Peloton - the entire history and strategy behind America's trendiest workout

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. *Links:* - Barry’s Hill School interview on YouTube: https://www.youtube.com/watch?v=9uwcSbe6YoE - Episode sources: https://www.acquired.fm/episodes/peloton#sources *Carve Outs:* - Barry’s planning framework from the Hill School interview: https://www.youtube.com/watch?v=9uwcSbe6YoE - Switched On Pop on James Bond’s Spycraft Sound: https://switchedonpop.com/episodes/james-bond-spycraft-sound-billie-eilish-hans-zimmer-daniel-craig *More Acquired:* - Get email updates https://www.acquired.fm/email and vote on future episodes! - Join the Slack http://acquired.fm/slack - Check out the latest swag in the ACQ Merch Store https://www.acquired.fm/store! _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._

• 0:00Speaker 1

  Ride to greatness. We're not here to work out. We're here to outwork. I said that to Jenny the other day, and she was like, What are you talking about?

• 0:12Speaker 0

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

• 0:24Speaker 3

  Who got the truth? Is it you? Is it you is a you who got the truth now. Is it you? Is it you? Is it you? Sit it down. Say it straight. Another story on the way. We've got the truth.

• 0:41Speaker 0

  Welcome to season 10 episode 2 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.

• 0:55Speaker 1

  And I'm David Rosenthal, and I am an angel investor based in San Francisco. And we are your hosts.

• 1:03Speaker 0

  Well, listeners, we have been waiting to do a Peloton episode for a long time, just searching for 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, and the uh the pandemic hitting and David and I both becoming customers and these crazy commercial, and then 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.

• 1:42Speaker 1

  Well, I mean, any time 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.

• 1:59Speaker 0

  Yes.

• 1:59Speaker 1

  Oh, just so excited.

• 2:01Speaker 0

  And you know, there's this fun thing too of like I've seen articles that are like John Foley's stepping down as CEO.

• 2:08Speaker 2

  Technically, technically

• 2:10Speaker 0

  people are saying he's staying involved. He's staying very involved, and uh we'll definitely dive into sort of how this duo is gonna conquer the road ahead together.

• 2:20Speaker 1

  Indeed.

• 2:21Speaker 0

  Well, first we want to say uh we were recording this on February 9th, and uh that is important because yesterday, uh February 8th was the day that the news broke about all of this Peloton stuff. Uh 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 uh 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.

• 3:00Speaker 1

  We are here for the comeback story.

• 3:02Speaker 0

  Indeed. All right. Well, we spent the last 24 hours getting uh 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. And first, we want to introduce you to our presenting sponsor, Vanta, the leader in automated security and compliance. Now, as you know from the Taylor Swift episode, we are huge fans of Vanta and their approach, the whole compliance process. They do SOC2, HIPAA, GDPR, and more, and we've got CEO and co-founder Christina Cassiopo back with us today. So, Christina, last time we talked about a little bit the origin of SOC 2 and how it's administered. What's the checklist?

• 3:47Speaker 2

  One of the interesting things about Talk2 is it's folks definitely refer to it as having a checklist, but there isn't really one. So if you go to the AICPA website and you look up the standard itself, it's really high level. Uh it has things like written in more complicated, you know, compliance speak, but basically says, you know, hey, do you have you know systems in place to control how data is accessed in your company, right? And then that can be implemented any number of ways. So in the early days of Vanta, when we talked to engineers who knew compliance, or actually, when you talk to investors who are engineers, they basically told us they're like, how do you automate that, right? Like that's that's too high level to be able to uh automate. Which they're correct.

• 4:33Speaker 2

  Uh one of the things we did with Vanta was just break down those high-level statements into specific things that could be automated and a company could implement. Um this obviously helped us actually build software for our category that never had software before. But it also helps companies because we realized one of the reasons smaller companies didn't pursue these certifications earlier, even though they helped them grow was they just didn't have the time bandwidth attention to figure out what those things meant.

• 5:04Speaker 0

  What are the most obvious no-brainer things that should be a part of that?

• 5:08Speaker 2

  So it's really, really high-level a SOC2 or a compliance certification is trying to figure out if you are kind of running a reasonable organization that protects data. So you can kind of break it down into three pillars. One is cloud infrastructure. Do you have your AWS, GCP, Heroku, whatever you're using? Is it set up reasonably? Right? And that can mean one of, you know, hundreds of things, but just do you lock all your doors and windows? Uh, one is around laptops or like devices employees are using. Uh, you know, are those reasonable? Because they're often have customer data on them or access, you know, websites that have all of the customer data. And then the final one is employees themselves. So the accounts they use, their own practices. Um how they're trained and onboarded. Uh, you know, again, that gets broken down, but just three pillars cloud infrastructure, devices, and employees.

• 6:00Speaker 0

  Our thanks to Vanta, the leader in automated security and compliance software. If you are looking to join Vanta's 2,000 plus customers to get compliance certified in weeks and instead of months, you can click the link in the show notes or go to vanta.com slash acquired for a sweet, sweet 10% discount. Other things, you all know the drill by now. If you want to join the Slack, you should. Acquired.fm slash 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 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 slash 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.

• 6:57Speaker 0

  So LPs, excited to see you in there. The LP show has been on fire recently. We've got like I'm just so pumped about the guests we're getting. 10K diver, that was really fun too. Pseudonymous interview.

• 7:10Speaker 1

  We've got some great founders coming up.

• 7:12Speaker 0

  Yep.

• 7:12Speaker 1

  It's awesome.

• 7:13Speaker 0

  Uh, listeners, as you know, this is not investment advice. Uh very much not adjustment advice this time. It

• 7:18Speaker 1

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

• 7:24Speaker 0

  bet you it's not

• 7:25Speaker 1

  investment advice.

• 7:26Speaker 0

  I bet you do. Uh, we may have investments in these companies uh 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 uh is that Peloton laid off 2800 people, including 20% of their corporate office. And uh, 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, uh super tough week for those 2800 people who had a really really terrible Tuesday reading this news, talking to their managers, all that, and and our hearts um go out to those folks.

• 8:07Speaker 1

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

• 8:15Speaker 0

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

• 8:18Speaker 1

  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.

• 8:36Speaker 0

  Yeah. And to transition us in the thinking about our previous episode with what 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.

• 9:01Speaker 1

  Yep. 40%. 40% riff.

• 9:04Speaker 0

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

• 9:12Speaker 1

  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. Uh 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.

• 10:00Speaker 1

  He's 68 years old.

• 10:02Speaker 0

  The spring chicken coming in the turn this thing around.

• 10:04Speaker 1

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

• 10:13Speaker 0

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

• 10:24Speaker 1

  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. Is it a boarding school? It's a boarding school in the Philadelphia area. Uh when I went to Tower Hill School in Wilmington, Delaware, also in the broader Philadelphia area. People would always get the Hill School and Tower Hill school confused.

• 11:11Speaker 1

  We we had a little chip on our shoulders. But

• 11:15Speaker 0

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

• 11:23Speaker 1

  Totally, totally the mid-Atlantic region. Uh 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.

• 11:36Speaker 0

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

• 11:39Speaker 1

  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.

• 11:47Speaker 0

  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.

• 11:54Speaker 1

  And very, very relevant to this news today that I was gonna 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, you know, like, well, you know, Barry, are you bored in retirement now that he's retired from Spotify fully at this point? And

• 12:12Speaker 0

  his answer is

• 12:13Speaker 1

  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 they're 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 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? Really? No. He was the CFO of a company called Music Choice.

• 13:01Speaker 1

  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 direct TV growing up. I think they're in the like the six or seven hundreds. It

• 13:17Speaker 0

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

• 13:21Speaker 1

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

• 13:33Speaker 0

  rooms sometimes.

• 13:34Speaker 1

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

• 13:46Speaker 0

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

• 13:53Speaker 1

  Some other things that I like learned most of this from that interview. Um, how did he end up leaving? 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 a company. Music Choice may have been public at that point in time. How did he find his way out to California in 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.

• 14:27Speaker 0

  I mean, most riffs don't include the CFO unless it's performance-based. Right. Usually the CFO is the one, you know, organi

• 14:34Speaker 1

  orchestrating the riff. Um, yeah, he got he got fired and he was 45 years old. He had already had this, you know, sort of long career as an investment banker and then as a CFO, been fired at 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. Like gosh, I hope my life is that interesting. Label

• 15:01Speaker 0

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

• 15:08Speaker 1

  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. Barry went through this himself. Yep. So how does he end up going out to Netflix? Netflix was recruiting for a CFO, and like nobody wanted the job because I think we talked about we may have talked about this a little bit in our Netflix uh episode, but the early days of Netflix, like it was not a hot startup in Silicon Valley. No. It was far from it. You know, Mark Randolph had originally started it. Uh Reed got involved a little later. Uh, and um I also did not know this. Uh, or at least I didn't remember it from the Netflix episode.

• 15:54Speaker 1

  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. Oh, I

• 16:05Speaker 0

  don't think I knew that either, or at least I didn't didn't remember

• 16:08Speaker 1

  that.

• 16:08Speaker 0

  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 gonna mail discs around? No one has a player for those discs yet.

• 16:36Speaker 1

  Totally. So this was not this was a tough role to recruit for. Um, 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, uh, 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 paper, paper rental uh 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.

• 17:24Speaker 1

  The next year, 35 million and then hundreds of millions, you know, after that. And then the IPO, there's the fight with Blockbuster, all that that we talk about in the part one of the Netflix story. And then 2003, it's a public company. Uh 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. Uh 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.

• 18:14Speaker 0

  Netflix is boring. It's it's done, like everything's gonna be smooth sailing and successful from here on out, so I'll go do something else. And then

• 18:24Speaker 1

  Amazon, uh 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. Uh this stock gets hammered. It dropped literally the stock price drops 60 60% shades of what's happening with Peloton now.

• 18:50Speaker 0

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

• 18:55Speaker 1

  right. And it's it's crisis mode. It's it's wartime again at Netflix. And Barry, in one of the most just like one of the many reasons why we love him here at acquired in his story, is uh he 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.

• 19:25Speaker 0

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

• 19:51Speaker 1

  mean, he literally in the Hill School interview. He says, You 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 Icon 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, you know, retire at this point. He's in his mid-50s. And he announces it at an investor conference. And this is just also amazing, amazing 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.

• 20:39Speaker 1

  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's saying that, you can take that to the bank. And then Benton what you were saying. This is also from the Hill School interview about him, you know, really being getting fired up by wartime and peacetime is not as interesting to him. Uh 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. It's

• 21:12Speaker 0

  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, it he is uh he has an amazing way of instilling confidence. Like he he has a a way with words and especially away with words to investors to bring a sense of calm. And I think uh there is nothing more necessary for Peloton than that than right now.

• 21:59Speaker 1

  Well, and I think the other thing, you know, that's sort of one half of the magic of Barry McCarthy to the extent uh he has magic, which I believe he does. Um, you know, I think the the other half is what he learns from this Netflix experience, and 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, uh, 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 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 gonna 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 gonna win that war.

• 23:19Speaker 1

  Like uh 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.

• 23:28Speaker 0

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

• 23:32Speaker 1

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

• 23:51Speaker 0

  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 that's that says a lot about how long TCV has been doing that.

• 24:10Speaker 1

  So he joins them as a venture partner, and uh 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 Eck 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 modernize the direct listing and everything that's happening now.

• 24:45Speaker 0

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

• 24:49Speaker 1

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

• 25:07Speaker 0

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

• 25:11Speaker 1

  So originally he moved to Stockholm and was uh 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. Um he had this incredible chapter there, the DPO, everything. And then in January of 2020, he retires, presumably fully at this point in time because he's 66 years old and rejoins the board of Spotify, and uh uh and spends, you know, thinking he's gonna go spend the next few years joining boards again.

• 26:01Speaker 1

  He joins the Instacart board and uh re-uh re-establishes his relationship with TCB.

• 26:08Speaker 0

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

• 26:13Speaker 1

  That was back before Spotify.

• 26:15Speaker 0

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

• 26:24Speaker 1

  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.

• 26:38Speaker 0

  David, I think it's inappropriate to start the Peloton story in 2012. I just have to say, I know you're the usually the one who goes back. This story starts in 2006 with SoulCycle. And I think, without going into the whole Soul Cycle story, by the way, there are two awesome episodes of how I built this. One on Soul Cycle with the founder founders there, uh, 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 Soul Cycle but on a screen in your living room. And SoulCycle was this massive dominant brand if you were touchy feely, and then there was Flywheel, which if you were more numbers-driven, you know, flywheel was more your shtick.

• 27:28Speaker 0

  So I guess it was more of a flywheel than a soul cycle, but it had the prestige brand of a soul cycle.

• 27:35Speaker 1

  And I actually don't know the history on this, you may know, but there's there's very intertwined history with Soul Cycle and Flywheel, right?

• 27:43Speaker 0

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

• 27:47Speaker 1

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

• 27:50Speaker 0

  It is totally inappropriate to like be think about Peloton in a vacuum. You know, that 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. Soul Cycle is totally taking off, and and this, you know, not yet connected fitness, but sort of boutique fitness. 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 uh numbers-oriented, schedule-oriented, disciplined person, more of a visionary product leader type person. And he's thinking, you know, I I uh I can't commit to five days from now, making sure that I schedule that spot in Soul Cycle.

• 28:35Speaker 0

  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?

• 28:45Speaker 1

  Totally. Well, we'll get into who John is in a in a sec, but uh I was gonna do this second, but you you're absolutely right to start with Soul Cycle and Boutique Fitness and Flywheel, uh, and Barry's boot camp 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 um, 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, you know, burgeoning sort of new care category. And this is what's just brilliant, you know. A, it's so like you said, it's so hard to get spots in those classes. Like you gotta, the instant they become available.

• 29:31Speaker 1

  Like you even had to do this in Seattle, I remember, but like in New York, it's impossible.

• 29:37Speaker 0

  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.

• 29:45Speaker 1

  So anybody, it's hard to get spots with the best instructors in these classes. John and Jill, his his wife, they were you know super into this. They had two little kids. Like, I can't, I mean, I've got one little kid, like I can't. 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 uh wanted this product and and couldn't get access to it. Um so the Peloton idea, like it was it was revolutionary on a whole bunch of dimensions. You know, one was 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.

• 30:42Speaker 0

  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 5 a.m. class?

• 31:02Speaker 1

  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 what makes Netflix awesome. That's what makes Spotify awesome. That's why podcasting is better than rock radio.

• 31:50Speaker 1

  That's why music streaming is better than listening on the radio. Uh, that's why Netflix is better than linear TV programming.

• 31:59Speaker 0

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

• 32:04Speaker 1

  And that Barry always says it, 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.

• 32:24Speaker 0

  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 you know, chat based or document-based forms of collaboration. That is a you know, on demandness of something that was previously linear.

• 32:42Speaker 1

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

• 32:47Speaker 0

  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. Yep. And to then create a product that is like

• 32:55Speaker 1

  native to that,

• 32:56Speaker 0

  you know, like

• 32:56Speaker 1

  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? Uh 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 and Noble's Nook business, their e-reader business. Uh which is based in New York. And like actually, you know, Barnes and Noble was a you know great company and then eviscerated by Amazon and the Nook business uh and the Nook product, I think was probably a decent product, but it was just sort of too late.

• 33:32Speaker 0

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

• 33:35Speaker 1

  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.

• 34:02Speaker 0

  Okay, I do have to pull forward that thing from what would have happened otherwise, because it's it's we can save the 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 uh equally elegant and really differentiated uh that bike. The original vision actually was a connect your own iPad vision. They 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. They thought if we have a bike, even if it's, you know, like uh a bike with our software, that's interesting enough to people, and we can partner with either Soul Cycle or Peloton.

• 34:57Speaker 0

  Oh,

• 34:58Speaker 1

  or or flywheel, you mean?

• 34:59Speaker 0

  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 um 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 uh Flywheel, they actually got to terms on what would it look like to make this thing uh not only um uh 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 was sort of forced to do their own content and and pivot to a really vertically integrated strategy.

• 35:41Speaker 1

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

• 35:59Speaker 3

  amazing.

• 36:00Speaker 1

  Okay, so that's what Foley was doing immediately before um before starting Peloton, but before that, he had been a long time IAC guy, interactive core working for Barry Diller,

• 36:10Speaker 0

  like, oh my god. The original tech media conglomerate. I mean, like I 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.

• 36:32Speaker 1

  We should do an episode on IAC because it is fascinating. Barry Diller and media and tech and and uh 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 you know, television with an interactive component that people at home were, you know, buying and calling and like uh the DNA is just like so so perfect.

• 37:06Speaker 0

  So what was John doing at IAC?

• 37:09Speaker 1

  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, you know, go between a whole bunch of their properties.

• 37:24Speaker 0

  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 e-vite 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 you know, relatively small on the to compare to the grander scale, but um, you know, had had sort of done this take a startup and uh 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.

• 38:00Speaker 1

  Man, eva, that's like the cockroach of the internet. Like in a good way. You just it just won't die.

• 38:06Speaker 0

  Yes.

• 38:07Speaker 1

  Amazing. Uh 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 gonna 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 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 two million dollar post money valuation.

• 38:53Speaker 1

  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 dollar public company.

• 39:07Speaker 0

  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.

• 39:18Speaker 1

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

• 39:28Speaker 0

  All from individuals, 25k and 50k checks.

• 39:31Speaker 1

  And then did a three and a half million dollar round, I believe also all from individuals after that. Uh they do a Kickstarter in 2013. I had forgotten this. I can't believe this thing was a

• 39:44Speaker 0

  Kickstarter.

• 39:45Speaker 1

  Until it got pointed out in the acquired Slack, like it was a

• 39:48Speaker 0

  Kickstarter. And it was like essentially a failed Kickstarter. Like it didn't technically fail, but it was not good. So here's the thing. Um 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 their phone

• 40:04Speaker 1

  eight years ago. Aside from what like the weights holders and they they tweaked the water bottle uh location. It's the same bike.

• 40:12Speaker 0

  Yeah. So they raised 307,32 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 and NPS scores. And yet, when they laid out the vision and they showed a very well produced video with a 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. And so I think it's worth pointing out that until you actually tried it.

• 41:02Speaker 1

  Yeah.

• 41:02Speaker 0

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

• 41:07Speaker 1

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

• 41:29Speaker 0

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

• 41:34Speaker 1

  Well, let's go right into 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.

• 42:04Speaker 0

  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 uh 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 on the headphones. Their goal, their sort of KPI is get you in the experience as soon as possible after stepping in the store.

• 42:55Speaker 0

  And this is by the way, how I bought mine. It is like uh you wander in and you bought it in the mall. 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.

• 43:26Speaker 1

  You know, I'm just remembering my own experience before I bought uh the Peloton, which I didn't get until this summer. So it was not like a pandemic purchase per se. Um, but I had 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 uh I got a digital subscription, so I was just I had a crappy old bike in my garage that I was using it with. 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 telotons there. And I was like, well, I'll try, I'll see what the actual bike is like. And then I was like, oh, this is awesome. And my 200 Amazon bike in the garage, it's night

• 44:06Speaker 0

  and day compared to this. It really is a great bike. It's the sort of magnetic um resistance, it's the belt instead of the the chain. I mean, everything about it is it is a nice piece of hardware. It really, it really is. But yeah, yeah, you gotta you gotta try it. 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 hotel strategy is just more and more ways for people to experience it and want to buy one. But yeah, okay, so you mentioned price, $2,000

• 44:42Speaker 1

  bike. So at the Kickstarter, I think they priced it at 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 in game consoles in there, and then we we've got this awesome subscription business that we're gonna layer on top of it, and that's where we're gonna make our money.

• 45:26Speaker 1

  People thought it was the hardware couldn't be that great if it was twelve hundred dollars, and they realized that if they raised the price, they raised the price up to two thousand two hundred and forty-five dollars, that then in people's minds this becomes this like dual 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, uh it was it was hurting that. It was it was preventing that from happening.

• 45:59Speaker 0

  That's absolutely fascinating.

• 46:01Speaker 1

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

• 46:04Speaker 0

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

• 46:12Speaker 1

  supposedly another one of the big things that really helped uh really help sales take off.

• 46:18Speaker 0

  Well, yeah, so that I I'm gonna 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 p 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 turn and annualize it, is something like 9%.

• 47:05Speaker 0

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

• 47:13Speaker 1

  Yep. As of last summer, so they're on a June 30 fiscal year end. So 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. Wow.

• 47:30Speaker 0

  Which like that's those are Netflix numbers there. I'm not sure. Yeah, I th I think it's meaningfully better than Netflix. Maybe maybe 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 gotta go sell them a $2,400 bike. On the other hand, once you get them, boy, is that sticky.

• 47:48Speaker 1

  So I don't know what revenue was for 2014, uh, which is their first kind of full year of sales and uh 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 now a legendary seed investor among others.

• 48:37Speaker 1

  Tiger Global. Get out of

• 48:38Speaker 0

  here. This is amazing. It's an unbelievable bet by LeafXL in 2014, it was a 10 million dollar total round on a 35 million post where Tiger put in five million. Tiger would go on to become the largest shareholder at IPO owning just under 20% of the business.

• 49:00Speaker 1

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

• 49:16Speaker 0

  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 a Lee to when he's left and started addition and wrote and raised over a billion dollars for Edition's first fund. Uh Peloton was a big big part of that.

• 49:33Speaker 1

  Yep. Yeah, for Lee for Edition, you know, and for Tiger itself, too. I mean, yeah. Gotta 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 is still without without insider access, um, but shaped their strategy too. Yep. So sixty million dollars in revenue in 2015, 2016 they do 170 million dollars in revenue. 2017 there is 325 million at a 1.3 billion dollar valuation. And this is where I think Silicon Valley really started to wake up and be like, oh my God, we missed this. How did we miss this?

• 50:13Speaker 0

  Yep. Because he he pitched everyone. Everyone.

• 50:16Speaker 1

  Literally everyone. 2018, they introduced the tread product, uh, 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 it's like $13 a month. Yep. It was $12.99. I think I originally started because I think there might have been like a some a deal with Apple or somebody, like a first try a free month trial or something like that.

• 50:43Speaker 0

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

• 50:47Speaker 1

  I think that might have been.

• 50:48Speaker 0

  So that was totally nuts. So John Foley talks about this. He says uh about the beginning of COVID. He said six months ago, we had about a hundred thousand digital subscribers for the business. And within 45 days of COVID hitting, uh, they they um 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. Wow. So that was a very I mean, again, we'll get into the unit economics of it later, but uh at least from a customer acquisition perspective, that was a great way to spike the number of subscribers they had.

• 51:30Speaker 1

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

• 51:44Speaker 0

  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 the Peloton, like why can't I just mount an iPod on an old uh 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 um 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.

• 52:17Speaker 1

  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. Um but I think to get like a similar quality bike, you're gonna 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.

• 52:40Speaker 0

  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.

• 52:49Speaker 1

  You're

• 52:49Speaker 0

  paying $40 a

• 52:50Speaker 1

  month. Uh okay, so I know you've got some fun stuff on this. 29 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 they gotta sort out, which is uh earlier in 2019 they get sued for first 150 million dollars and then they up it to 300 million dollars by the music publishers, National Music Publishers Association. Uh because they're obviously using all this music as part of the classes at Peloton and they didn't have the proper sync licenses.

• 53:33Speaker 0

  Yes. So this is my b one of my larger bear cases for Peloton. So uh music licensing and gross margins, uh uh a treacherous tale. Well, if you look at Peloton's income statement today and and across recent quarters, so we're we're at sort of a relative point of maturity here. Uh about a third uh 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, uh, this is not 86% gross margin like SAS is it's more like 66% gross margins.

• 54:21Speaker 0

  So a little examination. Why do we think that this mostly goes to music? Well, in part, the variable costs for everything else should be pretty low. I mean, maybe bandwidth is probably the next highest cost for for streaming video. I have some particular beef uh as a pedantic person with the video that they do stream, I find it to be too low frame weight, too low frame rate, uh, to have some motion blur to be a little bit compressed, but all that aside, it's still expensive to stream for video.

• 54:56Speaker 1

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

• 55:03Speaker 0

  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 uh down in in either GNA or I don't know, it might be in there, but you know,

• 55:18Speaker 1

  I I and I don't I don't know. I haven't dug in deep enough to know, but I I don't think it's that expensive relative to the amount of subscription revenue they get. We'll get into powers later in scale economies and all that, but uh my understanding is that the top Peloton instructors make like 500k to a million. Yeah, I think that's about right. And then obviously you've got all the production cost around that, but like still compared to you know, hundreds of millions of uh of subscription annual revenue that's a drop in the bucket.

• 55:49Speaker 0

  Totally. So okay, let's assume that the largest part of this 33% of cost of revenue is 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. I knew you were gonna get into this or the radio, Peloton actually requires multiple licenses for the particular way that they use the music. So first uh Peloton, I think is technically just like the radio, a live performance. So uh live performance royalties must pay out 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.

• 56:35Speaker 0

  Uh, but they also need a sync license in addition to synchronize those songs with the video content. Yeah,

• 56:41Speaker 1

  if

• 56:42Speaker 0

  you're gonna, you know, use a license in

• 56:45Speaker 1

  a commercial or a movie.

• 56:47Speaker 0

  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 sort of songwriter, the person with the publishing right, and the performing artist who owns or or whose label owns the master write. 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 uh 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 artists' songs got removed, and that's because those songs had different songwriters behind them. Yeah.

• 57:32Speaker 1

  Ah, so many people with veto power. What a Byzantine industry.

• 57:36Speaker 0

  Crazy, right? Okay, but back to sort of this like gross margin problem. So according to a piece uh uh 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 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 right. That's nine dollars of your subscription revenue that is going straight to music.

• 58:24Speaker 0

  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 if 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 uh large enough that they've negotiated a specific revenue share, you know, somewhere between 15, 25, 30%, something like that, uh, 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.

• 59:16Speaker 0

  God,

• 59:16Speaker 1

  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 back end costs.

• 59:27Speaker 0

  100%. I mean, it is uh okay, you you're leading the the horse to water, I'm the horse, here's the water. So uh 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. 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. You know, we want to like minimize the amount that we have to pay the music labels on your behalf, which is interesting.

• 1:00:15Speaker 0

  So I was thinking about this, you know, like uh 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 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.

• 1:01:08Speaker 1

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

• 1:01:14Speaker 0

  Very much so. Very much so.

• 1:01:16Speaker 1

  Uh if they don't, they should, and now they probably can.

• 1:01:20Speaker 0

  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, a 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 twenty.

• 1:01:51Speaker 1

  Wow. That's massively different.

• 1:01:54Speaker 0

  That sync right and the performance licenses, very expensive. So, you know, Barry is definitely used to this 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.

• 1:02:13Speaker 1

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

• 1:02:23Speaker 0

  Yes, very much so. Which you gotta wonder is that part of what's driving like the Taylor ride series and the Beyonce ride series and the Peloton is notoriously very collaborative with the most popular artists. So

• 1:02:37Speaker 1

  September 2019, they've settled this lawsuit, they figured things out, at least with the sync licenses. Uh 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 product that's been in market for five years. That is impressive. That is up over a hundred percent from four hundred and thirty-five million the year before. Of that nine hundred and fifteen million, a hundred and eighty-one million is subscription revenue, which is up from eighty million the year before, so growing even faster.

• 1:03:26Speaker 1

  Um we already talked about the margins on the subscription revenue. Interestingly, the hardware revenue, connected fitness products is the segment they call it, also about a 40% gross margin. So they're this is the benefit of you

• 1:03:42Speaker 0

  know, raising the price a thousand dollars. Right, right. They actually make pretty good margins on selling the bike itself. So uh I couldn't find this mostly because I was scrambling for just the last day to put together everything we did learn. Um, if you have data on this, please come and share it with us, acquire.fm slash 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 breakeven 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, 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 multi-million dollar homes riding in fancy places.

• 1:04:36Speaker 0

  It's expensive to you know, convince people to do this new behavior. And uh I think the the plan at the time is like, okay, don't 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.

• 1:04:53Speaker 1

  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 dollars on sales and marketing. Uh, and they added about 1.4 million gross ads on subscribers. Uh 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 it simple.

• 1:05:40Speaker 1

  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 cack, $521 per new subscriber. Aaron Powell

• 1:05:53Speaker 0

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

• 1:06:02Speaker 1

  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. Uh, 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.

• 1:06:34Speaker 0

  Right. They're making they're making a little, maybe a 100, couple hundred bucks total on each bike.

• 1:06:39Speaker 1

  Yep, they're making they're making some amount of contribution margin on the bike. Um, but then you attach the subscription, which you know, with the crazy low churn rates that they have the implied lifetime. 40 dollars a month is over 10 years. 66% gross margin. 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 gonna happen. At 40 a month, that's 2,340 in subscription revenue over five years. Wow. So that's this is 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, uh at the time.

• 1:07:30Speaker 1

  That was that was fun. Um the IPO is is not a good one. Uh 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, so you know, 3x forward revenue with pretty good unit economics that we just discussed, like interesting.

• 1:07:58Speaker 0

  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 uh disconcerting that it traded down from their IPO price.

• 1:08:16Speaker 1

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

• 1:08:24Speaker 0

  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 customer and their LTV, just because I want to hold that in my head as we continue through here?

• 1:08:34Speaker 1

  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-old

• 1:08:56Speaker 0

  customer lifetime. 2300 of LTV. And is that contribution or is that revenue? So then two-thirds of that per analysis is contribution. 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.

• 1:09:32Speaker 1

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

• 1:09:41Speaker 0

  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.

• 1:10:03Speaker 1

  And thus we end up with the holiday 2019 Peloton Wife commercial. Which kind of is a funny story. I mean, like, you know, it's uh does it end up being bad for Peloton or is this just good marketing in the end? I think it's good marketing. I

• 1:10:16Speaker 0

  think it's good for everyone. It ends up being good for that actress.

• 1:10:20Speaker 1

  Yep, good for Ryan Reynolds.

• 1:10:22Speaker 0

  Oh my god. The aviation gin thing that came out the next week is just genius. We'll we'll link to it. But people go 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, uh 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.

• 1:10:50Speaker 1

  Yeah, right, compared to everything that's happened since. Also, it was probably great for Peloton because I 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. Uh like, but then they got so much

• 1:11:08Speaker 0

  hype out of it. But this sets Peloton's track record for uh they can become a dominant trending topic in a pop culture-you know which it uh every time they would come to dominate headlines after this, 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, the treadmills and the treadmill recall and the yeah, like it basically was never good again.

• 1:11:48Speaker 1

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  Which is basically if you have a company, you need insurance and you would be insane not to pick vouch.

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  Right.

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• 1:14:28Speaker 1

  with insurance. You can take other risks, you can atomize them, and you can have somebody else do the underwriting on those. And that's what vouch does. So stuff that's completely unrelated to what you're trying to do with the business, you know, data breaches, accidents, wrongful termination claims. Uh, you know, that's what insurance is atomizing these different risks, and then you pay vouch the premium every month or whatever insurance company in return, they assume the risks, and because they're pooling and vouch is pooling these specific risks across many startups and tech companies, they're able to like in aggregate model it and price it such that they're gonna make profit and money on this, and that that's why Grout vouch is a great business, but it also is a total no-brainer for you to offload these risks.

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• 1:15:24Speaker 1

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• 1:16:18Speaker 0

  Thank you, vouch.

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• 1:16:23Speaker 0

  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. I didn't realize you so you bought it before the pandemic. I bought that and my car in January of 2020, totally randomly and by happenstance, which both ended up being unbelievable assets to have.

• 1:16:51Speaker 1

  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. Gold. Like 180 bucks maybe for like a full Olympic weight weight set was awesome. Which

• 1:17:07Speaker 0

  now is like a thousand dollars.

• 1:17:08Speaker 1

  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 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 dollars. The stock trades up as we've talked about to a peak of over 15 dollars per share at a 49, I believe, billion dollar market cap. People think this is going to the moon.

• 1:17:55Speaker 1

  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.

• 1:18:09Speaker 0

  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 oh yeah,

• 1:18:20Speaker 1

  there's like echelon out there. It's

• 1:18:22Speaker 0

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

• 1:18:51Speaker 1

  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?

• 1:19:06Speaker 0

  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. Uh I think it's pretty broad. I think the bike is kind is the first and best instantiation of it. Interestingly, fully and uh 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 thing, I think, than stationary bikes.

• 1:19:53Speaker 1

  Well, they also sell the treadmill for a lot more money. That's true too. It's interesting, right? Like the running market, it's different though. Like The I'm sort of halfway in between on this. I agree with you. I 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 I think the strength stuff is pretty good, but I can't imagine buying a treadmill or using uh a connected fitness for running. 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.

• 1:20:31Speaker 0

  Yeah. I mean, it says a lot that like ultimately all connected fitness is a digital uh facsimile 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 uh that is not the sweeping well, part of it is like what a 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.

• 1:21:10Speaker 1

  Yep. Yep.

• 1:21:11Speaker 0

  So to maybe maybe to like super simplify your question, uh 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. I I agree with that.

• 1:21:30Speaker 1

  Um 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.

• 1:21:46Speaker 0

  And you have a bias there. Like, I I'm the exact same type of runner, but you know, uh the hardcore cyclists would say the same thing. They're like a spin class, wouldn't but the beauty of cycling is that you know Right, right, right. And then the beauty of spin classes, like these are two different products. Yes. Anyway,

• 1:22:03Speaker 1

  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. Aaron Powell

• 1:22:12Speaker 0

  And we should say by by September of 2020, it's basically impossible to get one of these, the 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. Uh they certainly don't make any of 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.

• 1:22:43Speaker 1

  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 your 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 ninety-five. The original bike, remember, had been 2245.

• 1:23:09Speaker 0

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

• 1:23:14Speaker 1

  So they lower the price of the original bike to 1895. 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 2495 when you're selling treadmills for three four thousand plus? Clearly, there's like appetite for your core segment to buy expensive products here, and they're not that price sensitive. 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 gonna buy a bike plus. And I didn't even really think about pricing or how much it was relative to the bike.

• 1:24:00Speaker 1

  It arrived, and I gotta say, like, this is only my experience. It was a super crappy product. The bike plus. 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

• 1:24:28Speaker 0

  like a negative for me, you know. 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 would drive me up a wall. Aaron Powell

• 1:24:41Speaker 1

  That was I was gonna get to that last, but yeah, a few other things like the um 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. Um just a whole bunch of like really weird little things like that.

• 1:25:03Speaker 0

  The main gimmicky feature is you can flip the screen out sideways so you can do these boot camp rides where you're on the floor for part of it, you're on the bike for part of it. Do you ever try that?

• 1:25:11Speaker 1

  Yeah, A, I don't use that that much. Usually when I'm doing strength, I'm doing strength, and when I'm doing the bike, I'm 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 where I was like, this is a worse experience because they have a higher a bigger screen, but they're using the same 1080p crappy video on it, and it looks way worse. It's just like it's 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.

• 1:25:56Speaker 0

  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.

• 1:26:06Speaker 1

  People are probably like this is irrelevant. But no, I think this is illustration. 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 tr they roll a truck to do the delivery for me as a customer for the bike plus. Which is crazy expensive. Crazy expensive, right? But they're selling. And like they

• 1:26:27Speaker 0

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

• 1:26:31Speaker 1

  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, etc. Uh customer service call. Uh I use the bike plus for a loan 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 14.95. So I had just I had spent 2495. They've rolled a truck twice already. Now I just spent a thousand dollars less. I got the bike.

• 1:27:16Speaker 1

  They rolled a truck. There were some problems with the pedal. They rolled a truck to do another customer service for me. So four truck rolls, a purchase, a return, a restocking, mailing me new cleats.

• 1:27:29Speaker 0

  Wow, they're probably not profitable on you until like maybe year three as a subscriber. Absolutely. Like it's uh brutal. And I can't imagine that my experience is wholly unique here. I wonder. I've yeah, we only had the person come out once and it all thankfully worked worked really well. So

• 1:27:47Speaker 1

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

• 1:27:52Speaker 0

  on

• 1:27:52Speaker 3

  me now?

• 1:27:53Speaker 0

  Right.

• 1:27:53Speaker 1

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

• 1:28:00Speaker 0

  Aaron Powell 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 uh because I think that made their business really not resilient, all the the things that they did there. Uh 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 no they need to do both of those things in the longer term.

• 1:28:50Speaker 1

  Yeah, the bike plus was a product that needed more work before shipping. Uh 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 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

• 1:29:14Speaker 3

  don't they use

• 1:29:16Speaker 1

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

• 1:29:24Speaker 0

  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. That could be.

• 1:29:32Speaker 1

  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 precore for 420 million dollars in cash.

• 1:29:50Speaker 0

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

• 1:29:58Speaker 1

  That's right.

• 1:29:59Speaker 0

  And uh Windmill, right? 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 uh the the rare asset that they have on kit on hand there, the cash uh and primarily bought pre-core for their uh manufacturing prowess to have some, you know, uh US-based manufacturing to alleviate the supply chain stuff and to just have in-house capacity because at some point maybe they want to to take this fully in-house. Uh a secondary benefit that comes with it is pre-cor 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 Pelotons in there and eventually maybe merge these two product lines.

• 1:30:46Speaker 0

  But for now, they're running it as a totally separate independent business unit and um starting to do some work leveraging pre-core's uh manufacturing to hopefully start manufacturing some some Peloton bikes. Right. That

• 1:30:59Speaker 1

  feels like kind of a uh I want to say pipe dream, either a pipe dream or a very, very far out investment. The idea that you would retool pre-core's manufacturing to manufacture bikes. The commercial relationships, that that makes a little more sense to me. But um still it was a little puzzling at the time. Then they announce in uh spring of 2021 that they are going to build the Peloton output park to in-source their own manufacturing in

• 1:31:29Speaker 0

  Ohio. So this is now both both of my homes they're uh trying to manufacture in. That's right. That's right. We'll come back to that in a bit. But that's another 400 million that they announced their breaking ground on.

• 1:31:41Speaker 1

  Yep. Again, cash outlays. Uh, and uh and then in in the spring of 2021, there's treadmill recall and some of the tragic accidents uh around um you know, with the treadmill, the company doesn't handle that super well. First, they sort of say, oh, you people aren't using it right. It's like, well, kids are like dying and getting hurt here. Like that doesn't matter. Um stock drops 15% around that. They

• 1:32:08Speaker 0

  find me a culpa and say, you know what, we are gonna play ball with the investigation. We feel super bad that we mishandled this originally. And then

• 1:32:17Speaker 1

  November of 2021, last fall, they miss earnings, they cut their outlook, and the stock gets

• 1:32:25Speaker 3

  hammered

• 1:32:26Speaker 1

  down 32% in one day with uh earnings announcement. Uh they have some more holiday season uh media commercial uh uh this is also probably good with the the new sex in the city where Mr. Big dies on a Peloton.

• 1:32:42Speaker 0

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

• 1:32:45Speaker 1

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

• 1:32:51Speaker 0

  I mean, yeah, but it's indicative of uh the I think when something like that happens,

• 1:33:00Speaker 3

  the

• 1:33:00Speaker 0

  so someone died on Sex in the City and uh 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 uh a lot. That says way more

• 1:33:28Speaker 1

  than the Sex in 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.

• 1:33:57Speaker 0

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

• 1:34:02Speaker 1

  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.

• 1:34:18Speaker 0

  There's a lot of things to applaud the management team about and John Foley and the doggedness and the entrepreneurism and the in 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 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. 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.

• 1:35:09Speaker 0

  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.

• 1:35:28Speaker 1

  Totally flat out wrong. And we'll uh well, we'll wrap up the few last points to bring us to to literally today, present day. But uh 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.

• 1:36:00Speaker 0

  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 dollars into manufacturing capacity between pre-corps, which has its own business, so it's justifiable, um, assuming they paid a reasonable price for it, and of course the 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 it over the next year to about 9,000 before these recent layoffs. Now, this is a very complex business, but like 9,000 employees, and that's just corporate,

• 1:36:48Speaker 1

  right? No, that's that's everyone. Oh, that's everyone. Okay.

• 1:36:51Speaker 0

  Yeah. Yeah. And the layoffs, of course, were 2800 people across the whole business, and I think about 20% of the corporate staff. But they were really, really investing, uh and very certain this demand was there.

• 1:37:05Speaker 1

  Yep. So after that news on January 20th, a couple weeks later, an activist investor called Blackwell's 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 publish a deck calling for fully to resign and for the company to initiate a strategic sale process. Uh 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.

• 1:37:53Speaker 1

  They cancel the plans to build the manufacturing facility in Ohio. They lay off 2800 people. And Barry McCarthy is riding in as the new CEO.

• 1:38:04Speaker 0

  And the way they sort of message this is that John Foley is stepping down as CEO, which is the Or at least that's what people hear. 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. Uh they no longer have day-to-day responsibility running the company. Uh however, I believe they still are a compensated employee. They still draw a salary. They're still like a an employee of the company in addition to being um uh just a board member.

• 1:38:53Speaker 0

  So they share both this sort of like director level and um pseudo-operational. It's more like they're working with the current CEO uh 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 uh 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 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 structures put in place for founder-led companies.

• 1:39:41Speaker 0

  Uh, and here's a quote from Matt Levine at Bloomberg. Peloton has a dual-class structure uh 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%.

• 1:40:05Speaker 1

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

• 1:40:10Speaker 0

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

• 1:40:39Speaker 1

  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. Totally agree. And the memo that he writes to staff, which we've already read some from some of Bit 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? It's a great leader. Yeah. Oh, what a leader. So he writes, I know today's restructuring news has been difficult. There's no sugar coating 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.

• 1:41:24Speaker 1

  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 you read the the great the great part about the the comeback story uh after that. You know, and then he closes it. 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

• 1:42:05Speaker 3

  do.

• 1:42:06Speaker 0

  And

• 1:42:06Speaker 3

  that will require

• 1:42:08Speaker 1

  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.

• 1:42:18Speaker 0

  Of course, this is after he opens by talking about how much he loves riding with Matt Wilbers. It is great that he just wins the whole m. Yes, the whole memo is up uh 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 Wilbers. 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 well, Barry

• 1:42:42Speaker 1

  has no social media

• 1:42:43Speaker 0

  presence. He's

• 1:42:44Speaker 1

  basically not

• 1:42:44Speaker 0

  on

• 1:42:45Speaker 1

  the internet.

• 1:42:45Speaker 0

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

• 1:42:50Speaker 1

  Probably not before yesterday at the earliest. It's wild. I wonder what the instructors think of all this. Because 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.

• 1:43:05Speaker 0

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

• 1:43:08Speaker 1

  Robin Arzon and Alex Tucson.

• 1:43:11Speaker 0

  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 subscription noon deals or Under Armour deals, or uh uh even though they're making 500 to a million from Peloton in salary or whatever their contract is, I bet they're making a lot more from their other engagements.

• 1:43:36Speaker 1

  Oh, yeah, they're like professional athletes, like the 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 uh never underestimate acquired.

• 1:43:51Speaker 0

  We're also incapable of just going on air unprepared. So of course, you and I like uh 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? No, I didn't get that. That's awesome. All right, so I'll pull that one out, even though we skipped over it. Uh so John Pleasants, uh, who got a b a big job at Disney, uh, got uh convinced Foley to come on a Disney cruise with him. And so they're on this Disney cruise and foley rolls out a couple of spin bikes and stood there like for the first like 10 minutes of the ride, like coaching John Pleasants. Being what to do yeah, like and being like, okay, imagine there's a screen here, and like, you know,

• 1:44:38Speaker 1

  that really giving him and then Pleasants becomes one of the first angel investors in that 400k round, right?

• 1:44:44Speaker 0

  So it's like a pretty cool there 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.

• 1:45:11Speaker 1

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

• 1:45:13Speaker 0

  I'm wearing a Peloton hat because I referred you and they sent me a hundred dollars of free credit to buy uh 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. Uh yeah. Even if they sell, I 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 soul cycle like shirt and stuff now, because I just haven't been in two years, but the the Peloton stuff maybe it says a lot about me, but happy to wear it. Uh 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, uh, because we're recording early in the morning and I missed my morning ride this morning.

• 1:46:06Speaker 0

  Uh another huge component is uh say what you want about growth right now, but how could how could they possibly be worth less than they were worth before COVID? The they they grew membership from 700,000 to nearly three million. And it's not like they're just selling bikes

• 1:46:22Speaker 1

  here. This isn't one time. They just added all that subscription revenue with an incredibly low churn rate and high NPS.

• 1:46:27Speaker 0

  Yep, totally agree. They invented the connected fitness category, and they're still the largest player in it. Uh 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, that there is some amount of lock-in that comes from that. Uh the biggest thing we talked about is um this insanely low churn rate. And to date, the fact that, you know, they selected for customers that aren't going to turn. 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 gonna have customers that are more more sensitive to price all around, and so we're gonna turn um more often than your initial cohort. Even still, the the churn has gone up, but it I think it's gone from like

• 1:47:16Speaker 1

  I'm gonna get the numbers wrong, but it was at like 0.6% per month to like 0.8% per month. So

• 1:47:22Speaker 0

  like it's still good. 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 uh some information in their S1 where at the time Peloton was the largest customer or the largest source of revenue to a firm. Now a firm has grown a lot and diversified, uh, but I took up the I 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 zero percent deal. So 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 money while uh you know you can keep the float?

• 1:48:08Speaker 0

  And I was like, sure, I'll do that deal. That sounds like I know how the insurance business works. All day I will do that deal. And uh it's funny that 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. And that's the

• 1:48:27Speaker 1

  most Ben Gilbert thing that is possible. I love it.

• 1:48:32Speaker 0

  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 zero percent, or why was a firm willing to offer zero percent? 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 zero percent 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.

• 1:49:11Speaker 1

  Wow. Which

• 1:49:12Speaker 0

  if I'm doing the math right based on what their revenue numbers were at the time, that is 150 million dollars a year that Peloton was paying to a firm to offer this zero percent percent 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.

• 1:49:45Speaker 1

  Wow, that's that's huge. And and the whole, you know, we we uh we're about to release a great LP show episode with Christina Melas Curiazi, who uh just joined Bane Capital Ventures, it's been a long time friend of mine, but was an early. Employee at a firm, and we talk about with her about the whole buy now pay later space and that that's the key, you know, 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 uh 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. Well,

• 1:50:26Speaker 0

  the bear case to make out of that is like that 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 not really working.

• 1:50:49Speaker 1

  So then I think unless you have more. I think the last bull case, which I think really is a valid bullcase, is like, hey, you know, uh, I don't like to put faith in single people uh 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 been just bad product and marketing decisions uh over the past year. I mean, almost that that is not a controversial statement at all. There have a hundred percent been bad product and marketing.

• 1:51:20Speaker 0

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

• 1:51:25Speaker 1

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

• 1:51:31Speaker 0

  Yes, for sure. I mean, Barry's not gonna be the product person by any by any means, but uh, 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. Yep. Yep, yep.

• 1:52:00Speaker 1

  And the market the market liked the dudes. Peloton was up 25% yesterday.

• 1:52:05Speaker 0

  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. Um, but I suppose at the uh uh trading down where it is, that makes it a bull case to want to invest uh if uh if you feel like that person can sort of turn it around. Yep. 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 you 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.

• 1:53:02Speaker 0

  Uh and and you know, maybe Barry can be the Tim Cook of Peloton. Yeah. That's actually a great

• 1:53:08Speaker 1

  analogy. Um I certainly think he's capable. And I and I think the business is capable, you know, we it probably will never be an Apple, right? But I think it's capable of performing better than it is

• 1:53:19Speaker 0

  now. Aaron Powell Okay, more more bare narratives. Uh 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 three million uh at the end of the year rather than three and a half. They have piled up 1.3 billion dollars worth of bikes and treadmills, and it's just it's it's not good to hold it on the books. Um another interesting narrative that I haven't seen as much around Peloton specifically, but seems to be a fairly widely held uh belief, is that in the last 10 plus years, there has not been a breakout consumer hardware piece of technology that is that survives as a standalone company.

• 1:54:11Speaker 0

  And you look back at Fitbit and GoPro and Jambox, uh I I even want to call out this one's gonna be a serious callback, but flip video. Oh, yeah. Some of these companies that kind of invented a new category and they built, you know, real, they they imbued it with meaning and they pioneered it on, you know, technology that was hardware that was just now available. Uh 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.

• 1:54:56Speaker 0

  Flip video sold to Cisco in a very strange MA, uh, GoPro, still an independent company, but certainly not the high flyer it was when it first IPO'd Fitbit, you know, couldn't really survive Apple coming into their market and uh and ultimately landed at Google. Uh I think there's probably a case, a similar story around Nest, again, a little bit weird and some bungled MA. 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.

• 1:55:38Speaker 1

  I I thought about bringing this up earlier in the episode, and 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.

• 1:55:53Speaker 0

  I was I thought you were gonna go there. Yeah. And um lots of different dynamics

• 1:55:58Speaker 1

  there. But you know, if you just look at what Tesla has done with a in many ways a very uh resonant uh strategist, uh a similar, you know, harmonizing strategy with Peloton of like start with the high, you know, the the Elon master plan, right? Um and then how they've adapted that over the past several years, you know, it was not that long uh 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 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?

• 1:56:50Speaker 1

  Like you're competing with BMW now. Uh you're not going all the way down to like Toyota. Um, you know, the autopilot launch, like just the Tesla has executed incredibly well and incredibly strategically through again, different but resonant market dynamics. Aaron Powell

• 1:57:09Speaker 0

  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 it with a lowercase M, not accusing them of doing something that has legal implications. And they all to that point they had their near-death moments too. Totally. But Peloton has been exactly the opposite uh at manipulating financial markets for their own favor. I mean, they they had a massive stock run-up and then did a 420 million dollar 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. Yep. 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 dollars 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 their point in doing that is both to accuse him of insider y things, uh doing things that are against sort of company policy, but they're also trying to drive home the point that um the incentives are now misaligned because he's taken a lot off the table, he's now a very wealthy person in cash.

• 1:58:28Speaker 0

  Uh 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 dollars. So I don't care if you have 96 million dollars, the potential of turning that 500 million into one, two, three billion, that's motivating.

• 1:58:48Speaker 1

  So come on. And also like it's hard to, you know, look, he uh 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 um uh you know, before starting, he wasn't a Raman founder, but he wasn't, you know, the he didn't have 96 million dollars. Let's put it that way. So I can't begrudge him that.

• 1:59:17Speaker 0

  Despite being of the Harvard Business School network and having worked at IAC and you know, been close with a lot of uh, you know, CEOs and executives that really only manifested in him being able to raise a couple 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 uh, you know, I 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.

• 2:00:00Speaker 1

  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 uh uh anyway.

• 2:00:17Speaker 0

  Okay, power. Uh branding. Yes. I mean other stuff too, but like did I pay $2,000, 2300 for a bike because it was Peloton bike that otherwise I would have paid maximum, I don't know, a thousand dollars for. Yes. Yes, I did. It's

• 2:00:35Speaker 1

  interesting, right? Yes. Definite brand power, yes, that is correct. But I do think I did a lot of research, and I seriously consider doing a hack a Peloton. I kind of enjoy doing stuff like that, you know. Um to get the same quality of bike, you really yes, you can do it cheaper with a hack of Peloton, but not that much cheaper. Like they um uh it really is a like it's a very high quality bike relative to the price. So, but yes, agree on brand. Um I definitely to me one that stands out, and I think one that attracted uh Barry is is scale economies here. Like, you know, the amount that Peloton can invest, even with the music uh 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 uh relative to a soul cycle to a flywheel to anything else.

• 2:01:29Speaker 1

  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.

• 2:01:47Speaker 0

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

• 2:01:53Speaker 1

  Yep. I think Alex Tucson started with Flywheel, I believe. I could see

• 2:01:57Speaker 0

  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 gonna 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 that I can get for working out.

• 2:02:33Speaker 1

  Yep. Certainly the library of content. And and you know, it's interesting with I'm curious if we your feeling is on this as a from a user perspective. Um it is valuable to me that my favorite instructors, mostly just Alex. He's so awesome. Uh is constant are constantly adding new content and stuff like the ride to greatness is all we'll get into that more later later. Um 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. Um, and that's quite valuable to me too. And so even if we switch 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.

• 2:03:27Speaker 0

  By the way, there is someone who switched to another platform or at least left. I can't their name's escaping me. I I looked into this a couple years ago, and I think Peloton pulled all their content down, which was an interesting move because it it's basically saying we don't want to continue to build your brand for free to compete against us. Right, 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.

• 2:03:52Speaker 1

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

• 2:03:58Speaker 0

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

• 2:04:05Speaker 1

  Totally.

• 2:04:06Speaker 0

  Okay. I think those are the big ones. Those are the big ones. So a few interesting little what would have happened otherwise to go to a old acquired standby section. Uh so what if they actually had pursued a deal with SoulCycle? And I'm gonna 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. Uh Soul Cycle has not had a very good last couple years. And first there was the Trump fundraiser, and then there was the like failed go public of the Soul Cycled Equinox um fitness conglomerate, and then I think I mean I I'm not a doctor, so this is the uh or an epidemiologist, but this is not investment advice and also not healthcare advice.

• 2:04:54Speaker 0

  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. But they have candles in there. That that helps. I was trying to think like where is the single last place on earth that I want to be during the during the pandemic, and it's s at a soul cycle studio, even though I used to do that a lot before I got my Peloton. And um, and frankly, probably never will again. I can't imagine going back to that behavior uh for even for non-COVID diseases. It's like just if you want to stay healthy.

• 2:05:33Speaker 1

  I would only consider it in like you and I when when we would get together, we used to do a soul cycle. 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, yeah, day-to-day basis.

• 2:05:47Speaker 0

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

• 2:06:16Speaker 1

  It's interesting. I I 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.

• 2:06:25Speaker 0

  Put you know, putting cameras in, building a little Soul Cycle studio. There would have been

• 2:06:31Speaker 1

  too

• 2:06:31Speaker 0

  many um

• 2:06:32Speaker 1

  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 Soul Cycle 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.

• 2:06:58Speaker 0

  Every class kind of prints money, so if you're running one of those local studios, you're

• 2:07:02Speaker 1

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

• 2:07:11Speaker 0

  Oh, the Peloton rides are so produced. I 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 Soul Cycle, you know, places into TV studios.

• 2:07:35Speaker 2

  Yep.

• 2:07:36Speaker 1

  And so if you're like making the decision as Soul Cycle, like I'm gonna take our best content and instructors, dedicate them to that for this thing that I revenue split with. Yeah. I don't know.

• 2:07:49Speaker 0

  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 could they have done that would have enabled them to come out really strong?

• 2:07:59Speaker 1

  You know, it's easy here to sit here and say, like the pre-core 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. Um I've talked everyone's ear off about my feelings on the product and pricing decisions. At the same time, I think we gotta 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 was up and to the right. Like it's a rare, rare, rare leader and company that I think can stay disciplined through what was probably like one of the biggest boons for any company and of all time.

• 2:08:56Speaker 0

  Yep. On the other hand, other companies, I 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. Uh whereas Peloton saw a spike and then a decline.

• 2:09:19Speaker 1

  Yep.

• 2:09:20Speaker 0

  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 GoGo 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 monster. Whereas Peloton is deeply unprofitable on a you know full bottom line, uh, still raising billions from the public market with new stock issuances. They seemed convinced that this demands. Spike would last forever with these acquisitions and expensive investments.

• 2:10:08Speaker 0

  And 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 being in a business that just requires a lot more moving pieces, a lot more atoms. And that's just really hard.

• 2:10:29Speaker 1

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

• 2:10:44Speaker 0

  is it's it's different here. All right. Well, before we grade this one and bring it home, this one will be fun to grade, paint the A and the C and maybe the F scenarios for our friend Barry. Uh, I think we should talk about our final sponsor, the SoftBank Latin America Fund, which is a wonderful fund by good friends of ours at this point. So SoftBank created this fund with a simple thesis that the region was overflowing with innovative founders and great opportunities, as you know, but was always short on the one essential ingredient of capital. And so, as you've heard from Shu and Paolo, leaders of the SoftBank Latin fund on previous episodes. One of the big lessons that they learned while deploying eight billion dollars into 70 plus companies is that technology in Latin is less about disruption, the way that we tend to think about it, and and more about inclusion, because the vast majority of the population is underserved in almost every category from banking to transportation to e-commerce.

• 2:11:48Speaker 0

  Uh most businesses also aren't really served by modern software solutions. So there's just so much to build for so many people and so many businesses in Latin America. Uh, and we wanted to uh tell you about another one today, another example called OLIST, a leading Brazil-based sales platform. So OLIS provides technology and market intelligence to increase revenue for merchants, founded in 2015. They are a one-stop shop for helping merchants get online and capture opportunity in Brazil's fast-growing e-commerce market. They offer catalog services, market intelligence, operational tools, buyer support, logistics services, and more. And this is just one great example of how SoftBank is partnering with great founders with the capital they need and the experience that they have to build and shape the future of Latin America now.

• 2:12:41Speaker 0

  So if you're thinking about your next move in your career and maybe you want to start or join a company in Latin America, maybe you want to coinvest along with Soft Bank. Uh there really is no one better to go and bet on the region alongside. So to learn more, click the link in the show notes or go to Latin America Fund.com.

• 2:13:02Speaker 1

  They're the best. We are such huge fans. And as you say, friends at this point. They really are. They're great folks, Palo and Shu and the whole team there.

• 2:13:10Speaker 0

  Yep. 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 those outcomes are.

• 2:13:28Speaker 1

  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. It sells for

• 2:13:43Speaker 0

  parts.

• 2:13:44Speaker 1

  It all, yeah. Right.

• 2:13:45Speaker 0

  I don't think that's likely. But anyway, that's that's I think a C is it's selling in the next six months.

• 2:13:52Speaker 1

  Six to twelve months, I agree.

• 2:13:54Speaker 0

  For eight to ten billion dollars.

• 2:13:56Speaker 1

  Yep. Yep. Or even twenty billion dollars selling within the next year for a nice short-term shareholder return. I think that's a

• 2:14:04Speaker 0

  C.

• 2:14:05Speaker 1

  I

• 2:14:05Speaker 0

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

• 2:14:11Speaker 1

  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 uh 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.

• 2:14:30Speaker 0

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

• 2:14:34Speaker 1

  Yeah, totally. Uh, we are such huge fans of yours. Um but I don't think he would have taken this just to package it up for a sale in six to twelve months. Like, why would he do

• 2:14:46Speaker 0

  that? Yeah, agree. I will say I don't think this is a independent enduring company at this point. I think it's gonna 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 uh you can have sort of tight financial controls where it's run like a good company um and and some smart and make make smarter investments. But I have a hard time knowing how they're gonna grow 50% year over year at any time in the future. Like w where are they gonna go find more demand or where are they gonna really meaningfully alter their product lines to go find more demand? I mean, that that's the A plus. Like, that's the A is if they can figure out how to stay a an independent company and become a big profitable independent company and meaningfully find demand in concentric circles outside their current customer base.

• 2:15:45Speaker 0

  That's that's it. That's the dream. So, right, yes, that's

• 2:15:48Speaker 1

  the A plus. That's the dream for sure. Let's think about that. They have what, a little under three million subscribers

• 2:15:56Speaker 0

  currently. Something like that. That's actually not that many people,

• 2:15:59Speaker 1

  right? Like

• 2:16:00Speaker 0

  it is not, especially in several countries.

• 2:16:04Speaker 1

  Think about across the world, you know, even let's assume I don't know. I don't know the numbers. Let's assume two-thirds of that is the US and one third elsewhere. That may be generous, but like let's just use that as a swag. So that's two million US subscribers out of a nation of 330 million people. They're probably a lot more than two 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. Um, Apple is investing in a similar strategy to the digital fitness app. And I think for $12.99 a month for super high quality class, like this is the Netflix model, right?

• 2:16:52Speaker 1

  For the best content out there with the best instructors for $12.99 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. Uh maybe call those 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. Um then you layer on 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 dollar market cap.

• 2:17:35Speaker 0

  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.

• 2:17:53Speaker 1

  Uh well, we'll revisit with Barry in a couple of years. We will. How about that? They're a good deal.

• 2:17:58Speaker 0

  We're shaking hands on it. You and I are, yes, over uh video chat here. Uh Carveut.

• 2:18:06Speaker 1

  Carve outs. Uh, so related carve out, as I said at the top of the 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 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 they did Spotify, and I'm sure he will bring to Peloton of uh how to how to plan and build your organization to be resilient and robust for the future, and uh his four to five year strategy exercise.

• 2:19:01Speaker 1

  I won't spoil too much of it, but um it's very good and worth watching uh and and listening to that.

• 2:19:08Speaker 0

  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 an awesome episode called the James Bond spy craft theme, spy craft 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 as 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 out these different elements of that very mysterious chord at the end of the bond theme and uh and how that's That gets used through the decades and all the different um all the different movie themes.

• 2:20:06Speaker 0

  So highly recommend that song. Super fun. It's my car out. I

• 2:20:09Speaker 1

  went and listened to that episode after you we were texting about it, and it's so good. The whole show is so good. But uh

• 2:20:16Speaker 0

  oh yeah,

• 2:20:17Speaker 1

  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

• 2:20:25Speaker 0

  is so good.

• 2:20:27Speaker 1

  Oh man.

• 2:20:28Speaker 0

  Yeah, it is.

• 2:20:29Speaker 1

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

• 2:20:33Speaker 0

  Yes. 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 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 uh too. Tonight's warm

• 2:20:57Speaker 1

  cup of tea.

• 2:20:58Speaker 0

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

• 2:21:44Speaker 3

  Who got the truth? Is it you, is it you, is it you who got the truth now?