Peloton

In this episode of "Acquired," hosts Ben Gilbert and David Rosenthal, along with angel investor David Rosenthal, dissect the rise and challenges of Peloton, the technology-driven fitness company. They explore Peloton's journey from a scrappy startup struggling to raise funds to a household name in connected fitness, boasting an NPS of around 90 and a subscriber base that grew from 700,000 to nearly 3 million during the pandemic. Despite the company's success in creating a beloved brand and pioneering the connected fitness category, Peloton faced significant hurdles, including a 32% stock drop after missed earnings, a $1.3 billion inventory glut, and the recent layoff of 2,800 employees. The episode culminates with the announcement of Barry McCarthy replacing John Foley as CEO, with Foley retaining significant control as executive chairman. The hosts debate Peloton's future, questioning whether it can continue to grow and remain an independent company or if it will be acquired, comparing its trajectory to other consumer hardware companies and acknowledging the potential impact of McCarthy's leadership.

• Ben Gilbert introduces himself as the co-founder and managing director of Pioneer Square Labs and PSL Ventures.
• David Rosenthal identifies as an angel investor based in San Francisco.
• Both hosts express their personal connection to Peloton as customers and their anticipation for discussing the company.

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

The quotes establish the professional credentials and personal interest of the hosts in Peloton, setting the stage for an informed discussion.

• The hosts had considered doing a Peloton episode during various milestones but waited for the right moment.
• They decided to cover Peloton following significant company news and a leadership change.
• Ben and David became Peloton customers and were influenced by the pandemic and listener requests.

"We have been waiting to do a Peloton episode for a long time, just searching for that right moment."

This quote highlights the deliberate choice by the hosts to wait for a pivotal moment in Peloton's history to discuss the company, emphasizing the importance of timing in their content creation.

• Barry McCarthy's involvement with Peloton prompted an "emergency pod."
• McCarthy's reputation as a transformative leader is acknowledged.
• The hosts discuss John Foley's technical step-down as CEO but emphasize his continued involvement with Peloton.

"Anytime Barry McCarthy gets involved. We were texting. Ben texted me the news, and I was like, that's it. We got to do it. Emergency pod."

The quote illustrates the significance of Barry McCarthy joining Peloton and the urgency it created for the podcast hosts to discuss the implications.

• The episode was recorded on February 9, acknowledging the news of Peloton's changes broke the previous day.
• Barry McCarthy's first day as CEO of Peloton was on the recording date.
• McCarthy's vision for Peloton's future is shared, emphasizing the potential for a comeback story.

"Today, February 9, was Barry McCarthy's first day in the CEO seat. And I think he frames this better than we ever could have. In his email to the company this morning, he wrote, and now that the reset button has been pushed, the challenge ahead of us is this. Do we squander the opportunity in front of us, or do we engineer the great comeback story of the post-Covid era?"

The quote conveys McCarthy's forward-looking mindset and the notion of a "reset button" for Peloton, indicating a significant strategic pivot for the company.

• The hosts introduce Pilot as a sponsor, emphasizing its growth and value proposition for startups.
• They discuss the concept of focusing on core business strengths and outsourcing non-core activities like accounting.
• The relevance of Pilot's services to the startup ecosystem is highlighted.

"And speaking of Bezos, we talk all the time on acquired of Jeff's AWS inspired axiom that startups should focus on what makes their beer taste better."

This quote underscores the strategic business advice to concentrate on unique value offerings, using Jeff Bezos' axiom as a guiding principle.

• The hosts acknowledge the layoffs at Peloton, expressing sympathy for affected employees.
• They draw parallels between the layoffs and similar challenges faced by other companies.
• The discussion transitions to Barry McCarthy's experience with difficult company moments, such as Netflix's restructuring.

"We do want to acknowledge that a big part of the news yesterday and the restructuring is that Peloton laid off 2800 people, including 20% of their corporate office."

The quote recognizes the human impact of corporate restructuring, setting a somber tone for the discussion of Peloton's business challenges.

• Barry McCarthy's career trajectory is explored, from being fired as CFO of Music Choice to joining Netflix and contributing to its subscription model.
• McCarthy's operational expertise and strategic finance skills are emphasized.
• His retirement from Netflix and subsequent roles at Spotify and TCV are detailed.

"You don't leave your friends in the middle of a knife fight."

This quote from McCarthy highlights his commitment to seeing through difficult situations, which is relevant to his new role at Peloton.

• The hosts discuss Peloton's founding by John Foley and its relation to the rise of boutique fitness brands like Soulcycle and Flywheel.
• The innovative aspects of Peloton's model, including democratization, scalability, and on-demand access, are highlighted.
• John Foley's previous role at Barnes & Noble's Nook business is mentioned, potentially influencing his approach to content at Peloton.

"The original vision actually was a connect your own iPad vision. They did not want to unify it but sort of learned over time that we really do need to unify it to control more of the experience."

The quote sheds light on Peloton's initial strategy and its evolution to a more integrated content and hardware approach.

• Peloton initially attempted to partner with established fitness companies like Soulcycle and Flywheel.
• Soulcycle gave Peloton the cold shoulder, while Flywheel showed interest.
• Flywheel and Peloton reached the term sheet stage to create a joint product with content and go-to-market strategies.
• The deal with Flywheel fell through, leading Peloton to pivot towards creating its own content.
• The failed partnership forced Peloton into a vertically integrated strategy.

"But flywheel, they actually got to terms on what would it look like to make this thing not only content partner, but I think also like a go to market partner."

The quote explains that Peloton and Flywheel were close to finalizing a deal that would have included both content and distribution partnership, which was a key element in Peloton's initial market strategy.

• John Foley, before Peloton, worked at Interactive Corp (IAC) under Barry Diller.
• IAC was a tech media conglomerate, and Foley was involved in various projects, including citysearch and pronto.com.
• Foley managed the post-bubble evite team, growing its revenue significantly.
• His experience at IAC and with evite provided him with skills in managing and scaling smaller teams within larger tech environments.

"Like, oh, my God, the original tech media conglomerate."

This quote highlights Foley's deep involvement in the tech media industry through his work at IAC, which was a significant conglomerate in the sector.

• John Foley faced significant challenges in fundraising for Peloton.
• Venture capitalists repeatedly passed on investing in Peloton.
• Foley raised initial funds from friends and family at a $2 million post-money valuation.
• Peloton's valuation journey from the initial $2 million to a peak of $49 billion showcases its growth trajectory.
• The company used Kickstarter as part of its fundraising strategy, but the campaign was not very successful.

"He ends up raising $400,000 to start from friends and family at a $2 million post money valuation."

This quote illustrates the challenging beginnings of Peloton's fundraising efforts, where Foley had to rely on personal connections to secure initial capital.

• Peloton's initial sales strategy involved setting up mall stores, a contrarian move compared to typical tech startups.
• The in-mall stores provided potential customers with the opportunity to experience Peloton firsthand, which was crucial for high-ticket items like Peloton's bike.
• Peloton's pricing strategy involved raising the price of the bike to signal higher value and quality, which helped boost sales.
• The company targeted affluent customers with low price sensitivity, leading to low churn rates and high customer stickiness.

"They make the, especially at that point in time, completely orthogonal decision to 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."

This quote captures Peloton's unconventional decision to sell their product through physical mall stores, which was a key part of their sales strategy and contributed to their success.

• Peloton's use of music in its classes required multiple types of licenses, including live performance and sync licenses.
• Music licensing fees are a significant cost for Peloton, affecting its gross margins.
• Peloton pays out a substantial amount per song played during rides, which could account for a large portion of the subscription revenue.

"According to a piece from Tricordist, which is a music industry site, Peloton pays out 3.1 cents every time that you are on a ride and hear a song."

This quote highlights the financial impact of music licensing on Peloton's business model, indicating that the cost of music is a considerable expense for the company.

• Peloton experienced rapid revenue growth, reaching $60 million in 2015 and $170 million in 2016.
• The company attracted institutional funding, with Tiger Global leading a significant investment round.
• Peloton's growth and successful funding rounds demonstrated its market potential and the venture capital community's eventual recognition of its value.

"Tiger would go on to become the largest shareholder at IPO, owning just under 20% of the business."

The quote emphasizes the strategic importance of Tiger Global's investment in Peloton, which became a considerable stakeholder by the time of the IPO.

• Peloton went public in September 2019, with an initial valuation of around $8 billion.
• The company's IPO was affected by market conditions, including the WeWork debacle, and the stock traded down initially.
• Peloton's customer acquisition cost (CAC) and lifetime value (LTV) metrics were favorable, suggesting a robust business model with significant profit potential from long-term subscriptions.

"So $60 million in revenue in 2015, 2016, they do $170,000,000 in revenue."

This quote shows the rapid growth in Peloton's revenue in the early years, indicating the company's quickly expanding market presence and the success of its business model.

• The 2019 Peloton wife commercial sparked controversy but also significantly raised brand awareness.
• Ryan Reynolds capitalized on the situation with a clever marketing response involving his Aviation Gin brand.
• The controversy surrounding the commercial highlighted the increasing intensity of public reactions to advertising.
• Despite the controversy, the incident may have been beneficial for Peloton by making it a trending topic in popular culture.
• The pandemic provided Peloton with perfect product-market fit, but subsequent trending topics were less favorable for the brand.

"And thus we end up with the holiday 2019 Peloton wife commercial, which kind of is a funny story. Does it end up being bad for Peloton or is this just good marketing in the end?" "Oh my God. The aviation gin thing that came out the next week is just genius."

These quotes discuss the impact of the Peloton wife commercial and Ryan Reynolds' subsequent Aviation Gin commercial. The speakers suggest that while the initial ad was controversial, the overall effect was increased visibility and engagement for Peloton, exemplifying the adage "all publicity is good publicity."

• Statsig is a feature management and experimentation platform for product teams.
• Vijay Balasubramaniyan, CEO of Statsig, previously led mobile app ad product development at Facebook.
• Statsig enables product teams to ship features faster, automate A/B testing, and measure the impact of features on core business metrics.
• The platform is used by companies such as Notion, Brex, OpenAI, Flipkart, Figma, Microsoft, and Cruise Automation.
• Statsig also supports AI feature rollouts and integrates with company data warehouses.

"So now Statsig is the modern version of that promise and available to all companies building great products."

This quote explains the purpose and capabilities of Statsig, highlighting its role in enabling product teams to innovate and measure the success of new features efficiently.

• Ben Gilbert, one of the speakers, purchased a Peloton bike before the pandemic, which turned out to be a fortuitous decision.
• The pandemic significantly increased demand for Peloton products, leading to rapid subscriber growth and revenue increase.
• Peloton's success also led to a surge in copycats and the emergence of the connected fitness category.
• The speakers discuss the potential breadth of the connected fitness market and whether it extends beyond spin classes to other fitness activities.

"So the pandemic hits, 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."

This quote highlights the impact of the pandemic on Peloton's business, as it suddenly became highly relevant to a broader customer base due to lockdowns and gym closures.

• Peloton introduced the Bike+ model during a period of high demand, which puzzled the speakers due to its price point and features.
• The Bike+ had features that were deemed unnecessary or less valuable by some customers, leading to returns and re-evaluations of the product.
• Peloton's decision to lower the price of the original bike and introduce the Bike+ at a time of high demand was questioned by the speakers.
• The speakers discuss personal experiences with Peloton products, highlighting issues with the Bike+ and customer service challenges.

"They introduced the bike plus in September of 2020, and we should say by September of 2020, it's basically impossible to get one of these, the peloton bikes at all. There's like a four month backlog, pandemic hits, and unless you're getting one in the first week or two, you're out months before you can get one."

This quote discusses the high demand for Peloton bikes during the pandemic and the puzzling introduction of the Bike+ model, which the speakers felt did not align with customer needs or market conditions.

• Peloton faced challenges in manufacturing and supply chain management, particularly during the pandemic when demand surged.
• The acquisition of Precore for $420 million in cash was intended to improve manufacturing capabilities and commercial distribution channels.
• Plans to build Peloton Output Park, a manufacturing facility in Ohio, were eventually canceled.
• The speakers discuss the strategic and financial implications of these decisions.

"They announced that they're buying Precore for $420,000,000 in cash... primarily bought Precore for their manufacturing prowess."

This quote explains Peloton's acquisition of Precore, highlighting the focus on enhancing manufacturing capabilities to meet demand and improve supply chain resilience.

• John Foley stepped down as CEO and became the executive chairman of Peloton.
• Barry McCarthy took over as CEO with a strong focus on growth and the willingness to take risks.
• The speakers discuss the implications of the leadership change and the dual-class stock structure that gives Foley significant voting power.
• The narrative around Peloton's direction under new leadership is explored, including the importance of confronting challenges and adapting strategies.

"So John Foley becomes the executive chairman... 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%."

This quote details the shift in leadership roles at Peloton and the voting power retained by John Foley, indicating that despite stepping down as CEO, he still holds considerable influence over the company's direction.

• Peloton has established a strong brand that customers love and are proud to associate with.
• The company's products and experiences have created a sense of loyalty among its users.
• Ben Gilbert plans to use his Peloton bike after recording the podcast, indicating personal commitment to the brand.

"Oh, my God, we've built this brand that people love. They love the product. They love the experience."

The quote highlights the successful brand building of Peloton, where customers have a deep affinity for the brand, product, and experience.

• Peloton experienced significant growth during COVID, with membership increasing from 700,000 to nearly 3 million.
• There is a debate about Peloton's valuation and whether it could be worth less than prior to the pandemic given this growth.

"But how could they possibly be worth less than they were worth before? COVID they grew membership from 700,000 to nearly 3 million."

This quote points out the growth in Peloton's membership during the pandemic and questions the logic behind a lower valuation compared to pre-COVID times.

• Peloton's business model includes recurring subscription revenue with low churn rates and high Net Promoter Score (NPS).
• The churn rate has increased slightly but remains low, indicating a strong, loyal customer base.

"They just added all that subscription revenue with an incredibly low churn rate and high NPS."

The quote emphasizes the importance of Peloton's subscription revenue and customer satisfaction as key business strengths.

• Peloton is credited with inventing the connected fitness category and is the largest player in it.
• The presence of network effects is noted, with friends having Peloton creating a form of lock-in for users.

"They invented the connected fitness category, and they're still the largest player in it."

The quote recognizes Peloton's pioneering role in connected fitness and its current market dominance.

• Peloton's financing offer through Affirm for bike purchases at 0% interest is discussed.
• The company's strategy to select customers less likely to churn is shifting as they offer more affordable products.

"Peloton was the largest customer, the largest source of revenue to a firm."

This quote reveals the significant business relationship between Peloton and Affirm, highlighting Peloton's role as a major source of revenue for the latter.

• The discussion includes recent product and marketing decisions that may not have been optimal.
• There is hope that new leadership can address and fix these issues without financial missteps.

"There have 100% been bad product and marketing decisions over the past year."

This quote reflects on the challenges Peloton has faced with product and marketing strategies, suggesting room for improvement.

• Peloton's financial management is scrutinized, especially in light of stock market manipulation and capital raising.
• The potential for Barry McCarthy, as the new CEO, to turn around the company's fortunes is discussed.

"It's kind of a bare case to bring in a CFO, a career CFO as a CEO."

The quote considers the implications of appointing a CFO as CEO, indicating the company's financial challenges and the need for strong financial leadership.

• The history of consumer hardware companies struggling to remain standalone entities is reviewed.
• Peloton is compared to other companies like Fitbit, GoPro, and Tesla, with the latter being a success story.

"There has not been a breakout consumer hardware piece of technology that survives as a standalone company."

The quote reflects on the difficulty consumer hardware companies face in maintaining independence and market success.

• Peloton's strong brand allows it to charge premium prices and attract top instructors.
• The company benefits from scale economies, investing in content and instructors due to its large member base.

"I mean, other stuff too. But did I pay $2,000, $2,300 for a bike because it was a peloton bike that otherwise I would have paid maximum, I don't know, $1,000 for. Yes, I did."

The quote exemplifies the power of Peloton's brand and the premium customers are willing to pay for its products.