Peloton’s path to become a $50B connected fitness behemoth

Despite some people calling Peloton a long-term loser, I’ve got a bullish claim - I think they can become a profitable, valuable company worth over $50 billion. It’s totally easy - they simply have to learn from Apple, and reform part of their business into the very first enterprise SaaS fitness company.

Simple? Not remotely. But let me explain.

Peloton Can Make Billions By Learning from Apple and Twitch

It may surprise you (and others), but Peloton isn’t actually that bad of a company (I’m basing the following off of their Q1 Shareholder Letter and Q1 results). Their current issues are around their very much growth-stage mentality of spending an inordinate sum on marketing (34% of their revenue - about $78 million last quarter) while burning cash on both subscription content and the hardware itself. This isn’t great, but also leads to a really interesting comparison with Apple - Peloton has fairly awesome hardware margins of 43% compared to Apple’s 32%.

Considering we’re relatively early in Peloton’s life, I’d have expected the bike and treadmill to be an expensive problem - but somehow they have managed to make selling $2,000 and $4,000 connected fitness machines a viable business.

Their real issue is in the cost of making the $19 and $39 subscription products (the latter being the one that you’re required to pay for on the bike). Peloton’s platform margins aren’t awful - 56% versus Apple’s 64% - but they are being held down by the increasing costs of creating their own content, paying the staff (who are celebrities in their own right), real estate for the studios and the murky waters for music licensing. Lawsuits aside, all but one of these is very, very difficult to reduce: creating the content.

Peloton’s platform at present offers very little “new” content beyond more classes from the same instructors, but what keeps people on the bike is familiar faces and constantly-updated performance metrics (such as Watts generated over a particular time). By adding a heavily-vetted separate service of classes from people producing their own content, Peloton could potentially bring down several key cost drivers, or at least significantly increase the revenue generated from the platform.

They can also absorb the competition.

Very much like Apple’s AppStore, Peloton can create their own content store, (priced likely on a per-piece or subscription basis, either from Peloton or from the influencers themselves) that will vastly grow their content library, lower their marketing expenses/cost of customer acquisition (as these influencers will have a clear incentive to get people on Peloton bikes), and even stop other companies from making competitive products.

Let me give you some examples:

  • The most successful streamers (EG: Ninja, Dr. Lupo, etc.) spend large amounts of money to create professional streaming setups. Better yet, there’s already a huge YouTube presence of cycling influencers (such as the Global Cycling Network) who have proven that the ability to make classes that look and sound as good as Peloton’s. All they have to do is make sure A) that they’re abiding by the Peloton content guidelines and B) controlling what music they play, something that YouTube has proven it’s very capable of doing. This also gives the Peloton influencer community a way of, well, becoming notable beyond Facebook.
  • Soul Cycle and Flywheel both have created their own competitive bikes to varying degrees of success, and it’s obvious that other companies like Equinox are going to try and compete too. The question Peloton should ask them is simple: do you want to spend all that money trying to sell a bike, when we can get your content in front of our millions of users? Why not work with us, not against us?

This could be a huge revenue source for Peloton, because the reason that people stick with the bike is the ongoing competition and physical improvement that the bike’s metrics give you. Monetizing and augmenting the profitable experience of the bike/treadmill with content that you effectively didn’t have to pay for that still lives up to your quality requirements. It’s like selling Netflix via Apple TV, or letting users download Google Maps - give them what they want, where they want it, in the best way possible.

Peloton - The SaaS Company

The key takeaway from the recent successful IPO of Zoom and underperformance of Uber and Lyft is that subscription recurring revenue is significantly more valuable than one-time transactional sales. Ironically, Peloton currently pays little attention to investing in growing their subscription revenue. It’s that the 12-month customer retention metrics has been trending downwards: 95% at IPO to 94% last quarter.

Peloton needs to start think like a SaaS company, and start measuring the most critical metrics -- Net Revenue Retention. For reference, Zoom has 140% Net Revenue Retention last year! That means without spending a dime in marketing and adding a new customer, Zoom grew their existing customer base’ revenue by 140% year over year. How incredible is that?

Somehow, Peloton’s subscription revenue seems to be trending the other direction.   Because once a user buys a bike and subscribes, Peloton has few ways to make any more money. If there are two or three people in a house, they’ll make exactly $0 more off of them.

While I’ve celebrated the margins that Peloton makes on its hardware, there is eventually a point at which they will run out of people to sell $2000 connected fitness products to. Even with a powerful content hub, Peloton does a poor job of monetizing and incentivizing its users beyond relatively flimsy social functions (the ability to video chat friends who are biking, and the ability to follow/be followed). While they have added achievements (badges for X number of rides) and challenges (EG: Days on device in a month, miles run/biked), they haven’t really taken a full blown attempt at growth-hacking their own customers.

The content store mentioned above is a great first step, but Peloton also needs to find other sources of recurring revenue beyond just content. Indoor-cycling company Zwift has done a great job of creating the ability to add your own workouts, and many cyclists and runners use the connection between Zwift and workout planning app TrainingPeaks to train when the weather’s bad (or they just want to stay inside).

The first level is simple: add workout planning to the platform, with rudimentary guidance for each step (which Zwift does) and allow users to sell content for it. For example, FasCat Training sells $49-a-plan training packs that plug right into TrainingPeaks and Zwift - Peloton could simply sell them on their own Plan Store, taking a 20-30% cut for no effort beyond setting up the platform, and keep users paying for that. Peloton could even take this a step further and add Training Stress Score (a measure of how difficult it is to complete a class accurately) to their previous classes, giving users the ability to plan their own workouts on an automated platform that costs a small monthly subscription.

An even bigger opportunity would be building a coaching marketplace of vetted experts to train users one-on-one, with a fee for doing so (of which Peloton takes a cut). By letting coaches say “okay, you’re doing this, this and this” for users, Peloton locks users into both continuing to pay the $39-a-month subscription and gives them very good reasons to stick with the platform long-term. Heck, Peloton instructor Matt Wilpers already sells private coaching for $250 to $375 a month with his old coaches, and instructor Jess King charges an eye-watering $2,799 a month for “life coaching” and personal training. On the lower end, Peloton could vet coaches and certify them much like TrainingPeaks has.

Truly great upsell opportunities enhance the experience that someone already loves, and Peloton has so many options.

Finally: Make Money From The Enterprise

Bridging off my discussion of fundamentally growing their subscription revenue,, Peloton still needs to find a way to continue their strong position as a platform, which means sell more bikes, and they’re going to eventually run out of ways to do so to consumers. The international opportunity of Peloton is limited by the cost of devices and the high cost of content localization (a time-consuming endeavour that can easily go wrong) is going to be incredibly risky.

The answer is simple: Peloton has to create products entirely for businesses.

What this doesn’t mean is simply selling bikes to hotels like the Westin, or selling Peloton devices to the gyms at Apple and other huge companies.

What it does mean is that Peloton needs to create customized programs, even customized classes for companies. While I’m loathed to suggest anyone is forced to exercise, a healthier workforce makes more money, and Peloton as a platform could be sold to the Fortune 500 as a way to reduce rising healthcare benefits costs. It’s an expensive product that will only make sense for giant companies, but it’s also one of those corporate perks that is truly different. You don’t simply have to create bike or treadmill content - this could be perhaps yoga or meditation, built strictly for X company. It’s a way of selling them something that is truly unique, as a perk that will likely be free for the employees, but cost a $50-a-seat (for example) fee that includes a basic Peloton subscription, after the initial setup cost of content creation.

You could do the same at a bulk cost to hotels, too. Some (but not all) St. Regis and Four Seasons hotels have Pelotons, but the experience isn’t branded or different. Even if you’re not giving them completely customized content, Peloton should be selling them something special - perhaps structured workout plans for particular destinations (they already offer, as part of the subscription, groups of workouts) built into a hotel-branded channel.

Peloton’s install base is huge - and the opportunity to grow revenue from already-paying customers is so obvious that it blows my mind.