Opening up to external content is the only wayto ensure durability, scalability, and defensibility.
Peloton has had a terrible 12 months:
- Growth stalled as gyms re-opened
- Their stock price lost 78% of its value
- They massively over-invested in production capacity
- Their new treadmill product—which they hope can become a 3x larger business than the bike—got recalled
- Their old cycling product gave multiple (yes, multiple!) TV characters heart attacks
- They had to lay off 20% of their workforce
- Their founder and CEO stepped down
While most analysts are busy arguing over just how screwed Peloton is, nobody seems to be picking up on the signals that the company’s new CEO, Barry McCarthy, has been sending in interviews. His statements imply a strategy shift for Peloton that is fascinating: switching emphasis from hardware sales to subscriptions, and from product to ecosystem.
Whether or not you believe Peloton is a good investment right now—I’m personally 50/50—it’s fascinating to imagine what the company might become in the Barry McCarthy era. So today’s essay is simple: articulate the opportunity Peloton seems to be going after.
Here it is in a nutshell:
- Demand for Peloton-flavored fitness content is large—but anything that specific can only appeal to so many people for so long.
- There is a much larger and more durable opportunity to become a platform for many content providers across many exercise modalities.
- If they pull it off, Peloton can occupy a position in fitness similar to the position Apple occupies in computing: connecting developers with users through premium hardware and core OS functionality.
Ok, let’s get rolling!
Where Peloton Fits Today
There are, broadly speaking, two layers that comprise the fitness industry:
- Paradigms (I’ll explain what this means)
Paradigms are systems of belief that tell you what to do and why. There are a wide variety of them in fitness, ranging from CrossFit to Jazzercise. Each has a story about how things work, and what results you can expect if you perform specific actions in a specific way. They are essentially strategies; theories of cause and effect. But they’re also more than that. Communities form around paradigms, providing motivation through competition and camaraderie, and sometimes the benefits of being a part of a community of believers can be even more important than the value you get from the veracity of the belief itself.
I am kind of obsessed with paradigms, and think they explain much of human behavior beyond fitness. I wrote about them a few months ago in the context of memes, and a few years ago in the context of science.
For the purposes of analyzing Peloton most people talk about “content” or “community” but I think those words don’t fully capture everything that’s going on. Both the content and the community are manifestations of a more fundamental thing, the paradigm.
Equipment, on the other hand, is much simpler. It’s the stuff you use to follow the paradigm. Most equipment is paradigm-agnostic, the same way most computers let you run any sort of program. But sometimes custom equipment is created for a specific paradigm, and it lives or dies based on demand for the paradigm. Two examples of this are Bowflex and Shake Weights.
Peloton’s business encompasses both layers: they sell equipment like bikes and treadmills for a flat fee, and they sell paradigms (content and community) for a monthly subscription.
Each of the two businesses has unique strengths and weaknesses.
Fitness equipment tends to be relatively more stable than paradigms—benefiting from the Lindy effect—but is rarely as profitable. This is for a couple reasons. First is simply that paradigms are scalable and have few variable costs, while manufacturing and shipping physical equipment is expensive. Second, since fitness equipment is mostly standardized, most equipment makers struggle to compete on anything other than price. There are some premium equipment makers that are able to establish meaningful brand differentiation (Rogue being a prime example) but still I would bet their margins are lower than companies that own a paradigm.
Paradigms aren’t perfect though. They are often unstable and faddish. How confident are you really that popular paradigms of today like spinning or Barry’s will still be dominant in 20 years? There is a long history of fads that have come and gone: Jazzercise, Barre, P90X, Tae Bo, 8-minute abs, Bowflex, etc. Just because a paradigm seems cool to you now doesn’t mean your kids will think it’s cool. That being said, when a paradigm is growing it can still be a great business to be in, for reasons I elaborate on in Why Content is King: there are network effects, switching costs, economies of scale, and really all forms of power (as defined by Hamilton Helmer) to some degree or another.
The only reason paradigms are so often short-lived is because of a quirk of fitness as a category: the most popular ones by definition appeal to people who previously were not in the habit of exercising, and because exercise is inherently hard, most people won’t stick with any paradigm no matter how appealing it feels at first. The more intense paradigms like ultra-marathoning or bodybuilding tend to enjoy more stability, but attract fewer adherents because they don’t appeal to casual newcomers as much.
This leads us to Peloton’s greatest strength, which is simultaneously its biggest looming threat: right now they are able to sell hardware for a non-commodity price and have a fantastic subscription business because they’ve bundled their equipment with a differentiated paradigm that lots of people love. It sure doesn’t feel like a fad right now. But what if their core ‘spinning’ paradigm loses appeal? What if it starts to get old, and our kids think of it the way we think of Richard Simmons’s VHS tapes?
Peloton’s Platform Opportunity
Of course, this is why Peloton is expanding beyond the bike. They already released a treadmill, have a lightweight strength product called ‘Guide’ in the works, and are rumored to be releasing a rowing machine and a more full-featured strength training system. They also have expanded their content library to include a wide selection of non-spinning exercise paradigms—everything from Barry’s bootcamp-style classes to walking, stretching, meditation, and even sleep.