Acquired - Peloton

0:01Ride 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? Outwork. Just internalize all the Peloton instructor slogans. David, just make sure you live, learn, love well. See you next time.

0:32Welcome 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. And I'm David Rosenthal and I am an angel investor based in San Francisco. And we are your hosts.

1:03Well listeners we have been waiting to do a Peloton episode for a long time just searching for that 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 less than a request and of course in the pandemic hitting and David and I both becoming customers and these crazy commercials 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. Well, I mean, anytime very McCarthy gets involved, like we were texting Ben texted me the news and I was like, that's it. We got to do it emergency pod acquired super hero.

1:56Very McCarthy. Literally writing again. Yes. Just so excited. And you know, there's this fun thing too of like, I've seen articles that are like John Fully stepping down as CEO, technically, technically. People are saying he's staying involved. He's staying very involved and we'll definitely dive into sort of how this duo is going to conquer the road ahead together. Indeed.

2:21Well, first we want to say we were recording this on February 9th and that is important because yesterday February 8th was the day that the news broke about all of this peloton stuff. 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 email to the company this morning. He wrote, and now that the reset button has been pushed, the challenge ahead of us is this.

2:51do 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. We are here for the comeback story. Indeed. All right, well, we spent the last 24 hours getting 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. All right, listeners.

3:19Now is a great time to talk about a new partner of ours here on Acquired. LaGora, the agentic operating system that is redefining how the world's best legal teams work. Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. LaGora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

3:47So the founders did exactly what great founders do operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love like tabular review where you.

4:06drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lugora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work, and this means that the pie can grow even as each individual task takes less time.

4:26And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves. When they have a head to head pilot with their top competitor, they win 70% of the time. Legora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries. And crazily, they went from one million to a hundred million in ARR in about 18 months. Truly insane numbers. And that is the real test.

5:18Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you.

5:40Other things you all know the drill and buy now if you want to join the slack you should acquired dot FM slash slack You should listen to the LP show to get the nerdy or stuff like our updated thoughts on the markets and a little bit less 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. Uh, 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. So LPs excited to see 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 and 10k diver. That was really fun too. Sudana misinterview. We've got some great founders coming up. Yep.

6:33It's awesome. Listeners, as you know, this is not investment advice. Very much my investment advice this time. It may be product advice though. I've got some, I definitely want to discuss Peloton's product lineup because I have some thoughts. I bet you do. But it's not investment advice. I bet you do. We may have investments in these companies that we discuss. The show is for entertainment and informational purposes only. And before I head over to David for history and facts, 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. And 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, a super tough week for those 2800 people who had a really, really terrible Tuesday reading this news, talking to their managers, all that, and our hearts go out to those folks. Yeah. Oh, layoff sir.

7:30They probably weren't layoffs when you were at Microsoft, were there? Like two months after I left, there was a massive round. Yeah. Yeah. There were layoffs at UBS my first day 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. I mean, layoffs are just no fun. They're just, I mean, it's obvious statement, but it's hard. Yeah. And to transition us in, of thinking about our previous episode with, 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. Yep. 40%. 40% riff. But so he's, he's kind of clearly good at, uh, at sort of taking a

8:30Bearabones team and making the most of it. Indeed. 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.

8:54at Netflix through all the crazy. Well, that is such an amazing story. Like going back, reading the transcripts of those episodes, the Netflix journey is amazing. 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. He's 68 years old. The spring chicken coming into the turn of the thing around. It's unbelievable. He's the same, roughly the same age as our parents. If not, if not maybe slightly older, I think than yours, right? Definitely older than mine, meaningfully older, about a decade. But yeah, as other people ease into retirement, Barry accepts his first ever public company CEO job. I know.

9:45Oh, amazing. He's like the Sean Connery of Tech. He is James Bond. 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 can find it, I looked pretty deeply. The only dedicated long form interview with Barry McCarthy on the internet is on YouTube.

10:15with the headmaster of his high school that he went to a school called the Hill School. Instead of boarding school, it's a boarding school in the Philadelphia area. It was when I went to Tower Hill School.

10:27in Wellington, Delaware, also in the broader Philadelphia area. People would always get the Hill School and Tower Hill School confused. We had a little chip on our shoulders, but... You're upbringing somehow related to every episode these days. It's like, are we only selecting for people in the Southern, Southeastern, Pennsylvania region? Totally, totally, a bit late, agreed to. 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...

10:54a hundred views total on YouTube now it's up to like five or six hundred it's still super small 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 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 and very very relevant to this news today that i was going to save this for later in the episode but what are the final questions that the headmaster, who's a wonderful interviewer, asked him is sort of like, well, you know, Barry, are you bored in retirement now that he's retired from Spotify, fully at this point? And his answer is yes, I'd like to think that I have another game in me and how precious that would prove to be. So we all know that Barry becomes the CFO of Netflix when the company is very, very small, still start up. I think they're only about

11:5240 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.

12:22No. He was the CFO of a company called Music Choice. 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 like the 6 or 700s. It was sort of like serious XM in a way. It was like each one was a genre. It was exactly like serious XM but just on your...

12:45cable 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 them in hotel rooms sometimes. 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, what? How prescient? Well primed for the ultimate Spotify gig that he would take when he took them public.

13:13Some other things that I learned most of this from that interview, how did he end up? 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 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.

13:40as CFO of music choice. I don't know if it was part of a riff and if there were leg-offs or if he got fired directly, but he's very open about this. I mean, most riffs don't include the CFO unless it's performance-based. Right, usually the CFO is the one, you know, orchestrating the riff. Yeah, 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 and 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 it what you want. Growth mindset or learning from your mistakes or anything like that. It does feel like this guy is compounding knowledge. And I wonder if also, again, we talked at the top of history in fact 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.

14:38Barry 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 this a little bit in our Netflix episode, but the early days of Netflix, like it was not.

14:58a hot startup in Silicon Valley. No. It was far from it. Mark Randolph had originally started it. Reed got involved a little later and I also did not know this or at least I didn't remember it from the Netflix episode. It was not a subscription business. The original business of Netflix was you paid parental. It was literally like blockbuster and that is not a good business.

15:25Oh, I don't think I knew that either. At least I didn't remember that. The other 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, they sounded extra crazy because it not only was kind of a crazy idea but it was a bet on DVDs.

15:51and DVDs weren't popular yet. And it's like, what do you mean you're going to mail discs or no one has a player for those discs yet? Totally. So this was not, this was a tough role to recruit for. 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, 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 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 the next year 35 million and then hundreds of millions after after that and then

16:50the IPO, there's the fight with Blockbuster, all that that we talk about in the part one of the Netflix story. In 2003, it's a public company. Barry tells Reed, you know what, this has been an incredible journey. I think he was, had been there for maybe five years at that point, five or six years. I'm ready for my next challenge. I want to go be See, yo, of a company next. I've realized I'm really operational. I love this. It 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, 2003 to manage the transition. Do it right. Find his next challenge. Netflix is boring. It's done. Like everything's going to be smooth, sail, and unsuccessful from here on out. So I'm going to do something else. And then

17:44Amazon. I don't know if they ever publicly announced, but like, sort of word got out that Amazon was gonna enter the market and compete directly with Netflix, which of course they did in a different way much later in history. The stock gets hammered. It dropped literally, the stock price dropped 60, 6.0%. Shades of...

18:09What's happening with Peloton now? And 60 is a modest drop compared to what happened with Peloton. Yeah, right. And it's crisis mode. 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 and His Story is he says, I can't leave. I got to stay through this fight. He's literally word for word on a public earnings call.

18:38Announces 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. It's just so good. Barry is Mr. wartime like in in the parlance of Ben Horowitz's peace time CEOs and wartime CEOs.

18:55This is Mr. wartime when things kind of feel easy and like they're going to keep growing. You're over a year and we don't have a existential crisis in front of us. That's when he decides like to, you know, okay, you guys are good without me now. But by all means, if we're in battle, like put me in coach. I mean, he literally in the Hill School interview, he says, you got to ask yourself, are you a wartime fighter or not? And I've always gotten my biggest thrills being in the fight.

19:22That, of course, there's the car like in battle and the price was 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 fifties.

19:48And that's 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. There is nothing that I know that you don't know that would cause you to be sleepless about your position in the stock.

20:10Uh, at a fairie's saying that you can take that to the bank and then bent in what you were saying. And this is also from the health 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. Fascinating. And listeners, as you can tell, we're spending a lot of time here on Barry.

20:39In 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, he is, he has an amazing way of instilling confidence.

21:08like he has a way with words and especially a way with words to investors to bring a sense of calm. And I think there is nothing we're necessary for peloton than that then right now. Well, and I think the other thing, you know, that's sort of one half of the magic of Barry McCarthy to the extent he has magic, which I believe he does. You know, I think the other half is what he learns from this Netflix experience, and frankly, going all the way back to music choice before that, and then compounds with Spotify that we'll get into in a sec, which is he is probably the number one world expert in managing subscription businesses. He helps architect the OG internet subscription business of Netflix, and then again, go back and listen to our episodes, so much of what he was doing during those

22:03wartime 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 decisions with the whole company on the line about how low they were going to cut prices and how long they were going to 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 are going to win that war. If there are other people in the world who have done this to the degree that he has, there are few and far between. He is in the dictionary under the definition of strategic finance. Yes. Particularly subscription business, strategic finance. So then

22:59You know when he retires from Netflix he goes and joins tcv which of course has a storied history of investing in Netflix and helping them through through all of their challenges as a financing partner and we should say tcv stands for technology crossover ventures which well 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 says a lot about how long TCV has been doing that. So he joins them as a venture partner. And I don't know if he was thinking that he was just going to 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

23:51him to really come and transform that business. We shouldn't revisit Spotify at some point, because when we covered their direct listing, which he architected, buried like invent, you know, didn't invent, but modernize the direct listing and everything that's happening now. Yes, taking a page out of the Ben and Jerry's playbook. Indeed, indeed. So he goes and joins Spotify as CFO and not just CFO, but also eventually he would add head of their free business the advertising supported business at Spotify so not just the subscription business of Spotify. I didn't realize he's like an operational leader of the ad supported business so originally he moved to Stockholm and was was CFO of the business in Stockholm and then moved to New York to set up and really drive the free.

24:43portion of the Spotify business, which is what Taylor was so upset about. And 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. So he had this incredible chapter there, the DPO, everything. And then in January of 2020, he retires.

25:07presumably fully at this point in time because he's 66 years old and rejoins the board of Spotify and and spends, you know, thinking he's going to go spend the next few years joining boards. Again, he joins the Instacart board and reestablishes his relationship with TCV. Didn't he also join the board of Pandora from remembering right, speaking of music subscriptions? That was back before Spotify. Oh, okay. Got it.

25:37But just to add yet another piece of credibility on music related subscription businesses. Totally. So now let's switch over to the Peloton track of the story here. Peloton, as many folks probably know, was founded in 2012 by...

25:54John Foley. And this is where you know, the connections just go so deep here. David, I think it's inappropriate to start the Peloton story in 2012. I just have to say, I know you're usually the one who goes back. This story starts in 2006 with Soul Cycle. 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. And then another one actually interviewing John Foley on Peloton, which is great.

26:23And 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 Soul Cycle 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 stick. So I guess it was more of a flywheel than a Soul Cycle, but it had the prestige brand of a soul cycle. 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? There is. We will get to that and what would have happened otherwise. Ah, okay, okay. We'll save it for later. We'll save it for later. It is totally inappropriate to like, it be think about Peloton in a vacuum. You know, the, the moment in 2012, and I think even 2011 when the residiation happening was totally

27:22You know, I'm John Foley. I live in New York. Soul cycle is totally taking off 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 numbers oriented, schedule oriented, disciplined person or a visionary product leader type person. And he's thinking, you know, I can't commit to five days from now making sure that I schedule that spot in soul cycle. What if I could decide last minute and there was an infinitely scalable version of soul cycle where the room wasn't bound by four walls. Totally. Well, we'll get into who John is in a sec, but I was going to do the second. But you're absolutely right to start with soul cycle and fatigue fitness and flywheel.

28:17and Barry's boot camp and all the other similar businesses out there. Yes, John and his wife Jill lived in New York, which is the epicenter of all of this. 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 an instructor, an up-and-coming instructor in this burgeoning new category. And this is what's just brilliant.

28:46Hey, it's so hard like you said, it's so hard to get spots in those classes. Like you got the instant they become available. Like you even had to do this in Seattle I remember, but like in New York it's impossible. 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 scrambled to reserve the spots. So anybody gets hard to get spots with the best instructors in these classes. John and Jill, his wife, they were super into this.

29:15They had two little kids. I've got one little kid. Obviously, we live in a different era now, but even if we didn't, there'd be no way I could do this. There were a lot of people out there that wanted this product and couldn't get access to it. The Paladin idea, it was revolutionary on a whole bunch of dimensions.

29:45democratizing location like you didn't have to be in New York to get the best stuff to was like you said Elastically scaling access to the best instructors not the average instructors at the low quality instructors like literally only the best and Infinite class size 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? So to feather back in preview, a little berry element here, you know, one of the things that he talks about to the extent he does talk publicly and learned

30:35deeply 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.

31:02on 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 talk radio. That's why music streaming is better than listening on the radio. That's why Netflix is better than linear TV programming. Yeah. Which is mostly true, but not entirely true. You got like sports is probably the notable exception. Right. And Barry always says that your 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

31:42Peloton and John Foley for innovating on this. 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 chat-based or document-based forms of collaboration. That is a, you know, on-demandness of something that was previously linear. Totally. Yeah, like how many?

32:05People still obviously have, you know, work phone calls and whatnot. The 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 native to that, you know, like email existed right but like it's slow and it's not. Anyway, that's what Pelton was. So who's John Foley? This is like, it's such a small world out there. He had been prior to...

32:32Starting Peloton, he had been the head of Barnes & Noble's nook business there, e-reader business. Which was based in New York and it was like actually, you know, Barnes & Noble was a great company and then eviscerated by Amazon and the nook business and the nook product. I think it was probably a decent product but it was just sort of too late. And they were really a fierce competitor in this market. I mean, they outlasted borders. Totally. But, you know, it's interesting too thinking about the book and e-reader market.

33:01relative to Peloton too, and maybe some lessons that fully 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 no-cardware was better than the Kindle or not. Like Amazon had the biggest selection of books, the easiest buying experience, and had the most liking. Okay, I do have to pull forward that thing from what would have happened otherwise, because We can save the analysis for later, but I should share what actually happened. So you might be giving fully 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 equally elegant and really differentiated that bike.

33:51The 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. 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 like a bike with our software, that's interesting enough to people. And we can partner with either Soul Cycle or Peloton or Flywheel.

34:20or flywheel, yeah, to get access to their instructors, their content, that's the thing they're good at as the content. We'll just make this elegant device. And they actually got to term sheet with flywheel. I think Soul Cycle 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 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 like this was gonna be the distribution strategy, but flywheel ended up pulling out and walking away from the deal so Peloton were sort of forced to do their own content and pivot to a really vertically integrated strategy. Oh my gosh. It's like about history turning on a knife point. Wow, what a, like just like the echoes of the blockbuster Netflix situation. And Amazon, remember it.

35:15Netflix tried to sell itself to Amazon. Yep. Oh, amazing. Okay, so that's what Foley was doing immediately before, um, before starting Peloton, but before that, he had been a long time I AC guy interactive court working for Barry Diller, 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. We should do an episode on IAC because it is fascinating. Barry Dillard, media and tech and him being really the first person to integrate all that. But for a long time, sort of the jewel of IAC was

36:09KVC and the home shopping network. And what is that that is like literally streamed immediate out via, you know, television with an interactive component that people at home were, you know, buying and colleague and interact like, uh, the DNA is just like so, so perfect. So what was John doing at IAC? I believe he is 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 go between a whole bunch of their properties. Yeah. And I think I'm not sure if this was IAC or his next gig, but he ended up taking over the

36:52post bubble evite 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 and then to compare to the grander scale, but you know, had sort of done this, take a startup and 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.

37:20Man, that's like the cockroach of the internet. It just won't die. So you would think like, gosh, we're telling this story now and hindsight is 2020, like incredible vision, proven demand for this product. Like, yes, it's going to be hard to build a full stack company around this, but like financing hard stuff. Like, that's what builds modes. Like, this should be an easy fundraiser.

37:50Ben 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 four hundred thousand dollars to start from friends and family at a two million dollar post money evaluation 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 public company. IPO at $8 billion went all the way up to, I think, $49 billion and then today is floating a little above the IPO price between $9 and $10 billion. Wow. I mean, from a $2 million post-money valuation for that first round, I mean, that's 20% of the company he sold for.

38:47400,000 dollars. Yeah, all from individuals, 25K and 50K checks. And then did a three and a half million dollar round. I believe also all from individuals after that. They do a Kickstarter in 2013. I had forgotten this. I can't believe this thing was a Kickstarter until I got pointed out in the acquired Slack. Like, it was a Kickstarter and it was like essentially a failed Kickstarter. Like it didn't.

39:13Technically fail, but it was not good. So here's the thing. I just pulled it up. 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 eight years ago. Aside from what like the weights holders and they tweak the water bottle locations, the same bike. Yeah. So they raised $307,332 in the Kickstarter. Their goal was 250.

39:42And John says on the how I built this episode that half the people who backed the Kickstarter were already investors. So he is 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 NPS scores. And yet when they laid out the vision and they showed a very well-produced video with 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 gonna be awesome. And so I think it's worth pointing out that until you actually tried it, you didn't know it was gonna be good, which makes it a pretty hard thing to sell. Totally. We're gonna 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.

40:38Yeah, this product is not something you can really just sell over the Internet like you got you like you said you either got to try it or you got to have a bunch of friends who are using it and be like This is awesome. Right. There needs to be sufficient social pressure or your own experience Well, let's go right in so like how do they start and end up selling it they Make the especially at that point in time completely orthogonal decision to how 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.

41:25It'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 super explicit as a strategy, but 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.

41:55Plus 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 have someone's 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. And this is by the way how I bought mine. It is like you wander in and you bought it in the mall.

42:22I 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 Godhead phones 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 yeah I'm just remembering my own experience before I bought The Peloton, which I didn't get until this summer. So it was not like a pandemic purchase per se. But I had been hearing from you and playing my friends like how much they love it for years. And that wasn't even enough to put me over the edge. I had, I got a digital subscription. So I was just, I had a crappy old bike in my garage that I was using it with. It 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

43:18Palatons there and I was like, well, I'll try. I'll see what the actual bike is like. And I was like, oh, this is awesome. And my $200 Amazon bike in the garage, it's night and day compared to this. It really is a great bike. It gets the sort of magnetic resistance. It's the belt instead of the chain. I mean, everything about it is, it is a nice piece of hardware. It really, it really is. But yeah, yeah, you got to, you got to try it, which it's interesting. You're describing 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 bike so At the Kickstarter I think they priced it like 1500 on the Kickstarter I think as early but then when they first tried to start selling these things

44:15They 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 a year again, customer feedback. And what they realized was that for $1,200, 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 game consoles in there and then 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.

44:44people thought it was the hardware couldn't be that great if it was $1,200 and they realized that if they raised the price they raised the price up to $2,245 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 it was hurting that it was preventing that from happening. That's absolutely fascinating. So they didn't change a thing about the bike. They just raised the price by a thousand bucks. You know, in the Buffet parlance of prices, what you pay, value is what you get. They're using price to signal value. And that's supposedly another one of the big things that really helped sales take off. Well, yeah, so I'm going to pull forward a playbook theme here.

45:44The 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 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 churn and annualize it, is something like 9%. This is an unbelievably sticky business. When you look at most consumer businesses, they're like 50% annual churn. Yep. Has of last summer. So they're on a June 30 fiscal year. And so when they reported the last full year, fiscal end, I believe

46:43Suren was like 0.6. Monthly churn was like 0.6% worked out to about 7% annual churn. Wow. Which like that's those are Netflix numbers there. I'm not sure. Yeah. I think it's meaningfully better than Netflix. I should look at what Netflix is 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 got to go sell them a $2,400 bike. On the other hand, once you get them, boy is that sticky. So I don't know what revenue was for 2014, which is their first kind of full year of sales and 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're 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

47:41The seed was the $400,000 round and then the A was the still individuals, $3.5 million round led by the legendary seed investor. They are quite now a legendary seed investor among others. Tiger global. Get out of here. This is amazing. It's an unbelievable bet by Lee fixell.

48:06In 2014, it was a $10 million 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. 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 tech over the years and an adventure.

48:34Yeah, Tiger leads the first institutional round. 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 lead to when he's left and started addition and raised over a billion dollars for additions first fund. Peloton was a big, big part of that. Yeah, yeah, for Lee for addition, you know, and for Tiger itself too. I mean, yeah, got to imagine that that was a big part there notoriously.

49:02tight-lipped our friend Mario Gabriela wrote, I think the best piece out there on them, which was still without insider access, but shaped their strategy too. Yep. So $60 million in revenue in 2015, 2016 they do $170 million in revenue. 2017 there is $325 million at a $1.3 billion 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? Yup, because he pitched everyone, everyone. Literally everyone. 2018, they introduced the Tread product, the treadmill, and the digital app subscription. We fun to talk about that. I started as a digital app subscriber, and then... Which is how it's like $13 a month? Yup, it was $12.99. I think I originally started because I think there might have been like a...

49:58Some a deal with Apple or somebody like a first for a three month trial or something like that Were you a part of the covid offering the three month covid? Yeah, I think that might have been so that that was totally nuts So John fully talks about this he says 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 they they 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 Uniteconomics a bit later, but at least from a customer acquisition perspective, that was a great way to spike the number of subscribers they had. Totally.

50:52And the digital app experience is like surprisingly full, full, 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. 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 iPad on an 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. It knows you're doing the ride, and it knows how far into the ride you are, but it doesn't actually know anything about how you're doing in the ride. Leaderboard, and then I think also there's just like, it is a really good bike. You can hack together, you can do a hack a peloton and get some of the integrations with third party sensors.

51:49But I think to get a similar quality bike, you're going to be spending roughly the same amount anyway. That's what I kind of decided is, well, just get the whole ecosystem. Why wouldn't you get one anyway? Because the connected fitness digital only subscription is $13 a month. And once you have a bike, it becomes $40 a month. You're paying $40 a month. Okay, so I know you've got some fun stuff on this. 2019, people have started talking about Everybody of 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 got to sort out. Which is, earlier in 2019, they get sued for first $150 million and then they up at two $300 million by the Music Publisher's National Music Publishers Association. Because,

52:47They're obviously using all this music as part of the classes at Peloton, and they didn't have proper sync licenses. Yes, so this is one of my larger bear cases for Peloton. So, music licensing and gross margins, a treacherous tale. Well, if you look at Peloton's income statement today and across recent quarters, so we're at sort of a relative point of maturity here, About a third 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, this is not 86% gross margin like Sass is, it's more like 66% gross margins.

53:45So 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 streaming video. I have some particular beef as a pedantic person with the video that they do stream. I find it to be to low frame weight.

54:08to low frame rate, to have some motion blur to be a little bit compressed, but all that aside, it's still expensive to stream video. Now, do you know, do they put content production cost in variable cost here too? 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 down in either GNA or I don't know, it might be in there, but you know, and I don't know. I'm a dug in deep enough to know, but I don't think it's that expensive relative to the amount of subscription revenue they get. We'll get into powers later and scale kind of reason all that, but 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 costs around that, but like still compared to you know hundreds of millions of

55:06a subscription annual revenue that's a drop in the bucket. Totally. Okay, let's assume that the largest part of this 33% of cost of revenue 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, or the radio, Peloton actually requires multiple licenses for the particular way that they use the music. So first, Peloton, I think is technically just like the radio, a live performance. So live performance royalties must 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. But they also need a sync license in addition to synchronize those songs with the video content. If you're gonna

56:03you know, use a license in a commercial or a movie. Exactly. And just as a quick aside, I'm a side from a side, the interesting bit about sync licenses is they require the approval both of the sort of songwriter, the person with the publishing right.

56:21and the performing artist who owns or whose label owns the master right 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 the service which a lot of people really upset about it was weird because say you're like wait but some of this artist 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, so many people with veto power. What a Byzantine industry. Crazy, right?

56:57Okay, but back to sort of this like gross margin problem. So according to a piece from Trichordist, 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 product about 20 times for a 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 it's about right. That's $9 of your subscription revenue that is going straight to music. 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

57:54kind 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 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 large enough that they've negotiated a specific revenue share, you know, somewhere between 15, 25, 30%, something like that, 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 on these subscription. God, 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.

58:48100% I mean it is Okay, you're leading the the horse to water. I'm the horse. Here's the water so 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. They kind of want you to do the minimum amount to stay subscribed, like stay engaged enough with us, but don't cost us any money. We want to minimize the amount that we have to pay the music labels on your behalf, which is interesting. So I was thinking about this prepping for the episode and I slapped on it. When I woke up this morning, I kind of realized

59:46Because they're bragging about in their all their earning 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...

1:00:07Peloton 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. Well, if they don't have that, they probably have a new CEO who could help make that happen. Very much so.

1:00:36Very much. Uh, if they don't, they should. And now they probably can. 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, 15 hours across a month. So I was thinking the same as like, you know, 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 20. Wow. That's massively different. That sync right and the performance licenses, very expensive. So, you know, Barry is definitely used to this Spotify world of, we pay a pittance to the, you know, the labels and the artists. And in this world, because of the license structure, it's a meaningful part of COGS.

1:01:34One way to look at it is the meaningful part of cogs and sort of in the bear lens Another way to look at it is like artists should really embrace Peloton Yes, very much so what you got to wonder is that part of what's driving like the Taylor ride series and the Beyonce ride series and Peloton is notoriously very collaborative with the most popular artists so September 2019 Dave settled this lawsuit. They figured things out at least with the sync licenses. 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 five year old company. That is, or five big product that's been a market for five years. That is impressive. That is up.

1:02:30over 100% from 435 million the year before, of that 915 million, 181 million is subscription revenue, which is up from 80 million the year before, so growing even faster. 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.

1:03:00So there this is the benefit of you know raising the price of $1,000 right right they actually make pretty good margins on selling the bike itself so I Couldn't find this mostly because I was scrambling for just the last day to put together everything we did learn If you have data on this please come and share it with us acquired.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 break even 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

1:03:45a 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 multimillion dollar homes, writing in fancy places. It's expensive to, you know, convince people to do this new behavior. And I think the plan at the time is like, okay, just don't lose money, acquire 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.

1:04:14So 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 on sales and marketing.

1:04:43and they added about 1.4 million gross ads on subscribers. 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. So, cack on that is $521 per gross subscriber added. That is, to your point, a lot of money. That is a very, very high cack, $521 per new subscriber.

1:05:13Not 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. If you go out and put that in your pitch deck around Silicon Valley, like, you're going to have to have a very high LTV. Well, now at...

1:05:32The $18.95, $18.95 price point for the bike, which is what it was until they started doing crazy stuff with their pricing. But they had lowered it from the $22.45 to $18.95. At a 40% gross margin on that hardware, that's $758. So they're more than making their money back. Right, they're making a little, maybe a hundred, a couple hundred bucks total on each bike. Yep, they're making, they're making.

1:06:01some amount of contribution margin on the bike. But then you attach the subscription, which, you know, with the crazy low turn rates that they have the implied life $40 a month is over 10 years, 66% gross margin. Right. Let's cap it at five years for a customer lifetime because 10 years too crazy. Let's assume that that's not going to happen at $40 a month. That's $2,340 in subscription revenue over five years. Wow.

1:06:31So, 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. At the time, that was fun. The IPO is not a good one. Prices around $8 billion, but then trades down 11% on opening to a $7.2 billion.

1:07:01market cap. So we're talking like 7X trailing 12 months revenue, but like this company's growing over 100% a year. So, you know, three X forward revenue with pretty good unit economics that we just discussed. Like, interesting. Yeah. And this isn't an era to 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.

1:07:30a little disconcerting that traded down from their IPO price. Indeed, indeed. And then they don't really help things shortly after the IPO and the holiday season 2019 rolls around. Wait, wait, wait, 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? Okay, so rough, rough numbers.

1:07:59500, 520 bucks to acquire a customer and Let's say they are break even dislately profitable on that with the hardware and then $2,340 of lifetime revenue assuming a five-year okay, so 20 customer lifetime 2300 of LTV and is that contribution or is that that's revenue so then two-thirds of that per your 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. Yep, yep. So you would understand why

1:08:56this company and management and the board would be like we should advertise 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 and thus we end up with the Holiday Tony 19 Peloton Wife commercial. Which kind of is a funny story? I would like, you know, it's just it end up being bad for Peloton or is this just good marketing in the end? I think it was good marketing. I think it was good for everyone. It ends up being good for that actress. Yep. Good for Ryan Reynolds. Oh my God. The aviation gin thing that came out the next week is just genius. We'll link to it. The people go, go, go, go. Peloton Wife aviation gin and watch that commercial.

1:09:52I also thought the Peloton wife commercial thing was like pretty overblown. I mean, it feels like every year stuff gets more and more insane. So this commercial at the time, I think had a lot of people up in arms, but you're like, this is not that scandalous. Yeah, right, compared to everything that's happened since. Also, it was probably great for Peloton because I didn't go back and watch it, but my recollection of it.

1:10:20Put the controversy aside is that the commercial itself was like, yeah, fine, you know? But then they got so much hype out of it. But this sets Peloton's track record for they can become a dominant trending topic in a pop culturey way, which every time they would come to dominate headlines after this, it's not really good for them.

1:10:48other 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 treadmill, the treadmill recall and the, yeah, like basically was never good again. Yep. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture.

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1:12:31Trust has to be continuous now, which is why Vanta automates your security, your compliance and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at Vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. All right. So David, uh, Tell everyone why I was the most fortunate person in the world to in January 2020 have just so happened to have bought a peloton at that moment in history. I didn't realize 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. I actually bought a

1:13:28Olympic weight set off Craigslist right at the same time. So not as high value as you've been like stuff that like immediately became unavailable Yeah, 180 bucks maybe for like a full Olympic weight set. It was almost now is like a thousand dollars. 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 a 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 the fiscal year ended June 30, 2020 is 1.8 billion in the fiscal year ended June 30, 2021 is $4 billion. The stock trades up as we've talked about to a peak of over 150.

1:14:25dollars per share at a 49 I believe billion dollar market cap people think this is Going to the moon and like rightly so it's amazing product If you know fitness has now become fully digital. They are the leader in the category You know, so much, so much to love here. 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. Oh yeah, there's like echelon out there. That's crazy. But also pioneering this category of connected fitness, which says, sure, peloton's gonna do a tread and a...

1:15:03and a bike, but they're not gonna do a mirror and a, you know, band-based weight set. And, you know, in a yoga thing, like, there's all these brands that are saying, like, yeah, Peloton does a little bit of that, but it'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 curious your thoughts. Connected fitness.

1:15:29both within the Peloton suite of products and competitors. Is it a broad thing? Or is there something that just works really, really well for spin classes? Great question. I've done a bunch of the Peloton strength stuff. I think that works well. And I think that the Peloton strength 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.

1:16:00I know people with the mirror, who are very happy with that. I think it's pretty broad. I think the bike is the first and best instantiation of it. Interestingly, fully, 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. Things that the tread market is like three X, what the bike market is because running is a much more like treadmills are a bigger thing. I think the stationary bikes. Well, they also sell the treadmill for a lot more money.

1:16:30That's true, too. It's interesting, right? Like, the running, it's different, though. I'm sort of halfway in between on this. I agree with you. I both have an Olympic weight set in my garage, but I use the Peloton strength stuff more often, especially as I get a little older and the idea of squatting and bench pressing is less appealing to me. I think the strength stuff is pretty good, but I can't imagine buying a treadmill or using a connected fitness for running. But we're lucky we live on the west coast. We can run outside your round. There's plenty of places where that's not possible. Yeah, I mean, it says a lot that like ultimately all connected fitness is a digital 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

1:17:25never really existed in the real world for running. I mean, there's like Barry's bootcamp, but that is not a sweeping, well, part of it is like what 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. Yep. Yep. So to maybe maybe to like super simplify your question, 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 agree with that. 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. And you have a bias there, like I'm the exact same type of runner, but

1:18:24You know, 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 glass is like, these are two different products. Yes. Anyway, 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.

1:18:47And 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 kits 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. 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. 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 their philosophy. And like we've been talking about, they want as many people to access Peloton as possible. Bob. Okay. Great. But so they introduced the bike plus. They price it at 2495. The original bike, remember, had been 2245. And David, you

1:19:44you bought a bike plus, so you know the differences of this product firsthand. 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.

1:20:15So 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 gonna 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. It arrived, and I gotta say this is only my experience. It was a super crappy product. The bike plus? Yeah, I thought it was actually a worse product.

1:20:45then 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 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 driving me up a wall. That was, I was gonna get to that last, but yeah, a few other things, like the micro-adges 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.

1:21:34It's just a whole bunch of like really weird little things like that. The main gimmicky feature is you can flip the screen outside ways 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? Yeah, hey, 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 cycling. But V, 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 $1,000 more for that? Anyway, but yeah, what you said about the screen, that was the dagger for me. 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 just didn't make any sense to me. So I returned the bike plus.

1:22:28So now let's think about me as a customer for Peloton. By the way, I love that in these episodes, like, well, we have personal experience, like half the Airbnb episode was my experience as a host, and now here's David's Peloton buying experience. People are probably like, okay. This is irrelevant, but no, I think this is illustrious. This is illustrious. I think if 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 roll a truck to do the delivery for me as a customer.

1:22:57for the bike plus which is crazy expensive crazy expensive right but they own all their own distribution and they're driving around neighborhoods all over America 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 they come with it the cleats didn't fit they had to send me new cleats so all right that's another you know shipping costs customer service etc customer service call I used the bike plus for 11. I'm like, this is not that good. I return it because they have a 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 just, I had spent 24.95. They rolled a truck twice already. Now I just spent $1,000 less. I got the bike. They rolled a truck. There were some problems with the pedal.

1:23:55hold the truck to do another customer service for me. So four truck rolls, a purchase, a return, a restocking, mailing me new cleats. Wow. They're probably not profitable on you until like maybe year three as a subscriber. Absolutely. Like it's a year four. And I can't imagine that my experience is wholly unique here. I wonder. Yeah, we only had the person come out once and it all thankfully worked, worked really well.

1:24:22So I'm a very happy customer, but yeah, to your point, how long do they have to retain me to even break even on me now? Right. Right. And I think a lot of this could have been avoided with some different product decisions and some different pricing decisions. 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.

1:24:49customer 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, and let's not talk about supply chain and inventory and stuff yet, because I think that made their business really not resilient to all the things that they did there. But they probably should have easy to say in hindsight, but not shipped the bike plus and not dropped prices yet, even though they know they need to do both of those things in the longer term. Yep, the bike plus was a product that needed more work before shipping. And then in terms of 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

1:25:44The bikes that the instructors use in the classes are the original bikes. If they really want to push the bike, why don't they use the pluses? Totally. I thought that was so weird. I don't think that hurts anything and that's just great merchandising for higher margin products. 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. 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 pre-core for $420 million in cash. In cash. And you and I both went and looked this up because we were like, I remember the $420 million pre-core acquisition, which is a Washington-based company, by the way. That's right. And a wooden mill, right? Yep. And I was hoping they used some stock to pay for it, given their stock was...

1:26:40trading ludicrously high at the time, but alas, they spent the rare asset they have on hand there, the cash, and primarily bought pre-core for their manufacturing prowess to have some US-based manufacturing to alleviate the supply chain stuff and to just have in-house capacity because at some point maybe they want to take this fully in-house. A secondary benefit that comes with it is pre-core is really, really good at selling in commercial distribution channels. So, Peloton's are then can inherit all those relationships with all the hotels to get more Peloton's in there and eventually maybe merge these two product lines. But for now, they're running it as a totally separate independent business unit and starting to do some work leveraging pre-chorus manufacturing to hopefully start manufacturing some Peloton bikes. All right, that feels like kind of a...

1:27:35I want to say pipe dream. Either a pipe dream or a very, very far out investment. The idea that you would retool pre-cores manufacturing to manufacture bikes. The commercial relationships, that makes a little more sense to me. But so it was a little puzzling at the time. Then they announce in spring of 2021 that they are going to build the Peloton Output Park to enforce their own manufacturing in Ohio.

1:28:05So this is now both of my homes. They're trying to manufacture it. 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. Yep. Again, cash outlays. And then in the spring of 2021, there's the treadmill recall and some of the tragic accidents around with the treadmill. The company doesn't handle that super well. First, they sort of say, oh, people aren't using it right. It's like, well, Kids are like dying and getting hurt here. Like that doesn't matter. Stock drops 15% around that. They issue me a culpa and say, you know what? We are going to play ball with the investigation. We feel super bad that we miss handled this originally. And then November of 2021 last fall, they miss earnings, they cut their outlook and the stock gets hammered down 32% in one day.

1:29:03with earnings announcement. They have some more holiday season media commercial. This is also probably good with the new sex in the city, where Mr. Big dies on a Peloton. No, because that tanked their stock price and it never recovered. It did. It did. Although, I know that to be feels like the wrong reason to sell the stock. I mean, yeah, but it's indicative of the I think when something like that happens, so someone died on Sex and the City and 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.

1:30:00That says a lot. That says way more than the sex in the city episode. Yes. So then the other sheet 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. There's a $1.3 billion worth of inventory that they're sitting on now. 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 and servicing them, bringing them back to now. They can't sell these things.

1:30:52There's a lot of things to applaud the management team about and John Foley and the dog-idness and the entrepreneurism and the pure invention of a movement and recognizing talent and hiring the right instructors and finding ways to align incentives and building this part like so much. The one that is really, 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 gonna keep growing and they were just completely wrong like completely wrong the 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 and this company just

1:31:49believed 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. Totally flat out wrong. And we'll wrap up the few last points to forget to literally today, present day. But one of the things when they released 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 good. That is not good for a growth company. No, and you look at the level of certainty that they had that it was that

1:32:40they just needed to keep expanding to service all this demand. Not only did they plunk over $800 million into manufacturing capacity between pre-core, which has its own business, so it's justifiable, assuming they paid a reasonable price for it. And of course, 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 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, right? No, that's that's everyone. Oh, that's everyone. Okay. Yeah.

1:33:26Yeah. And the layoffs, of course, were 2,800 people across the whole business. And I think about 20% of the corporate staff, but they were really, really investing and very certain this demand was there. Yep. So after that news on January 20th, a couple of 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 published a deck calling for fully to resign and for the company to initiate a strategic sale process. And that brings us to yesterday, February 8th, 2022, where they announced earnings. They're bad. They lower guidance significantly.

1:34:22They pull the plug on Peloton Output Park, they cancel the plans to build manufacturing facility in Ohio, they lay off 2800 people, and Barry McCarthy is riding in as the new CEO. And the way they sort of message this is that John Fully 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 zoom in on what mechanically is actually happening here. So John Fully becomes the executive chairman. Now what an executive chairman is, I was compared to a non-executive chairman is they're still the chairman of the board or the chairperson of the board. They no longer have day-to-day responsibility running the company. However, I believe they still are a compensated employee. They still draw a salary. They're still like an employee of the company in addition to being

1:35:22just a board member. So they share both this sort of like director level and pseudo operational. It's more like they're working with the currency yo 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 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 lead companies, and here's a quote from Matt Levine at Bloomberg.

1:36:18Peloton has a dual class structure in which the founders and some insiders have stock with 20 votes per share and fully 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%. So there you go. That's enough. That's over 50% of the voting power of the company right there. Right. Fully can't do it alone, but with one, probably it certainly both of his other co-founders basically can make a unilateral decision. So the message Peloton wants Blackwell's and other upset shareholders to hear is John Foley has sort of moved on, stepped down as CEO and we've brought in Barry McCarthy in practice. Dude still holds the cards. It's more complicated. Now, all that is true. At the same time, I don't think Barry would

1:37:17take 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 it, 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. 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, the sting has a long half life. But the hard truth.

1:37:46is 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. 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 read the The great part about the comeback story after that. You know, and then he closes, 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. I just like, full stop. That is what we are here to do. And that will require us to take risks.

1:38:43to 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. Of course, this is after he opens by talking about how much he loves riding with Matt Wilbur's. It is great that he opens the whole map. Yes, the whole memo is like kicked off with, you know, rather than like, hi, I'm here to see you. It's boy do I love riding with Dennis Morton and Matt Wilbur's.

1:39:09And 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 what's up, Barry has no social media presence. He's basically not on the internet. You got to wonder, has he met any of the instructors yet to probably not? Probably not before yesterday at the earliest wild. I wonder what the instructors think of all this because they like, they've built such brands. I mean, the Instagram following and the Twitter following of the top instructors is like, They have a meds power. I'm a love well and allie lot. I mean, they're getting up close to a million followers. Robin Harza, Alex DeSan. And they've all partly this and other things too. Like Allie is the like the the in arena host for the Brooklyn Nets or at least was last year. And you know, everyone's got, you know, noon subscribe noon deals or underarmor deals or even though they're making 500 to a million from Peloton in salary or whatever their contract is.

1:40:08I bet there may get a lot more from their other engagements. Oh, yeah, they're like professional athletes. Like 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, huh, never underestimate acquired. We're also incapable of just going on air unprepared. So of course, you and I, like, 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 big job at Disney, uh, got convinced fully to come on the Disney cruise with him. And so they're on this Disney cruise and fully rose out a couple of spin bikes and stood there like,

1:41:03for the first like 10 minutes of the ride, like coaching John Pleasant's. Yeah, like, and being like, imagine there's a screen here and like, you know, that really given him. And then Pleasant's becomes one of the first angel investors in that 400k round, right? So it's like a pretty cool. There's there's so much crazy lore in the building of Peloton, which I think we would have done if we gave this the three hour treatment. But let's.

1:41:28Let's go into our narratives. So what is the media narrative right now for the bull case and the bear case? Well, on the bull, there's just an insane level of customer love for this company. I mean, the NPS is around 90. You're wearing a peloton hat.

1:41:46As we do. I'm wearing a Peloton hat because I referred you and they sent me $100 of free credit to buy a 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. Yeah, even if they sell, I have to imagine this will stay a prestige brand for a reasonable amount of time. It's funny how I feel like a little bit weird wearing my sole cycle.

1:42:14Like, hmm, shirt and stuff now because I haven't been in two years, but the peloton stuff. Maybe it says a lot about me, but happy to wear it. So that huge component of the bull cases, 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 because we're recording early in the morning and I missed my morning ride this morning. Another huge component is Say what you want about growth right now, but how could they possibly be worth less than they were worth before COVID? They grew membership from 700,000 to nearly 3 million. And it's not like they're just selling bikes here. This isn't one time. They just added all that subscription revenue with an incredibly low churn rate and high NPS. Yep. Totally agree. They invented the connected fitness category and they're still the largest player in it.

1:43:07We'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, there is some amount of lock-in that comes from that. The biggest thing we talked about is this insanely low-churn rate, and to date, the fact that they selected for customers that aren't going to turn, and that's slowly shifting, because that's the other side of the sort of selling a product that is cheaper than it used to be, is that you're going to have customers that are more sensitive to price all around. And so we're going to turn more often than your initial cohort. Even still, the turn has gone up, but I think it's gone from like, I'm going to get the numbers wrong, but it was at like 0.6% per month to like 0.8% per month. So like it's still good. Totally.

1:43:59I 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 some information in their S1, where at the time, Peloton was the largest customer, the largest source of revenue to affirm. Now, a firm has grown a lot and diversified, but I took up 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 and cash out, right? Because it was a 0% deal. 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? Well, you know, you keep the float and I was like, sure, I'll do that deal. That sounds. I know how the insurance business works all day. I will do that deal. And it's funny how much I've thought about this for how

1:44:54little 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 most bend guilty thing that is possible. I love it. But what's interesting is the fact that they offered it all. So when you look under the covers of why was Peloton willing to offer 0% or why was a firm willing to offer 0% 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 0% financing, we will pay you an amount in order to make it worth your while. And so tell us what 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. Wow.

1:45:46If I'm doing the math right based on what their revenue numbers were at the time, that is $150 million a year that Peloton was paying to affirm to offer this 0%% financing thing. So that gives you a sense of how much Peloton knows and do even then, oh my God, we need to expand down market because we are saturating our wonderfully price and sensitive.

1:46:17core customer base or initial customer base. Wow. That's that's huge. And in the whole, you know, we were about to release a great LP show episode with Christina Malas Curiazzi, who just joined Bane Capital Ventures, been a long time friend of mine, but was an early employee at a firm. And we talked about with her about the whole by now, pay later space and that that's the key.

1:46:40The key, one of the key value props to merchants is this enables sales that wouldn't happen otherwise. But oh my gosh, yeah, but I think that's just, you're right, this is between a bull and a bear. But trending into the bear category here, the focus on their core customer is really things have gotten so wonky in the past year plus. Well, the bear case to make out of that is 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 a firm 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. So yeah, I think unless you have more, I think the last bull case, which I think really is a valid bull case is like, hey, you know, I don't like to put faith in

1:47:33single people 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 just bad product and marketing decisions over the past year. I mean, almost that is not a controversial statement at all. There have 100% been bad product and marketing. Well, and bad bad strategy, bad financial decisions, bad forecasting. You got to think that Barry can make a huge difference in fixing a lot of these issues. Yes, for sure. I mean, Barry's not going to be the product person by any means, but you know, that's why fully is 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 in balance to make sure that Peloton can do its thing of creating products and brand and experiences that people love without

1:48:30screwing themselves over financially. Yep, yep, yep. And the market, the market liked the dues. Peloton was up 25% yesterday. Yeah. It's kind of a bare case to bring in a CFO, career CFO as a CEO like that. That is a strong admission of how in trouble a company is. But I suppose at the trading downward is that makes it a bulk case to want to invest if if you feel like that person can sort of turn it around. 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 the 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, products.

1:49:27person who was the founder of the company as CEO to an operational financial supply chain, contractual legal person. And, you know, maybe Barry can be the Tim Cook of Peloton. Yeah, that's actually great analogy. I certainly think he's capable. And I think the business is capable, you know, it probably will never be an apple, right? But I think it's capable of performing better than it is now. Okay, more, more bear narratives.

1:49:57So 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 only predicting they're going to be it around three million 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 not good to hold it on the books.

1:50:22Another interesting narrative that I haven't seen as much around Peloton specifically, but seems to be a fairly widely held belief, is that in the last 10 plus years, there has not been a breakout consumer hardware piece of technology that survives as a standalone company. And you look back at Fitbit and GoPro and Jambox.

1:50:51I even want to call out this one's going to be a serious callback, but flip video. Some of these companies that kind of invented a new category and they built real, they imbued it with meaning and they pioneered it on technology that was hardware that was just now available.

1:51:15that investment doesn't pay itself back. Lots of cheap fact similes come in and they can't defend the castle. And you know, you look at jam box, they made a $300 Bluetooth speaker. And now you can get $20 Bluetooth speakers that are reasonable. And jam box, of course, went out of business. Flip video sold to Cisco in a very strange M&A 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 ultimately landed at Google. I think there's probably a case, a similar story around Nest, again, a little bit weird and some bungled M&A, 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.

1:52:12I thought about bringing this up earlier in the episode 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. I thought you were going to go there. Yeah. And lots of different dynamics there. But if you just look at what Tesla has done, in many ways, a very resonant...

1:52:42a strategist, a similar, you know, harmonizing strategy with Peloton of like, start with the high, you know, the Elon master plan, right? And then how they've adapted that over the past several years, you know, it was not that long after Peloton was started that the Model S came out.

1:53:02and like, what is 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, got Model S to Model X, like, double down on the high end brand. And then the Model 3, which was affordable, but it was like, it was still aspirational, right? Like, you're competing with BMW now. You're not going all the way down to like Toyota.

1:53:30you know, the autopilot launch, like just the Tesla has executed incredibly well and incredibly strategically through again, different but resonant market dynamics. 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 manipulated with a lowercase M, not accusing them of doing something that has legal implications. And they are to that point they had their near death moments too.

1:54:00totally, but Peloton has been exactly the opposite at manipulating financial markets for their own favor. I mean, they had a massive stock run up and then did a $420 million all cash deal. 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 incitory things doing things that are against sort of company policy but they're also trying to drive home the point that

1:54:56The incentives are now misaligned because he's taken a lot off the table. He's now a very wealthy person in cash 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 So I don't care if you have $96 million the potential of turning that 500 million into one two three billion. That's motivating. So come on and also like it's hard to you know Look, he started Peloton in late 2011, early 2012. It's been a long journey. And he talks about on how I built this episode. Even though he had done well in his career, he didn't have any big wins. He wasn't fabulously wealthy before starting, before starting. He wasn't a ramen founder, but he didn't have $96 million. Let's put it that way. So I can't begrudge him that.

1:55:51despite being of the Harvard Business School network and having worked at IAC and been close with a lot of 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 you know he had good jobs and buddy had a family to support and he was he knew a lot of wealthy people but that actually didn't really accrue to him successfully capitalizing the business for a long time look sometimes activists have good points and their good points to be made against peloton here and i think we've been making them but like

1:56:40They're also just so whiny and 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 anyway. Okay, power branding. Yes. I mean, other stuff too, but like, did I pay $2,000, $2,300 for a bike? Because it was Peloton bike that otherwise I would have paid maximum, I don't know, $1,000 for? Yes, yes I did.

1:57:09It's 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-pele-ton. I kind of enjoy doing stuff like that, you know. And to get the same quality of bike, you really, yes, you can do it cheaper with a hack-a-pele-ton, but not that much cheaper. It really is a very high-quality bike.

1:57:37Relative to the price so but yes agree on brand I Definitely to me one that stands out and I think one that attracted Barry is scale economies here like you know the amount that Peloton can invest even with the music 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 relative to a soul cycle, to a flywheel, to anything else. 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. Totally, totally agree. And it says, I mean, the proofs in the pudding that like Emma Lovewell and others used to be soul cycle instructors. Yep. I think Alex Tucson started with flywheel, I believe. I can see that.

1:58:32Yeah, it just makes total sense that Peloton would say like 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 in content, which does that make to 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?

1:59:00If at least my perception is that is the best on-demand content I can get for working out. Yeah. Certainly the library of content. And it's interesting. I'm curious what your feeling is on this from a user perspective. It is valuable to me that my favorite instructors, well, it's like just Alex, he's so awesome.

1:59:28is constantly adding new content, and stuff like the right degree. That's extremely valuable to me if he stopped adding new content. I would seriously consider churning, but the years worth of library, I do go back and do old library content, and that's quite valuable to me too. Even if he switched to another platform, then Yeah, it would take a long time to build up. I've got a few 20-minute rides that he did years ago that are really high quality for me. By the way, there is someone who switched to another platform or at least left. Their name's escaping me. I looked into this a couple years ago and I think Peloton pulled all their content down which was an interesting move because...

2:00:14It's basically saying, we don't want to continue to build your brand for free to compete against us, which I found fascinating, because I bet that's totally case by case how they would think about whether they should leave it up or not. And that's a big stick for the instructors, too. Like, if you leave then all of your library of work goes away. Right. Right. I would kill Bill to look at all those contracts and understand how all that works. Totally. Okay. I think those are the big ones. Those are the big ones.

2:00:44So, a few interesting little, what would have happened otherwise to go to a old acquired standby section? So, what if they actually had pursued a deal with Solcycle? And I'm going to use Solover Flywheel, because I think even though Sol wasn't given them the time of day at the moment, that's the more interesting one. Solcycle has not had a very good last couple of years.

2:01:11First, there was the Trump fundraiser, and then there was the like failed go public of the soul-cycled equinox fitness conglomerate, and then I think, I mean, I'm not a doctor, so this is...

2:01:28or an epidemiologist, but this is not investment advice, and also not healthcare advice. 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've candles in there 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 at a sole cycle studio, even though I used to do that a lot before I got my peloton. And And frankly, probably never will again. I can't imagine going back to that behavior. For even for non-COVID diseases, it's like just. Yeah. If you want to stay healthy. I would only consider it in like you and I went when we would get together. We used to do it. It was really fun to do it with friends. I would maybe consider that again in the future, but definitely not on a day-to-day basis.

2:02:21So obviously, Soul Cycle came out with a Peloton competitor after Peloton did very well. It wasn't fully Soul Cycle. It was part Soul Cycle, part Equinox parent company. I have to imagine that thing was a total flop. What would have happened if you had this sort of like JV between Peloton and Soul Cycle five years in a strong position, six years in when COVID hit?

2:02:50It's interesting. 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. But you know, putting cameras in, building a little soul cycle studio. There would have been too many, 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 every class kind of prints money So if you're running one of those local studios, you're 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 I like full

2:03:45Oh, the Peloton rides are so produced. 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 sole cycle, you know, places into TV studios. Yep.

2:04:10And so if you're like making the decision a sole cycle, like I'm gonna take our best content and instructors, dedicate them to that for this thing that I revenue split with. I don't know. Okay, well there's another one here which I know you wanna 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? You know, it's easy here to sit here and say like the pre-core acquisition was dumb.

2:04:39The Peloton Output Park was, 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. I've talked to everyone's ear off about my feelings on the product and pricing decisions. At the same time, I think we got to be intellectually honest here with ourselves and with like the market too.

2:05:07It was easy to believe like it would have been hard to Really think about the downside over the past year as everything was up into the right like It's a rare rare rare leader in company that I think can stay disciplined through What was probably like one of the biggest boons for any company and of all time? Yep, on the other hand other companies I think the difference is A lot of these other companies demand didn't go away. Amazon saw a spike, but then it kind of kept rising from there across all their businesses. Whereas, Peloton saw a spike and then a decline. Yep. 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.

2:06:05Both of these were pandemic era go-go stocks that have totally crashed. Palatine down over 80% from peak, zoomed 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. Whereas, Palatine is deeply unprofitable on a full bottom line, still raising billions from the public market with new stock issuances, they seem to convince that this demands Spike would last forever with these acquisitions and expensive investments. 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.

2:07:04demand spike, created huge complexities for Peloton as a business in a way that, you know, for Zoom, like, I created some complexities for Zoom, like, I don't want to say, like, it was just easy, but like, you know, they're shipping software, like, it's, it's different here. All right, listeners. Now is a great time to thank our longtime friend of the show service. Now, if you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

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2:08:58So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. All right. 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 what those outcomes are. 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 parts. Yeah, right. I don't think that's likely, but that's that's I think a C is it's selling in the next six months. Six to 12 months. I agree for eight to ten billion dollars. Yep. Yep. Or even

2:09:55$20 billion, selling within the next year for a nice short-term shareholder return. I think that's a C. I think a lot of shareholders would be very happy selling this thing in a year for $20 billion. I 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, we don't know Barry at all. We've never talked to him. Barry, open invitation. When this chapter is over, You got to come on the podcast and we got to do like a recap. Or if you want to do a follow up now, what would we get? Would we get right? Would we get wrong? We're happy to. Yeah, totally. We are such huge fans of yours. But I don't think he would have taken this just to package it up for a sale in six to 12 months. Like, why would he do that? Yeah, agree. I agree. I will say I don't think this is a

2:10:50independent enduring company at this point. I think it's going to 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 you can have sort of tight financial controls where it's run like a good company and some smart and make smarter investments. But I have a hard time knowing how they're going to grow 50% year over year at any time in the future.

2:11:20Like, where are they going to go find more demand, or where are they going to really meaningfully alter their product lines to go find more demand? I mean, that's the A plus. Like, that's the A is if they can figure out how to stay an independent company and become a big, profitable independent company and meaningfully find demand in concentric circles outside their current customer base. That's it. That's the dream. So, right, yes, that's the A plus. That's the dream pressure. Let's think about that.

2:11:49They have what a little under three million subscribers currently. Something like that. That's actually not that many people, right? Like, it is not especially in several countries. I think about across the world, you know, even 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 let's just use that as a swag. So that's two million US subscribers out of a nation of 330 million people.

2:12:18There 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. You know, 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 for the best content out there with the best instructors for 1299 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 Maybe you call those two two segments. I think I think they can address both affluent people who don't care about

2:13:10cost and aspirational people who do care about costs, but are willing to invest in this. And then you layer on the digital product. I do think 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 market cap. I like it. Well, I don't think that's the most likely outcome, I think.

2:13:37Two 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 set all that on air. Well, we'll revisit with Barry in a couple of years. We will. How about that? We will. Deal. We're shaking hands. What? You and I are. Yes. Over video chat here. Carvout. Carvouts. So. Related Carvout.

2:14:07As I said 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. And really the only artifact, long form interview with him dedicated to just him. There's some stuff where he talks about direct listing on the 16Z podcast and others, but that's just about him and his career. It's worth watching.

2:14:34There's a great nugget in there. He talks about his strategy exercise that he likes to do that they did in Netflix. It's Spotify and I'm sure he will bring to Peloton of how to how to plan and build your organization to be resilient and robust for the future and his four to five year strategy exercise. I won't spoil too much of it, but it's very good and worth.

2:15:02Watching and listening to that sweet mine is also related so since the Taylor Swift episode I've been listening to a lot of switched on pop and There is a awesome episode called the James Bond spycraft theme spycraft sound, and the hosts are just awesome of Switch On Pop. The show is reliably great. It's sort of like acquired for music as 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.

2:15:47And 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 how that gets used through the decades and all the different, all the different movie themes. So I highly recommend that song. Super fun. That's my car route. I went and listened to that episode after we were texting about it. And it's so good. The whole show is so good.

2:16:13Oh, yeah, that's so good. And one of my favorite parts about it was it reminded me that Chris Cornell's song for Casino Royale is so good. Oh, man. Yeah, it is. Rest in peace, Chris Cornell, but that is one of the best Bond themes of all time. Yes. All right, listeners.

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2:17:31Listeners, thank you for going on the journey with us. Go check out the LP show. Our latest episode with the NZS capital folks is is really good. Like I they're just so smart. And if you're staring at stock tickers, getting anxious. This is this I mean, not investment advice, but like it will help you bring a cool steady hand. Otherwise trying times. Yes.

2:17:58And if you want to join us for the Zoom call tonight, if you're listening to this on drop day, then join acquired.fm slash LP and 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 Yeah, tell your friends about this. You can find us on Spotify right alongside Taylor Swift and many other great artists and podcasts or anywhere where you get your podcasts. And we'll see you next time. We'll see you next time.