.

• 1:27:41David Rosenthal?

  Yep. Again, cash outlays. And, and then in the spring of 2021, there's treadmill recall and some of the tragic accidents around, you know, with the treadmill, the company doesn't handle that super well. First, they sort of say, oh, people aren't using it right. It's like, well, kids are like dying and getting hurt here. Like, that doesn't matter.

• 1:28:05David Rosenthal?

  Stock drops 15% around that.

• 1:28:07Ben Gilbert?

  They ask you in mea culpa and say, you know what? We are going to play ball with the investigation. We feel super bad that we mishandled this originally.

• 1:28:15David Rosenthal?

  And then November of 2021, last fall, they miss earnings. They cut their outlook and the stock gets hammered down 32% in one day. With the earnings announcement, they have some more holiday season media commercial. This is also probably good with the, the new Sex and the City where Mr. Big dies on a Peloton.

• 1:28:41Ben Gilbert?

  No, because that tanked their stock price and it never recovered.

• 1:28:44David Rosenthal?

  It did. It did. Although I know that to me feels like the wrong reason to, to sell the stock.

• 1:28:51Ben Gilbert?

  I mean, yeah, but.

• 1:28:54Ben Gilbert?

  It's indicative of the, I think when something like that happens. So someone died on Sex and the City and was on a Peloton and Peloton stock dropped. And you might say, that's so stupid. But I think the, what to read into that is people are on such uneasy footing about the future prospects of this company that merely imagining that something like that could happen is enough to spook investors. And that says a lot.

• 1:29:27David Rosenthal?

  That says way more than the Sex and the City episode. Yes. So then the other shoe drops, the other cycling cleat drops. On January 20th, news comes out that supposedly Peloton is completely stopping production of new hardware as they have an inventory glut that they can't sell. Demand has completely dried up. It all got pulled forward through the pandemic and this is bad news.

• 1:29:57Ben Gilbert?

  There's a $1.3 billion worth of inventory that they're sitting on now.

• 1:30:01David Rosenthal?

  Yeah. Yeah. So we went from literally, they can't make this stuff fast enough. They're hiring delivery teams all across the country and around the world, delivering bikes into people's homes, picking them up, servicing them, bringing them back to now they can't sell these things.

• 1:30:18Ben Gilbert?

  There's a lot of things to applaud the management team about and John Foley and the doggedness and the entrepreneurism and the pure invention of a movement and recognizing talent and hiring the right instructors and finding ways to align incentives and building this, like so much. The one that is really, really damning is all the quotes that Foley and other folks gave along the way saying, Sure, this pulled forward demand, but we think it will only ever be more. We think we will only ever continue to sell more and more of this stuff. Demand is just going to keep growing. And they were just completely wrong, like completely wrong.

• 1:30:58Ben Gilbert?

  The incredible slowdown, like the really, really scary slowdown that has happened for them is to the point where they only grew 9% in Q4 and then 5% in revenue in Q1. And this company just believed that there was way, way, way more demand out there. And sure, the pandemic accelerated us, but we're not going to have to sort of make up for everything that was pulled forward. It's just going to continue to be high demand from here. And they were just flat out wrong.

• 1:31:28David Rosenthal?

  Totally flat out wrong. And we'll, well, we'll wrap up the few last points to bring us to, to literally today, present day. But one of the things when they release earnings yesterday is they cut guidance. Guidance had been for full fiscal year revenue of four to four and a half billion. They cut it down to 3.7 to 3.8, which is actually going to be down. Like revenue is going to be down sequentially year on year, this year versus last year. Like that is not, that is not good. That is not good for a growth company.

• 1:32:00Ben Gilbert?

  No, and you look at the, the level of certainty that they had, that it was, that they just needed to keep expanding to service all this demand. Not only did they plunk over $800 million into manufacturing capacity between Precor, which has its own business, so it's justifiable, assuming they paid a reasonable price for it, and of course, the, the Ohio factory. But you look at their employees, I mean, they were growing employees pretty quickly from 2015, 16 to 2020. But when you look at, as of January 2021, they had 4,000 employees. That ballooned over the next year to about 9,000 before these recent layoffs.

• 1:32:43David Rosenthal?

  Now, this is a very complex business, but like 9,000 employees, and that's just corporate, right?

• 1:32:48Ben Gilbert?

  No, that's, that's everyone.

• 1:32:49David Rosenthal?

  Oh, that's everyone.

• 1:32:50Ben Gilbert?

  Yeah, yeah. And the layoffs, of course, were 2,800 people across the whole business. And I think about 20% of the, the corporate staff. But they were really, really investing and very certain this demand was there.

• 1:33:05David Rosenthal?

  Yep. So. After that news on January 20th, a couple of weeks later, an activist investor called Blackwells Capital comes out and announces that they've accumulated a 5% stake in Peloton, the share price and market cap of which, by the way, have dropped below the IPO price, which as we chronicled was not a great IPO in and of itself. And they published a deck calling for Foley to resign and for the company to initiate a strategic sale process.

• 1:33:37David Rosenthal?

  And that brings us to yesterday, February 8th, 2022, where they announce earnings. They're bad. They lower guidance significantly. They pull the plug on Peloton Output Park. They cancel the plans to build the manufacturing facility in Ohio. They lay off 2,800 people. And Barry McCarthy is riding in as the new CEO.

• 1:34:04Ben Gilbert?

  And the way they sort of message this is that John Foley is stepping down as CEO, which is the

• 1:34:10David Rosenthal?

  Or at least that's what people hear.

• 1:34:11Ben Gilbert?

  That's what people hear. And it's somewhat to appease these activist investors. But let's like zoom in on what mechanically is actually happening here. So John Foley becomes the executive chairman. Now, what an executive chairman is as compared to a non-executive chairman is they're still the chairman of the board or the chairperson of the board. They no longer have day-to-day responsibility running the company. However, I believe they still are a compensated employee. They still draw a salary. They're still like an employee of the company in addition to being just a board member. So they share both this sort of like director level and pseudo-operational.

• 1:34:56Ben Gilbert?

  It's more like they're working with the current CEO to sort of set strategy with them. And so while they're not running the day-to-day, they are still the senior-most person who is an employee of the company. And I don't think it would be correct to say that John Foley is currently Barry McCarthy's boss, but it totally is fair to say that John Foley is on the board, is the chairman of the board. The board hires and fires the CEO. And, and here's the real kicker on this whole thing. As many of you will know, We've been on a heck of a run over the last 20 years of having dual-class

• 1:35:37Ben Gilbert?

  structures put in place for founder-led companies. And here's a quote from Matt Levine at Bloomberg. "Peloton has a dual-class structure in which the founders and some insiders have stock with 20 votes per share, and Foley has a lot of it. According to Peloton's proxy statement, he controls 39.6, so right around 40% of the voting power of Peloton's stock, and his co-founders own another 18%."

• 1:36:05David Rosenthal?

  So there you go. That's enough to, that's over 50% of the voting power of the company right there.

• 1:36:09Ben Gilbert?

  Right. Foley can't do it alone, but with one, probably, certainly both of his other co-founders, basically can make a unilateral decision. So the message Peloton wants Blackwell's and other upset shareholders to hear is John Foley has sort of moved on, stepped down as CEO, and we've brought in Barry McCarthy. In practice, dude still holds the cards.

• 1:36:36David Rosenthal?

  It's more complicated. Now, all that is true. At the same time, I don't think Barry would take this job if he didn't feel like he had full autonomy.

• 1:36:47Ben Gilbert?

  Totally agree.

• 1:36:49David Rosenthal?

  And the memo that he writes to staff, which we've already read some from some of it, and I want to read a bit more, because it's amazing. It's like Barry is like, who wouldn't want to work for Barry?

• 1:36:59Ben Gilbert?

  A great leader. Yeah.

• 1:37:00David Rosenthal?

  Oh, what a leader. So he writes, "I know today's restructuring news has been difficult. There's no sugarcoating it. It's a bitter pill, and in my experience, this thing has a long half-life. But the hard truth is either revenue had to grow faster or spending had to shrink. The math simply didn't work otherwise, and the status quo was unsustainable. One of my core management principles is about getting real. We have to be willing to confront the world as it is, not as we want it to be if we're going to be successful. We have to be honest with ourselves and with each other in order to make that happen, even when..." The truth is uncomfortable or inconvenient to deal with. And then Ben, I think you read the great, the great part about the comeback story after

• 1:37:45David Rosenthal?

  that, you know, and then he closes, he says, when he closes the memo, he says, in the months ahead, you can expect to hear from me about our strategy and the choices we're planning to make to drive our success. For the avoidance of doubt, we are in the business of driving growth. That's just like, full stop. That is what we are here to do. And that will require us to take risks, to be willing to fail quickly, to learn quickly, to adapt and evolve quickly, rinse and repeat. I promise the journey won't be dull. I look forward to working with you, Barry.

• 1:38:17Ben Gilbert?

  Of course, this is after he opens by talking about how much he loves riding with Matt Wilpers. It is great. And he opens the whole, yes, the whole memo is like kicked off with, you know, rather than like, hi, I'm your new CEO. It's, boy, do I love riding with Dennis Morton and Matt Wilpers. And I think he says, like, who don't yet know me from Adam, which is pretty funny, thinking about the fact that they're reading this email and.

• 1:38:40David Rosenthal?

  Well, Barry has no social media presence. He's basically not on the internet.

• 1:38:45Ben Gilbert?

  You got to wonder, has he, has he met any of the instructors yet too? Probably not.

• 1:38:50David Rosenthal?

  Probably not before yesterday at the earliest.

• 1:38:53Ben Gilbert?

  It's wild.

• 1:38:54David Rosenthal?

  I wonder what the instructors think of all this. Cause they're like, they've built such brands. I mean, the Instagram following and the Twitter following of the top instructors is like, they have immense power.

• 1:39:04Ben Gilbert?

  Emma Lovell and Ali Love. I mean, they're getting up close to a million followers.

• 1:39:08David Rosenthal?

  Robin Arzon and Alex Dusan.

• 1:39:10Ben Gilbert?

  And they've all parlayed this into other things too. Like Ali is the, like the, the in arena host for the Brooklyn Nets, or at least was last year. And, uh, you know, everyone's got, you know, noon, subscribe, noon deals or Under Armour deals, or even though they're making 500 to a million from.

• 1:39:30Ben Gilbert?

  Peloton in salary or whatever their contract is, I bet they're making a lot more from their other engagements.

• 1:39:35David Rosenthal?

  Oh yeah, they're like professional athletes, like the earning power from endorsement and other deals is way higher. All right. So there we are on history. We thought this would be short with the emergency pod on history and facts, but huh, never underestimate acquired.

• 1:39:50Ben Gilbert?

  We're also incapable of just going on air unprepared. So of course you and I like, well, we only had a day to do this. Like we kind of put together a full, there are so many more deep cuts in the history that we didn't go into, like John and his, uh, his friend, like prototyping the experience on a Disney cruise. Did you read about that?

• 1:40:10David Rosenthal?

  No, I didn't get that. That's awesome.

• 1:40:12Ben Gilbert?

  All right. So I'll pull that one out, even though we skipped over it. So John Pleasance, uh, who got a big job at Disney, uh, got convinced fully to come on a Disney cruise with him. And so they're on this Disney cruise and fully rolls out a couple of spin bikes and stood there like for the first like 10 minutes of the ride, like coaching John Pleasance.

• 1:40:32David Rosenthal?

  Being the instructor.

• 1:40:33Ben Gilbert?

  Yeah, like, and being like, okay, imagine there's a screen here and like, you know, the really given him.

• 1:40:39David Rosenthal?

  And then Pleasance becomes one of the first angel investors in that 400K round, right?

• 1:40:43Ben Gilbert?

  So it's like a pretty cool, there's, there's so much crazy lore in the building of Peloton, um, which I think we would have done if we gave this the three hour treatment. But let's, let's go into our, uh, our narratives. So like what's, what, what is the media narrative right now for the bull case and the bear case? Well, uh, on the bull, there's just an insane level of customer love for this company. I mean, the NPS is around 90.

• 1:41:10David Rosenthal?

  You're wearing a Peloton hat as we do this.

• 1:41:13Ben Gilbert?

  I'm wearing a Peloton hat because I referred you and they sent me a hundred dollars of free credit to buy gear for myself, which I proudly wear around and I hope Peloton stays a prestige brand because I've definitely bought a decent amount of the merch.

• 1:41:28Ben Gilbert?

  Yeah, even if they sell, I have to imagine this will stay a prestige brand for a reasonable amount of time. Like, I won't. It's funny how I feel like a little bit weird wearing my SoulCycle, like shirt and stuff now, especially I haven't been in two years, but the Peloton stuff, maybe it says a lot about me, but happy to wear it. So that a huge component of the bull case is, oh, my God, we've built this brand that people love. They love the product. They love the experience. David, after we record, I will probably go hop on for a ride because we're recording early in the morning and I missed my morning ride this morning.

• 1:42:06Ben Gilbert?

  Another huge component is, say what you want about growth right now, but how could, how could they possibly be worth less than they were worth before COVID? They grew membership from 700,000 to nearly 3 million.

• 1:42:20David Rosenthal?

  And it's not like they're just selling bikes here. This isn't one time. They just added all that subscription revenue with an incredibly low churn rate and high NPS.

• 1:42:27Ben Gilbert?

  Yep, totally agree. They invented the connected fitness category and they're still the largest player in it. We'll talk about this on Power, but there are network effects from your friends having Peloton. So the fact that they grew all these subscribers, you know, there is some amount of lock-in that comes from that.

• 1:42:45Ben Gilbert?

  The biggest thing we talked about is this insanely low churn rate and to date, the fact that, you know, they selected for customers that aren't going to churn and that that's slowly shifting because that's the other side of the sword of selling a product that is cheaper than it used to be, is that you're going to have customers that are more, more sensitive to price all around. And so we're going to churn more often than your initial cohort.

• 1:43:11David Rosenthal?

  Even still, the churn has gone up, but I think it's gone from like, I'm going to get the numbers wrong, but it was at like 0.6% per month to like 0.8% per month. So, like, it's still good.

• 1:43:23Ben Gilbert?

  Totally. I do want to call out, and this is sort of between a bull and a bear case, but it's just an interesting stat to know. So when a firm went public, there was some information in their S1 where at the time Peloton was the largest customer, the largest source of revenue to a firm. Now, a firm has grown a lot and diversified, but I took up the, I took a firm up on their offer and Peloton up on their offer to finance my bike over the course of a few years rather than pay for it in cash outright because it was a 0% deal. Someone was basically saying, do you want to keep investing your money and you can pay us once a month over the course of two years and generate some, some money?

• 1:44:08Ben Gilbert?

  Well, you know, you keep the float. And I was like, sure, I'll do that deal. That sounds-

• 1:44:11David Rosenthal?

  I know how the insurance business works.

• 1:44:13Ben Gilbert?

  All day I will do that deal. And it's funny how much I've thought about this for how little the actual dollars are that, that is like marginal for me to have done this versus paying cash, but I did.

• 1:44:26David Rosenthal?

  And- That's the most Ben Gilbert thing that is possible. I love it.

• 1:44:31Ben Gilbert?

  But what's interesting is the fact that they offered it at all. So when you look under the covers of why was Peloton willing to offer 0%? Or why was a firm willing to offer 0%? What does that deal look like? Well, Peloton and a firm did a backend deal where Peloton said, if you agree a firm to do 0% financing, we will pay you an amount in order to make it worth your while. And so you tell us what, you know, that amount is. At the time of IPO, of a firm's IPO, 28% of all of the revenue in the previous year leading up to the IPO was from the Peloton deal.

• 1:45:11David Rosenthal?

  Wow.

• 1:45:12Ben Gilbert?

  If I'm doing the math right, based on what their revenue numbers were at the time, that is $150 million a year that Peloton was paying to a firm to offer this 0% financing thing. So that gives you a sense of how much- Peloton knows and knew even then, oh my God, we need to expand down market because we are saturating our wonderfully price insensitive core customer base or initial customer base.

• 1:45:45David Rosenthal?

  Wow, that's, that's huge. And the whole, you know, we, we were about to release a great LP show episode with Christina Malas Curie Azzi, who just joined Bain Capital Ventures. It's been a long time friend of mine, but was an early employee at a firm. And we talked about with her about the whole buy now, pay later space and that that's the key, the key, one of the key value props to merchants is this enables sales that wouldn't happen otherwise. But oh my gosh, yeah, but like, I think that's just, you're right. This is between a bull and a bear, but trending into the bear category here, like the focus on their core customer is really like, things have gotten so wonky in the past year plus.

• 1:46:25Ben Gilbert?

  Well, the bear case to make out of that is like, when you look at their demand recently, like the fact that they only grew 9% in Q4 and 5% in Q1, even though they have this affirm deal out there, even though they're dropping the prices on their bikes, like that's the scary thing is that their attempts to make this more interesting at more price points to a much broader swath of people is, is not really working.

• 1:46:49David Rosenthal?

  So then I think, unless you have more, I think the last bull case, which I think really is a valid bull case is like, hey, you know, I don't like to put faith in single people in general, but like, I do think there is a lot of like fundamental, like to my mind, my experience as a customer with Peloton makes me believe that there have been just bad product and marketing decisions over the past year. I mean, almost that is, that is not a controversial statement at all. There have a hundred percent been bad product and marketing.

• 1:47:19Ben Gilbert?

  Well, and bad, bad strategy, bad financial decisions, bad forecasting.

• 1:47:25David Rosenthal?

  You gotta think that Barry can make a huge difference in fixing a lot of these issues.

• 1:47:30Ben Gilbert?

  Yes, for sure. I mean, Barry's not going to be the product person by any, by any means, but you know, that's why Foley's there. That's why all the great people that they brought on are there and hopefully. Barry can provide the right sort of, it's almost like the check and balance to make sure that Peloton can do its thing of creating products and brand and experiences that people love without screwing themselves over financially.

• 1:47:58David Rosenthal?

  Yep, yep, yep. And the market, the market liked the deuce. Peloton was up 25% yesterday.

• 1:48:05Ben Gilbert?

  Yeah, it's kind of a bear case to bring in a CFO, a career CFO as a CEO like that. That is a strong admission of how in trouble a company is. But I suppose at the, trading downward is that makes it a bull case to want to invest if, if you feel like that person can sort of turn it around.

• 1:48:28David Rosenthal?

  Yep.

• 1:48:29Ben Gilbert?

  It's definitely not giving Barry enough credit to call him a career CFO, especially given his divisional responsibility in building the ads business at Spotify. But you know what? The right comp might be to Apple. When they transition, I mean, this was a much different, high-flying company at the time of transition, but transitioning from a product founder, you know, product person who was the founder of the company as CEO to an operational, financial, supply chain, contractual, legal person. And, and you know, maybe Barry can be the Tim Cook of Peloton.

• 1:49:06David Rosenthal?

  Yeah, that's actually a great analogy. I certainly think he's capable and I think the business is capable, you know, it probably will never be an apple, right? But I think it's capable of performing better than it is now.

• 1:49:19Ben Gilbert?

  Okay, more, more bear narratives. So we talked about the slowing growth. We talked about the fact that they revised down not only the revenue targets, but also the subscriber targets. They're, they're only predicting they're going to be at around 3 million at the end of the year rather than three and a half. They have piled up $1.3 billion worth of bikes and treadmills and it's just, it's not good to hold it on the books. Another interesting narrative that I haven't seen as much around Peloton specifically, but seems to be a fairly widely held belief is that

• 1:49:59Ben Gilbert?

  In the last 10 plus years, there has not been a breakout consumer hardware piece of technology that survives as a standalone company. And you look back at Fitbit and GoPro and Jambox. I even want to call out, this one's going to be a serious callback, but Flip Video.

• 1:50:23David Rosenthal?

  Oh, yes.

• 1:50:24Ben Gilbert?

  Companies that kind of invented a new category and they built, you know, real, they imbued it with meaning and they pioneered it on, you know, technology that was hardware that was just now available. But that investment doesn't pay itself back. Lots of cheap facsimiles come in and they can't defend the castle. And you know, you look at Jambox, they made a $300 Bluetooth speaker. And now you can get $20 Bluetooth speakers that are reasonable. And Jambox, of course, went out of business. Flip Video sold to Cisco in a very strange M and A. GoPro, still an independent company, but certainly not the high flyer it was when it first IPO'd.

• 1:51:07Ben Gilbert?

  Fitbit, you know, couldn't really survive Apple coming into their market. And ultimately landed at Google. I think there's probably a case, a similar story around Nest. Again, a little bit weird and some bungled M and A. But I'm trying to think of like, what? I suppose Sonos might be the only example of a recent consumer hardware company that has been successful and with Sonos successful, kind of in quotes, as a standalone public business.

• 1:51:38David Rosenthal?

  I thought about bringing this up earlier in the episode and I decided not to because I decided it was unfair to Peloton. I still think it's unfair, but is an interesting point of comparison. The only very strong counterpoint I can think of is Tesla.

• 1:51:52Ben Gilbert?

  I thought you were going to go there.

• 1:51:54David Rosenthal?

  Yeah. And lots of different dynamics there.

• 1:51:59David Rosenthal?

  But you know, if you just look at what Tesla has done with in many ways, a very resonant strategy, a similar, you know, harmonizing strategy with Peloton of like, start with the high, you know, the Elon master plan, right? And then how they've adapted that over the past several years, you know, it was not that long after Peloton was started that the Model S came out and like, what has Tesla done with their brand strategy and their pricing and their marketing and their position within the market and their product development and their software development, you know, gosh, Model S to Model X, like double down

• 1:52:41David Rosenthal?

  on the high end brand and you know, and then the Model 3, which was affordable, but it was like, it was still, it's still aspirational, right? Like you're competing with BMW now. You're not going all the way down to like Toyota, you know, the autopilot launch, like just the Tesla has executed incredibly well and incredibly strategically through, again, different, but resonant market dynamics.

• 1:53:08Ben Gilbert?

  Well, they've also been able to manipulate the capital markets to raise capital on a ton of capital on extremely favorable terms. I'm using manipulate with a lowercase m, not accusing them of doing something that has legal implications.

• 1:53:22David Rosenthal?

  And they, to that point, they had their near death moments too.

• 1:53:25Ben Gilbert?

  Totally. But Peloton has been exactly the opposite at manipulating financial markets for their own favor. I mean, they, they had a massive stock run up and then did a $420 million all cash deal, err? And now they're more recently, they're raising, they've raised more money after it's, I don't know. So there's another bear case, which is being floated by our good friends, the activist investors, which is, hey, everyone, did you know John Foley sold $96 million of Peloton stock in 2021, when the price was really high? And he was talking about what a strong future the company still had in front of it. And

• 1:54:05Ben Gilbert?

  their point in doing that is both to accuse him of insider-y things, doing things that are against sort of company policy, but they're also trying to drive home the point that.

• 1:54:22Ben Gilbert?

  The incentives are now misaligned because he's taken a lot off the table. He's now a very wealthy person in cash. That, that doesn't hold a lot of water to me though, because his current remaining stock, even at the closing price on Monday was $500 million. So I don't care if you have $96 million. The potential of turning that 500 million into 1, 2, 3 billion, that's motivating. So come on.

• 1:54:49David Rosenthal?

  And also like, it's hard to, you know, look, he, he started Peloton in, you know, late 2011, early 2012. It's been a long journey, you know, and he talks about on the How I Built This episode, you know, it's not like, even though he had done well in his career, like it was, he didn't have any big wins, you know, he wasn't fabulously wealthy before starting, you know, before starting, he wasn't a ramen founder, but he wasn't, you know, he didn't have $96 million, let's put it that way. So I can't begrudge him that.

• 1:55:16Ben Gilbert?

  Despite being of the Harvard Business School Network and having worked at IAC and, you know, been close with a lot of, you know, CEOs and executives, that really only manifested in him being able to raise a couple of hundred thousand dollars, despite the fact that he runs in like pretty wealthy circles and still couldn't convince any institutions to come in. So it was like, you know, he had good jobs and, but he had a family to support and he was, he, he knew a lot of wealthy people, but that actually didn't really accrue to him successfully capitalizing the business for a long time.

• 1:55:59David Rosenthal?

  Look, sometimes activists have good points and they're good points to be made against Peloton here, and I think we've been making them. But like, they're also just so whiny and like, the, like the incentives are so misaligned. And of course they want to never be happy because they want to keep buying more to then, you know, sell, anyway.

• 1:56:17Ben Gilbert?

  Okay, power, branding.

• 1:56:19David Rosenthal?

  Yes.

• 1:56:20Ben Gilbert?

  I mean, other stuff too, but like, did I pay $2,000, $2,300 for a bike?

• 1:56:28Ben Gilbert?

  Because it was Peloton bike that otherwise I would have paid maximum, I don't know, a thousand dollars for, yes, yes, I did.

• 1:56:34David Rosenthal?

  It's interesting, right? Yes, definite brand power. Yes, that is correct, but I do think I did a lot of research and I seriously considered doing a hack a Peloton. I kind of enjoy doing stuff like that, you know? And to get the same quality of bike, you really, yes, you can do it cheaper with a hack a Peloton, but not that much cheaper. Like they, it really is like, it's a very high quality bike.

• 1:57:03David Rosenthal?

  Relative to the price. So, but yes, agree on brand.

• 1:57:07David Rosenthal?

  Definitely to me, one that stands out, and I think one that attracted Barry is scale economies here. Like, you know, the amount that Peloton can invest, even with the music, variable cost overhang, but the amount that they can invest in content and in the best instructors, I think, which is where this plays out the most, relative to a SoulCycle, to a flywheel, to anything else. And then even relative to other connected fitness companies, because Peloton has the largest member base, just like with Netflix, they can invest in more great content because they have more resources from more subscribers and then that's a virtuous flywheel.

• 1:57:46Ben Gilbert?

  Totally, totally agree. And it says, I mean, the proof's in the pudding that like Emma Lovewell and others used to be SoulCycle instructors.

• 1:57:53David Rosenthal?

  Yep. I think Alex Toussaint started with flywheel, I believe.

• 1:57:56Ben Gilbert?

  I can see that. Yeah, it just makes total sense that Peloton would say like, uh, we can make this much more interesting for you, both in terms of fame, dollars, career advancement, because your rides are going to be 5,000 people instead of 40. And duh, you're going to get the best instructors and content, which does that make, do the contracts, I don't know what the contracts look like, but would that make the instructors and all the content that they've produced a cornered resource? If, if my, at least my perception is that is the best on-demand content I can get for working out.

• 1:58:33David Rosenthal?

  Yep. Certainly the library of content and, and you know, it's interesting with, I'm curious what your feeling is on this as from a user perspective.

• 1:58:44David Rosenthal?

  It is valuable to me that my favorite instructors, mostly just Alex, he's so awesome,

• 1:58:54David Rosenthal?

  are constantly adding new content and stuff like the ride to greatness is all we'll get into that more later. That's extremely valuable to me. If he stopped adding new content, I would seriously consider churning, but the year's worth of library, like I do go back and do old, old library content. And that's quite valuable to me, too. And so even if he switched to another platform, then yeah, like, you know, it would take a long time to build up. Like, I've got a few 20 minute rides that he did years ago that like are really high quality for me.

• 1:59:27Ben Gilbert?

  By the way, there is someone who switched to another platform, or at least left. I can't, their name's escaping me. I looked into this a couple of years ago, and I think Peloton pulled all their content down, which was an interesting move because it's basically saying, we don't want to continue to build your brand for free to compete against us, which I found fascinating because I bet, I bet that's totally case by case how they would think about whether they should leave it up or not.

• 1:59:52David Rosenthal?

  And that's a big stick for the instructors, too. Like, if you leave, then all of your library of work goes away.

• 1:59:58Ben Gilbert?

  Right, right. I would kill to be able to look at that, all those contracts and understand how all that works.

• 2:00:04David Rosenthal?

  Totally.

• 2:00:06Ben Gilbert?

  Okay, I think those are

• 2:00:07David Rosenthal?

  Those are the big ones.

• 2:00:08Ben Gilbert?

  Those are the big ones. So a few interesting little, what would have happened otherwise to go to a old acquired standby section. So what if they actually had pursued a deal with SoulCycle? And I'm going to use Soul over Flywheel because I think even though Soul wasn't given them the time of day at the moment, that's the more interesting one. SoulCycle has not had a very good last couple of years. And first, there was the Trump fundraiser, and then there was the like failed go public of the SoulCycle, the Equinox Fitness conglomerate. And then I think, I mean, I'm not a doctor, so this is

• 2:00:54Ben Gilbert?

  Or an epidemiologist, but

• 2:00:55David Rosenthal?

  This is not investment advice and also not healthcare advice.

• 2:00:58Ben Gilbert?

  The number one place to go and get COVID would be a box, an unventilated box of 50 people breathing as hard as they possibly can for 45 minutes in a room.

• 2:01:08David Rosenthal?

  But they have candles in there. That helps.

• 2:01:10Ben Gilbert?

  I was trying to think, like, where is the single last place on earth that I want to be during the pandemic? And it's at a SoulCycle studio, even though I used to do that a lot before I got my Peloton. And frankly, probably never will again. I can't imagine going back to that behavior for even for non-COVID diseases. It's like, just if you want to stay healthy.

• 2:01:33David Rosenthal?

  I would only consider it in, like you and I, when we would get together, we used to go to SoulCycle. It was really fun to do it with friends. I would maybe consider that again in the future, but definitely not on a, you know, day-to-day basis.

• 2:01:47Ben Gilbert?

  So would it, so obviously SoulCycle came out with a Peloton competitor after Peloton, you know, did very well. And it was, it wasn't fully SoulCycle. It was like part SoulCycle, part Equinox parent company. I think that, I have to imagine that thing was a total flop.

• 2:02:04Ben Gilbert?

  What would have happened if you had this sort of like JV between Peloton and SoulCycle, five years in, in a strong position, six years in when COVID hit?

• 2:02:16David Rosenthal?

  It's interesting. I want to say I don't think the JV would have worked nearly as well as Peloton did as a standalone full-stack entity.

• 2:02:24Ben Gilbert?

  But, you know, putting cameras in, building a little SoulCycle studio.

• 2:02:30David Rosenthal?

  There would have been too many, you know, I think back to power, there's an element of counter positioning in the early days of Peloton here, too. Like, there would have been too many incentives and resources within a SoulCycle or a flywheel to, like, you would have to really cannibalize a lot of the core in-person, you know, operations. Like, take your best instructors and make them dedicated to the online offering, right? Like, it, there would have been some weird dynamics there.

• 2:02:57Ben Gilbert?

  Every class kind of prints money. So if you're running one of those local studios, you're like, well.

• 2:03:02David Rosenthal?

  Right. Now, you could just record that and put it on, on this JV with Peloton, but I think that would be lower quality content than what a, like, full, you know.

• 2:03:10Ben Gilbert?

  Oh, the Peloton rides are so produced. In doing this, I was like, looking at videos about their control room and the number of cameras that they have set up. And, I mean, At this point, they're a TV production company with celebrity instructors who happen to be good at riding bikes, but it's a TV studio and it would be very hard to turn any of these SoulCycle, you know, places into TV studios.

• 2:03:35David Rosenthal?

  Yep. And so I feel like making the decision as SoulCycle, like I'm going to take our best content and instructors, dedicate them to that for this thing that I revenue split with. Yeah, I don't know.

• 2:03:49Ben Gilbert?

  Okay. Well, there's another one here, which I know you want to do is how should Peloton have managed over the last couple of years? What, what could they have done that would have enabled them to come out really strong?

• 2:03:59David Rosenthal?

  You know, it's easy here to sit here and say like, the Precor acquisition was dumb. The Peloton Output Park was misguided, you know, probably good in the long run to bring your production in-house, but like that big, using cash at that moment in time, probably not the right thing. I've talked to everyone's ear off about my feelings on the product and pricing decisions. At the same time, I think we got to be intellectually honest here with ourselves and with like the market too. It was easy to believe, like it would have been hard to really think about the downside over the past year as everything

• 2:04:42David Rosenthal?

  was up and to the right. Like it's a rare, rare, rare leader in company that I think can stay disciplined through what was probably like one of the biggest boons for any company and of all time.

• 2:04:56Ben Gilbert?

  Yep. On the other hand, other companies, I think the difference is a lot of these other companies, demand didn't go away. Like Amazon saw a spike, but then it kind of kept rising from there across all their businesses. Whereas Peloton saw a spike and then a decline.

• 2:05:19David Rosenthal?

  Yep.

• 2:05:20Ben Gilbert?

  It's funny, I was thinking about what would be an interesting comparison here. And I think Eric Yuan against John Foley is sort of an interesting one. Or let's just say Zoom against Peloton. Both of these were pandemic era go-go stocks that have totally crashed. Peloton down over 80% from peak, Zoom down over 70%. But for Zoom, despite the fall, I think it's still growing revenues at close to 100% year over year and is a free cash flow positive machine. Whereas Peloton is deeply unprofitable on a, you know, full bottom line. Still raising billions from the public market with new stock issuances. They seemed convinced that this demand spike would last forever with these acquisitions

• 2:06:04Ben Gilbert?

  and expensive investments. It's funny, like I don't want to blame the management as much as I kind of want to blame. Well, maybe it is management, but it's like kind of inability to forecast and know that demand was drying up. And, and being in a business that just requires a lot more moving pieces, a lot more atoms. And that's just really hard.

• 2:06:29David Rosenthal?

  This demand spike created huge complexities for Peloton as a business in a way that, you know, for Zoom, like it created some complexities for Zoom. Like, I don't want to say like it was just easy, but like, you know, they're shipping software like it's, it's different here.

• 2:06:46Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 2:06:59David Rosenthal?

  Yep, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 2:07:15Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 2:07:30David Rosenthal?

  And that's how you get features that customers love like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 2:07:54Ben Gilbert?

  And they recently launched Legora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 2:08:13David Rosenthal?

  And Legora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Legora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 2:08:44Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at legora.com/acquired and just tell them that Ben and David sent you. All right, uh, let's grade this one. So I think what we should do is paint the A scenario and maybe a C or an F scenario for what Barry does from here and, and, you know, what, what those outcomes are.

• 2:09:24David Rosenthal?

  Yeah. Well, maybe let's start with the C scenario because I think that's the sort of more interesting one. You know, F is obvious of like this business falls off a cliff and you know, there's no more demand ever.

• 2:09:39Ben Gilbert?

  Sells for parts.

• 2:09:40David Rosenthal?

  It all. Yeah, right. I don't think that's likely, but that's, that's.

• 2:09:45Ben Gilbert?

  I think a C is it's selling in the next six months.

• 2:09:48David Rosenthal?

  Six to 12 months. I agree.

• 2:09:50Ben Gilbert?

  For eight to $10 billion.

• 2:09:52David Rosenthal?

  Yep. Yeah. Or even $20 billion selling within the next year for a nice short-term shareholder return. I think that's a C.

• 2:10:01Ben Gilbert?

  I think a lot of shareholders would be very happy selling this thing in a year for $20 billion.

• 2:10:07David Rosenthal?

  I totally agree. I think shareholders would be happy, but I think that's like, you know, I think it would be sort of sad if that happened. And I doubt, you know, I, we don't know Barry at all. We've never talked to him. Barry, open invitation. When this chapter is over, you gotta come on the podcast and we gotta do like a recap.

• 2:10:26Ben Gilbert?

  Or if you want to do a follow-up now, what'd we, what'd we get right? What'd we get wrong? We're happy to.

• 2:10:30David Rosenthal?

  Yeah, totally. We are such huge fans of yours. But I don't think he would have taken this just to package it up for a sale in six to 12 months. Like, why would he do that?

• 2:10:43Ben Gilbert?

  Yeah, agree. Agree. I will say, I don't think this is an independent enduring company at this point. I think it's going to be more along the lines of a lot of the consumer electronics companies that we've talked about where I think Barry can turn it around. I think you can have sort of tight financial controls where it's run like a good company and some smart, make smarter investments. But I have a hard time knowing how they're going to grow 50% year over year at any time in the future. Like, where are they going to go find more demand? Or where are they going to? Really meaningfully alter their product lines to go find more demand.

• 2:11:27Ben Gilbert?

  I mean, that that's the A plus like that's the A is if they can figure out how to stay an independent company and become a big profitable independent company and meaningfully find demand in concentric circles outside their current customer base. That's that's it. That's the dream.

• 2:11:44David Rosenthal?

  So, right, yes, that's the A plus. That's the dream for sure. Let's think about that. They have what a little under 3 million subscribers currently?

• 2:11:53Ben Gilbert?

  Something like that.

• 2:11:54David Rosenthal?

  That's actually not that many people, right? Like

• 2:11:56Ben Gilbert?

  It is not, especially in several countries.

• 2:11:59David Rosenthal?

  I think about across the world, you know, even even let's assume, I don't know. I don't know the numbers. Let's assume two thirds of that is US and one third elsewhere. That may be generous, but like, let's just use that as a swag. So that's 2 million US subscribers out of a nation of 330 million people.

• 2:12:18David Rosenthal?

  There are probably a lot more than 2 million people that could be in like a addressable segment for Peloton. You know, and then there is the digital app, right? Like the digital app is a good experience. I started that way. I graduated up, but like, it's a really good experience. You know, Apple is investing in a similar strategy to the digital fitness app. And I think for 1299 a month for super high quality class, like this is the Netflix model, right? For the best content out there with the best instructors for 1299 a month. That's accessible to a lot of people. So I think there's probably still headroom on the core, you know, affluent aspirational segments.

• 2:13:03David Rosenthal?

  Maybe you call those two, two segments. I think you, I think they can address both affluent people who don't care about cost and aspirational people who do care about cost, but are willing to invest in this.

• 2:13:16David Rosenthal?

  And then you layer on the, the digital product. I do think it could, there is a world where this could become a, you know, maybe not forever, but a longer term standalone company that actually is justifiable of a $49 billion market cap.

• 2:13:32Ben Gilbert?

  I like it. Well. I don't think that's the most likely outcome. I think two years from now, I think the most likely thing is that it's acquired by someone. But the fun thing is, we will get to watch and see, and we both just said all that on air.

• 2:13:50David Rosenthal?

  Well, we'll revisit with Barry in a couple of years.

• 2:13:52Ben Gilbert?

  We will.

• 2:13:52David Rosenthal?

  How about that?

• 2:13:53Ben Gilbert?

  We will.

• 2:13:53David Rosenthal?

  Deal.

• 2:13:55David Rosenthal?

  We're shaking hands on it.

• 2:13:57Ben Gilbert?

  You and I are, yes, over, over video chat here. Uh, carve out?

• 2:14:03David Rosenthal?

  Carve outs. Uh, so related carve out. As I said at the top of, at the top of the episode, whether you enjoyed this emergency pod or not, whatever you think of it, go watch that interview with Barry McCarthy at the Hill School. It is so good. Uh, and really the only artifact, uh, long form interview with him dedicated to just him. There's some stuff where he talks about direct listing on the 16Z podcast and others, but, uh, um, that's just about him and his career. It's worth watching. And there's a great nugget in there. He talks about his, um, uh, strategy exercise that he likes to do, uh, that they did at Netflix and Spotify, and I'm sure he will bring to Peloton of, uh, how to, how

• 2:14:48David Rosenthal?

  to plan and build your organization to be resilient and robust for the future. And, uh, his four to five year strategy exercise. I won't spoil too much of it, but, um, it, it's very good and worth watching, uh, and, and listening to that.

• 2:15:05Ben Gilbert?

  Sweet. Mine is also related. So since the Taylor Swift episode, I've been listening to a lot of Switched on Pop. And, uh, there is a awesome episode called the James Bond Spycraft Theme, Spycraft Sound. And, uh, the hosts are just awesome of, uh, of Switched on Pop. The show is reliably great. It's, it's sort of like acquired for music is another, is a way to sort of think about it. I've been really hooked on music podcasts, but this one in particular gives the whole history of the Bond theme of all the songs that are used for all the different movies across all the decades. And they're musically related and it's really cool to listen to how they pull

• 2:15:49Ben Gilbert?

  out these different elements of that very mysterious chord at the end of the bond theme and, uh, and how that gets used through the decades and all the different, um, all the different movie themes. So highly recommend that song. Super fun. It's my car out.

• 2:16:06David Rosenthal?

  I went and listened to that episode after we were texting about it and it's so good. The whole show is so good, but, uh, uh, yeah, it's so good. And, and one of my favorite parts about it was it, uh, reminded me that Chris Cornell's song for, uh, Casino Royale is so good. Oh, man.

• 2:16:24Ben Gilbert?

  Yeah, it is.

• 2:16:25David Rosenthal?

  Rest in peace, Chris Cornell. But that is one of the best bond themes of all time.

• 2:16:29Ben Gilbert?

  Yes.

• 2:16:30David Rosenthal?

  All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 2:16:37Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 2:16:47David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 2:17:08Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system. So teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 2:17:20David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 2:17:31Ben Gilbert?

  Listeners, thank you for going on the journey with us. Go check out the LP show. Our latest episode with the NZS Capital folks is, uh, is really good. Like I, they're just so smart. And if you're staring at stock tickers getting anxious, uh, this, this, this, I mean, not investment advice, but like it will help you bring a cool, steady hand.

• 2:17:53David Rosenthal?

  It's a nice warm cup of tea.

• 2:17:55Ben Gilbert?

  Otherwise trying times, yes. And if you want to join us for the Zoom call tonight, if you're listening to this on drop day, then join acquired.fm/lp and we will, we will see you in the Zoom later tonight. We have a job board, acquired.fm/jobs. Find your next great career move. And yeah, tell your friends about this. You can find us on Spotify, right alongside Taylor Swift and many other great artists and podcasts, or anywhere where you get your, your podcasts. And we'll see you next time. We'll see you next time.