Peloton IPO: Peloton Says It's a Media Company, Not a Bike Business. Is That True?

Though Peloton is best-known for its high-end exercise equipment, the company’s pre-IPO filing suggests it’s also “a technology, media, software, product, experience, fitness, design, retail, apparel [and] logistics company.” So how can a company that manufactures stationary bikes plausibly claim to be in so many businesses? It’s more defensible than you might think, especially when it comes to its claims to be a media company.

Peloton’s official name is Peloton Interactive and the name is accurate: interactive classes are live-streamed to users’ machines throughout the day. Non-interactive classes can also be screened on demand, and as far back as 2016, CEO John Foley described them as “like a Netflix library, but for fitness classes.” Though bikes are its most visible product, Peloton, like Netflix, has spent heavily on content to attract customers: $103 million in fiscal 2019, including a New York studio for streaming video that was projected to cost $45 million.

Most Peloton customers, which numbered around 511,000 as of June, subscribe to the full-featured Connected Fitness service for $39 per month. A smaller subset of about 100,000 customers subscribe to a slimmer service called Peloton Digital, which limits interactive features. In fiscal 2019, those content subscriptions accounted for $181 million of Peloton’s revenue, one-fifth of the total.

Subscription models are often very attractive for investors, since they create recurring revenue. But subscriptions can also be a double-edged sword, especially for startups. When they stop growing or decline, a stock can get hammered, because slowing momentum upends projections of future growth. That’s what happened to Netflix over the summer.

But Peloton has some advantages when it comes to making its media subscriptions sticky.

Most obviously, Peloton wants users to make a strong connection to its instructors. They each have profiles on the corporate website, and some are becoming stars in their own right, with Hollywood agents and hundreds of thousands of followers on social media. Live “shout outs” from instructors are so coveted that members share strategies for getting one.

Peloton participants also fight for position on the Leaderboard during classes, providing the more competitive members incentive to stick with it. Each rider can also track their own performance over time—as long as they maintain their membership. Peloton even helps its members connect with each other in real life through an annual convention called Peloton Homecoming, which attracted a reported 3,000 attendees this year.

Finally, Peloton’s competitive landscape isn’t nearly as scary as what’s going on in streaming television right now. A company called Echelon is trying to position itself as an affordable alternative, complete with live classes. And NordicTrack owner Icon has its own connected fitness product, but it’s no Disney, reporting half as many subscribers as Peloton claims.

All of that seems to be helping Peloton defy the tenuous nature of fitness trends. The company reports a 95% retention rate for members who stick around for a full year, which is massively better than churn rates for gyms, which can be above 50% (and also beats overall subscription service churn rates of around 7% annually. But not all is on an upswing. Peloton’s Connected Fitness churn rate has ticked upwards a drop over the past two quarters, though, from around 0.5% per month to over 0.7%.

The media game is not without its risks, though. Peloton’s classes get a lot of their energy from music, and a $300 million infringement lawsuit from the music industry has led the company to pull some classes from its library. Customers have complained that the company’s content has suffered.

For a would-be media company, that could be as much an opportunity as a problem. Peloton Music, anyone?