Peloton

0:00 Ride to greatness. Yeah. 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?

0:12 Outwork Just internalize all the Peloton instructor slogans. David just Make sure you live, learn love well. See you next time. Who got the truth?

0:27 Is it you, is it you, is it you who we got No. Is it you, is it you, is it you Me down Straight!

0:36 Another story on the way Yeah. Welcome 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'm an angel investor. Beast.

0:59 In San Francisco. And we. Or your hosts. Well, 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

1:14 big stock run up and we thought about that and we got a zillion listener requests and of course and the the pandemic hitting and David and I both becoming customers and these crazy commercial 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 twenty four hours to prep and have done basically nothing in the last twenty four hours except learn everything we possibly can about this company that we are so intimate with already. Well

1:43 I mean any time. Very McCarthy gets involved. Like we were texting w Ben texted me the news and I was like, That's it. We gotta do it. Emergency pod Acquired superhero. Barry McCarthy literally writing again. Yes. Oh.

2:00 Just so excited. And you know, there's this fun thing too of like I've seen articles that are like John Foley stepping down as CEO. Technically, technically people are saying he's staying involved. He's staying very involved, and uh we'll definitely dive into sort of how this duo is gonna conquer. the road ahead together. Indeed. Well, first we wanna say uh we're recording this on February ninth.

2:25 And uh that is important because Yesterday, uh February eighth. was the day that the news broke about all of this Peloton stuff. Uh 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 uh email to the company this morning. He wrote, And now that the reset button has been pushed, the challenge ahead of us is this. Do we squander the opportunity in front of us or do we engineer the great comeback story of the post-COVID era? I am here for the comeback story. We are here for the comeback story.

3:02 Indeed. All right. Well we spent the last twenty four hours getting uh everything in order, all of our thoughts. I've done 167 workouts since January of twenty twenty when I got my Peloton bike to make sure we are as knowledgeable as possible. All right listeners. Now 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.

3:30 Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Ligora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do. operate with obsessive customer focus. They embedded inside a massive law firm. For months.

3:57 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 drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lagora'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. And 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 Ligora numbers essentially

4:53 speak for themselves. When they have a head to head pilot with their top competitor, they win seventy percent of the time. Lagora now has over a hundred thousand lawyers on the platform from twelve hundred legal teams in fifty countries. And crazily they went from one million to a hundred million in ARR. About. Eighteen months.

5:14 truly insane numbers. And that is the real test. Plenty 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 Lagora.com slash acquired. And just tell'em that Ben and David sent you.

5:39 Other things. You all know the drill and buy now. If you want to join the Slack, you should acquired.fm slash Slack. You should listen to the LP show to get the nerdier stuff like our updated thoughts on the markets. And a little bit less us 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 acquire.fm slash LP 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.

6:19 Excited to see you in there. The L P show has been On fire recently. We've got like I'm just so pumped about the guests we're getting and Ten K Diver, that was really fun too. Pseudonymous interview.

6:30 We've got some great founders coming up. Yeah. It's awesome. Uh, listeners, as you know, this is not investment advice. Uh very much not investment advice this time. It may be product advice, though. I've I've got some I definitely want to discuss Peloton's product lineup because I have some thoughts. I bet you're not investment advice. I bet you do. Uh, we may have investments in these companies uh that we discussed. The show is for entertainment and informational purposes only. And before I hand it over to David for History and Facts, we do want to acknowledge that a big part of the news yesterday and the restructuring

7:01 uh is that Peloton laid off twenty eight hundred people, including twenty percent of their corporate office. And uh 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, uh a super tough week for those twenty eight hundred people who had a Really, really terrible Tuesday reading this news, talking to their managers, all that, and and our hearts um go out to those folks. Yeah. Oh, layoffs are. Tough.

7:31 With There probably weren't layoffs when you were at Microsoft, were there? Like two months after I left, there was a massive round. Yeah. Yeah. Yeah. There were layoffs at UBS in my first job out of college during the financial crisis. Ultimately. Gosh, I think like close to fifty percent of the company was laid off while I was there. It's hard. It's so hard. It's I mean

7:51 Layoffs are just no fun. They're just I mean, that's obvious statement, but it's hard. Yeah. And To transition us in

8:00 Yeah. thinking about our previous episode with well 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.

8:21 Yep, forty percent. Forty percent rift. Yeah. So he's he's kinda clearly good at uh at sort of taking a

8:29 bare bones team and and making the most of it. Indeed. Well. With that. History and facts. I think that is the perfect transition.

8:39 Very McCarthy. The acquired superhero. We talked about him. The Spotify episode. We talked about him on the Netflix.

8:49 Two parter both parts of the Netflix episodes because he ended up staying for twelve years. at Netflix through all the crazy that is such an amazing story. Like going back Reading the transcripts of those episodes. The Netflix journey is amazing. Uh

9:05 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.

9:15 First off. Something that just like is wild. He's sixty eight years old. The spring chicken coming in to d to turn this thing around. It's unbelievable. He's the same, you know, roughly the same age as our parents, uh if not uh uh if not maybe slightly slightly older, I think. Than yours, right? Definitely older than mine, meaningfully older, but a decade.

9:36 Um But Yeah, as as other people ease into retirement. Uh Barry accepts his first ever public company CEO job. I know. Oh amazing. He's like the Sean Connery of tech. Like he's he is James Bond. Like he will always be James Bond. So great. Well, a few quick things about his background. There's not

9:55 A lot on the internet. About or with Barry McCarthy. Yeah. In fact As far as I could find it, I looked

10:04 Pretty deeply. The only like Dedicated Long form. Interview.

10:11 with Barry McCarthy on the internet. Is on YouTube. With the headmaster of his high school that he went to, a school called the Hill School. Is it a boarding school? It's a boarding school in the Philadelphia area. Uh it's when I went to

10:25 Tower Hill School. In Wilmington, Delaware, also in the broader Philadelphia area. People would always get the Hill School and Tower Hill School confused. We we had a little chip on our shoulders. But your upbringing is somehow like related to every episode these days. It's like are we only selecting for people in the southern, southeastern Pennsylvania region? Totally, totally the mid Atlantic region. Uh 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 A hundred views total on YouTube. Now it's up to like five or six hundred. It's still super small.

10:59 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 it for a very long time he had basically no public appearances. And very, very relevant. Two this news today that I was gonna save this for later in the episode, but one of the final questions.

11:22 That the headmaster, who's a wonderful interviewer, asked him is sort of you know, 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 present that would prove.

11:40 To be. So We all know that Very

11:44 becomes the CFO of Netflix. when the company is very, very small, still a start up. I think they're only about forty people at Netflix when he joined, and it was certainly pre IPO, pre their being. A real business there. Which we'll get into.

12:00 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

12:10 The CFO. Previously. Netflix of another company. Actually A digital.

12:17 Music. Streaming company. Did you know this, Ben? Really? No. He was the CFO of a company called Music Choice.

12:26 Music choice. Do you remember back in like the early days of digital cable and satellite TV, there used to be those channels. Like on we had direct TV growing up. I think they're in the like the six or seven hundreds. It was sort of like Sirius XM in a way. It was like each one was a genre. It was ex it was exactly like Sirius XM, but just on your cable box or your satellite box, you go to XYZ channel and they'd have some crazy, you know, like nineties era visualizations. Yes. You 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?

13:00 It's a it's a cable channel, a couple like it's subscription, revenue, music streaming, music right like What how Present. Well primed for the ultimate Spotify gig that he would take when he took them public. Some other things that I you'll learn most of this from that interview.

13:17 Um How did he end up leading Mm. 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, you know, senior investment banker to going and becoming CFO of of a company. Music choice may have been public at that point in time.

13:35 How did he find his way out to California Netflix? He got fired. As CFO of music choice. I don't know if it was part of a riff and if there were layoffs 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, organi orchestrating the riff. Um Yeah, he got he got fired and he was forty five years old. He had already had this you know, sort of a long career as an investment banker and then as a CFO.

14:07 Been fired at like What an inspiration to go from that to Having so many more chapters to come. Even now to a new chapter at sixty eight years old, like Gosh, I hope my life is that interesting.

14:21 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, you know, again we talked At the top of history and facts about it. How this was a hard week for So many people at Peloton and

14:36 You know, our hearts are with them and it's hard but yeah, it's like Barry went through this himself. Yep. So How does he end up going out to Netflix? Netflix was recruiting.

14:45 For a CFO. And like nobody wanted the job. Because I think we talked about I we may have talked about this a little bit in our Netflix. uh episode. But the early days of Netflix, like it was not

14:57 A hot startup in Silicon Valley. No. It was Far from it. You know, Mark Randolph had originally started it. Uh Reed got involved a little later. Uh and um I also did not know this. Uh 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

15:19 Parental. It was literally like Blockbuster, and that is not a good business. Oh, I don't think I knew that either, or at least I didn't didn't remember that. The other like crazy Netflix thing that I always sort of forget about until I reread it is that they sort of timed it with DVDs becoming

15:38 More widely distributed and when they were starting the company Like they sounded extra crazy because it w not only was kind of a crazy idea, but it was a bet on DVDs. And DVDs weren't popular yet. And it's like what do you mean you're gonna mail discs around? No one has a player for those discs yet.

15:56 Totally. So this was not this was a tough role to recruit for. Um 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.

16:13 It wasn't a subscription business. Barry was, you know, alongside Reed, uh Part of architecting. The true you know. incredible business model of Netflix of becoming A subscription business.

16:25 So they had done Before he joined just about a million dollars in revenue on the like paper paper rental uh model. He joins This is all pre IPO.

16:37 they implement the subscription business model, it goes from one million to five million in revenue. That year. The next year thirty five million and then hundreds of millions. Yeah. After After that.

16:49 And then The IPO, there's the fight with Blockbuster, all that that we talk about in the Part one of the Netflix story. And then two thousand three public company. Uh

17:00 Barry tells Reed. You know what, this has been an incredible journey. I'm right. I think he was had been there for maybe five years at that point. Five or six years. Uh I I'm ready for my next challenge. I wanna go be

17:14 CEO of a company next. I've realized I'm really operational. I love this. He talks with Reed, he talks with the board. They announce on an earnings call, public earnings call that Barry's gonna be stepping down. He's staying an extra year throughout the year of two thousand three to manage the transition. Do it right.

17:33 Find his next. Challenge. Netflix is boring. It's it's done. Like everything's gonna be smooth sailing and successful from here on out. So I'll go do something else. And then Amazon. Uh I don't know if they ever publicly announced, but like

17:49 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. Uh the stock Gets hammered. It dropped literally the stock price dropped sixty. Six is zero.

18:06 Yeah. Shades of What's happening with Peloton now. And sixty is a a modest drop compared to what happened with with Peloton. Yeah. Right. And it's it's crisis mode. It's it's war time again at Netflix. And Barry in one of the most just like

18:23 One of the many reasons why we love him here at Acquired in His Story is uh He he says I can't I can't leave. I gotta stay through this fight. He literally Word for word. On a public earnings call.

18:38 announces that he's staying, he's not leaving And his reason is, quote, you don't leave your friends in the middle of a night fight. It's just so good. Barry is Mr. Wartime. Like it in in the parlance of uh Ben Horowitz's peacetime CEOs and wartime CEOs. This is Mr. Wartime when things kind of feel easy and like they're gonna keep growing year over year and we don't have a you know existential crisis in front of us. Well that's when he decides like to, you know, uh oh okay, you guys are good without me now. But uh by all means, if if we're in battle, like put me in, coach.

19:12 I mean he literally in the Hill School interview he says you quote, You gotta ask yourself, Are you a wartime fighter or not? And I've always gotten my biggest thrills. Being in the fight. And then of course there's the Carl Ichen battle and the price wars and all the all the stuff that happens at Netflix. He ends up staying Until

19:29 twenty ten. So Many, many more years. Dead. Hm. originally expected.

19:37 And when he finally does announce that he is Leaving Netflix in twenty ten He could totally, you know, retire at this point. He's in his mid fifties. And um he announces it at an investor conference. This is just also amazing, amazing quotes here. He's telling the street, quote, You can infer from the record in two thousand four that I wouldn't be leaving unless things were in very good shape. There is nothing that I know that you don't know.

20:06 that would cause you to be sleepless about your position in the stock. Oh and if Barry is saying that you can take that to the bank. And then bent to what you were saying. This is also from the Hill School interview. About him. You know, m really being getting Fire up by wartime and peacetime is not as interesting to him. Uh, the headmaster asks, you know, w why did he leave Netflix? He says, I got bored. The more successful the business was, the fewer the challenges there were for me.

20:33 Fascinating. And listeners, as you can tell, we're spending a lot of time here on Barry. In part because I think it's really important to know as we think about the future of Peloton.

20:46 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. W why? And what's the track record of of this person, so what's he likely to do when he comes in.

21:01 And of course it he is uh He has an amazing way of instilling confidence. Like he he has a away with words and especially away with words to investors to bring a sense of calm. And I think uh there there is nothing more necessary for Peloton than that than Than right now.

21:20 Well, and I think the other thing You know, that's sort of one half of the magic of of Barry McCarthy to the extent uh he has magic, which I believe he does. Um You know, I think the the other half is

21:32 what he learns from this Netflix experience. And and frankly, going all the way back to music choice before that. And then compounds you know with with Spotify that we'll get into in a sec. Uh. Which is like he is probably the number one world expert in managing subscription businesses. Like

21:50 He helps architect. The OG internet subscription business. of Netflix and then uh You know, again, go back and and listen to our episodes. So much of what he was doing during those wartime years was modelling out

22:06 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 uh uh decisions with the whole company on the line about how low they were gonna cut prices and how long they were gonna 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 were gonna win that war. Like

22:39 Uh there are If there are other people in the world who have done this to the degree that he has They're few and far between. He is

22:49 in the dictionary under the definition of strategic finance. Yes. Particularly. Subscription business, strategic finance. So then You know, when he retires from Netflix.

23:01 Hm. goes and joins T C V, 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 T C V stands for Technology Crossover Ventures, which while it seems like everyone is doing this now, investing in both private and public companies. This I mean

23:21 this was a unique enough strategy when they were formed. that they named themselves after it. I mean, th that's that says a lot about how long TCV has been doing that. So he joins them. as a venture partner and uh I don't know if he was thinking that he was just gonna sort of be on boards and be an advisor for the rest of his career, but in twenty fourteen he joins

23:41 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 him to really come and transform that business.

23:53 We should revisit Spotify at some point because when we covered Their direct listing. He architected very like invent you know, didn't invent, but modernized the direct listing and everything that's happening now. Yes, taking a page out of the Ben and Jerry's playbook. Indeed. Indeed. So

24:12 He goes and joins Spotify as CFO and not CFO, but also eventually he would add Uh uh head of their free business, the advertising supported business at Spotify. So not just

24:26 The subscription business of Spotify. Oh, I didn't realize he's like an operational leader of the ad supported business. So originally he moved to Stockholm and was uh was CFO of the business in Stockholm and then moved to New York Two set up and really drive the

24:41 Free. portion of the Spotify business, which is what Taylor was so upset about. And that 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. Um So he had this

24:59 Incredible chapter there. The DPO. Everything. And then In January of twenty twenty. He retires.

25:07 Presumably fully at this point in time,'cause he's sixty six years old. And rejoins The board of Spotify. And uh Uh and spends You know.

25:18 thinking he's gonna go spend the next few years joining boards again. He joins the Instacart board and uh re uh reestablishes his relationship with TCV. Didn't he also join the board of Pandora, if I'm remembering right? Speaking of music subscriptions. That was Back before Spotify. Oh okay.

25:36 Got it. But like d just to add yet another credibil a piece of credibility on music related subscription businesses. Totally. So now let's Let's switch over two. The Peloton track of the story here.

25:50 Folks probably know, was founded in twenty twelve by John Foley, who 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 twenty twelve. I just have to say I know you're the usually the one who goes back. T this story starts in two thousand six, Whistle 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

26:18 founders there. Uh and then another one actually interviewing John Fulley on Peloton, which is great. And This We don't think about the narrative Of

26:29 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 SoulCycle 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 shtick. So I guess it was more of a flywheel than a SoulCycle, but it had the prestige brand of a soul cycle.

26:55 And I actually don't know. The history on this, you may No, but there's There's very intertwine history with Soul Cycle and Flywheel, right? There is

27:05 We will get to that in 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 Yeah, be think about Peloton in a vacuum. You know, the the the moment in two thousand twelve and I think even twenty eleven when there was ideation happening was totally You know, I'm John Foley, I live in New York. Soul Cycle is totally taking off and and this, you know Not yet connected fitness, but sort of boutique fitness. High end group boutique fitness is taking the world by storm.

27:35 And of course There's there's John who's not Really the most uh numbers oriented, schedule oriented, disciplined person, more a visionary product leader type person. And he's thinking You know.

27:49 Uh I uh 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 the we'll get into who John is in a in a sec, but uh

28:10 I was gonna do this second, but y you're absolutely right. To start with Soul Cycle and Boutique Fitness. And Flywheel, uh and Barry's boot camp and you know, all the other similar businesses out there. Yeah, so John and his wife Jill lived in New York, which is the epicenter of all of this.

28:26 And um 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 in this, you know, an instructor, an up and coming instructor in this, you know, burgeoning sort of new care category.

28:43 And this is what's just brilliant. You know A, it's so like you said, it's so hard to get spots in those classes. Like you gotta 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 scramble to reserve the spots. So Anybody it's hard to get spots with the best instructors in these classes.

29:11 John and Jill, his his wife, they were Yeah, super into this. They had two little kids. Like I can't I mean I've got one little kid. Like I can't like it it would be obviously we live in a different era now, but Even if we didn't, like there'd be no way. I could

29:27 Do this. Like there were a lot of people out there that were just uh wanted this product and and couldn't get access to it. Um So the paladin idea, like it was It was revolutionary. On

29:40 A whole bunch of dimensions. Yeah, one Was democratizing location. Like you didn't have to be in New York to get the best stuff. Two was Like you said.

29:52 elastically scaling access to the best instructors. Not the average instructors, but 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 five AM class?

30:22 So to feather back in preview a little. You know, one of the things that Hm. talks about to the extent he does talk publicly and learned

30:35 deeply from Netflix, but has just become kinda 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.

30:51 Everything on demand. wins. And it's so true, like you know the being able this this element of being able to Access.

31:00 Best in the world content. On 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

31:13 Music streaming is better than listening on the radio. Uh, that's why Netflix is better than linear T V programming. Yeah. Which is mostly true, but not entirely true. You got like sports is probably the notable exception. Right. And that uh Barry always says that you know, 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

31:40 give enough credit to Peloton 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, you know, chat based or document-based m forms of collaboration. That is a you know, on demandness of something that was previously linear. Totally. Yeah, like how many.

32:04 People 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 existing, right? But like it's slow and it's not you know. Anyway. That's what Pel Tom was. So who's John Foley? Uh

32:26 This is like it's such a small world out there. He had been Prior to Starting Peloton, he had been the head of Barnes and Nobles. Nook business there. E reader business. Uh which was based in New York. And like actually, you know, Barnes and Noble was a you know great company and then

32:44 eviscerated by Amazon. And uh Nook business. Uh and the Nook product. I think was probably a decent product, but it was just sort Too late. And they were really a fierce competitor in this market. I mean they they outlasted borders. Totally. But you know, it's interesting too thinking about the book and e reader market.

33:01 relative to Peloton too, and maybe some lessons that Foley learned from that. you know, y you can 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 Nook hardware was better than the Kindle or not. Like Amazon had the biggest selection of books, the easiest buying experience. And had the most lock in.

33:22 Okay, I do have to pull forward that thing from what would have happened otherwise,'cause it's it's we can save the analysis for later, but I should share what actually happened. So you might be giving Foley a little bit too much credit here. When He was starting the business. They wanted to build

33:40 The best bike. Beautiful piece of hardware like Apple. They wanted to build software that was uh equally elegant and really differentiated uh that bike. The original vision actually was a connect your own iPad vision. They 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.

34:05 They thought if we have a bike w even if it's, you know, like uh a bike with our software, that's interesting enough to people and we can partner with either Soul Cycle or Peloton. Oh or or Flywheel, you mean? Or Flywheel, yeah, to get access to their instructors, their content. That's the thing they're good at is the content. We'll just make this elegant device. And they actually got to term sheet with I th with um 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 uh flywheel, they actually got to terms on what would it look like to make this thing uh not only

34:44 Um uh 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 walking away from the deal so Peloton were sort of forced to do their own content and and pivot to a really vertically integrated strategy. Oh my gosh.

35:03 Talk about history turning on a knife point. Wow, what a like just like the echoes of the Blockbuster Netflix. uh situation. And and and Amazon, remember Netflix tried to sell itself to Amazon. Yep. Uh. Amazing.

35:20 Okay, so that's what Foley was doing immediately before Um before starting Peloton. But before that he had been a long time IAC guy, interactive corp, 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.

35:40 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 nineties, early two thousands. We should do an episode on IAC'cause it is

35:55 fascinating Barry Diller and media and tech and and uh him being really the first But For a long time. Sort of the jewel of IAC. was

36:08 QVC and the home shopping network. And what is that? That is like literally streamed media out via, you know, television with an interactive component that people at home were, you know, buying and calling and inter 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 dot com. I think I'm not sure exactly what

36:38 that was doing. But he had bounced around and I think a lot of people at IC Yeah, go between the A whole bunch of their properties. Yep. And I think I'm not sure if this was IAC or his his next gig, but he ended up taking over The

36:52 Post 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 twenty five million in revenue or something. Still, you know, relatively small on the to compare to the grander scale, but um you know, had had sort of done this take a start up and uh rehab it and build it bigger.

37:14 So he hadn't actually Done a start up from scratch, but had built something meaningful with a small team. Man, Eva, that's like the cocker of the internet. You just it just won't die. Yes. Amazing. Uh

37:29 So you would think like, you know, gosh, we're telling this story now and hindsight is twenty twenty. Like Incredible vision, proven demand for this product. Like, yes, it's gonna be hard to build a full stack company around this, but like Financing hard stuff, like that's what builds moats, like this should be an easy fundraise. And

37:50 Ben, as you referenced the John's episode on 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.

38:07 Thousand dollars to start. From friends and family. At a two million dollar post money valuation. 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 forty five billion dollar

38:26 Public. Company. IPO'd at eight billion, went all the way up to I think forty nine billion. Uh and then today is floating. A little above the IPO price between nine and ten billion.

38:38 Well I mean From a two million dollar post money valuation. for that first round. I mean that's twenty percent of the company he sold for Four hundred thousand dollars. Yeah, all from individuals, twenty five K and fifty K checks.

38:52 And then did a three and a half million dollar round, I believe also all from individuals after that. Uh They Do a Kickstarter in twenty thirteen. I had forgotten this. I can't believe this thing was a Kickstarter. Until it got pointed out in the acquired slack, like

39:08 It was a Kickstarter. And it was like essentially a failed Kickstarter. Like it didn't technically fail, but it was good. So here's the thing. Um I just pulled it up. We'll 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 there from eight years ago. Aside from what like the weights holders and they ch they tweaked the water bottle uh location. It's the same bike. Yeah. So They raised three hundred and seven thousand three hundred and thirty two dollars in the Kickstarter. Their goal was two hundred and fifty.

39:42 And John says on the how I built this episode that half the people who backed the Kickstarter were already investors. So Mm-hmm. We all know Peloton is a killer product. I mean, you and I rave about it. They have these ludicrous NP NPS scores.

39:59 And yet. When they laid out the vision. And they show a very well produced video with a like a very You know, You get a sense of what the experience is like from this video.

40:12 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. Yeah.

40:22 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. Um Yeah, this product is not something you can really just sell over the

40:41 Internet. Like you got like you said, you either gotta try it or you gotta 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

40:56 Start and end up selling it. They Make the Especially at that point in time. Completely orthogonal.

41:06 Decision. To how you know. tech companies and startups were supposed to sell. They go to the Shorth Hills Mall in New Jersey. And they

41:15 Rent? A store in the mall. And set up A mall store. And they start.

41:22 selling these by hand in the mall. It's a beautiful 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 uh super explicit as a strategy, but the the realization that Hey, until you try this thing.

41:44 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$2000 a bike. plus a subscription fee price point. And so the mall was sort of necessary and They have these anecdotes about how people actually weren't

42:02 in the market to go buy gym equipment, but they're walking by, they try it, you know, they they have someone size the bike for you, you throw on the headphones, their their goal, their sort of KPI is get you in the experience as soon as possible after stepping 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? I 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 got headphones on and typically people are together, so you look at your partner or whoever and Then you're like, Whoa. And

42:38 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. You know, I'm just remembering my own experience before I bought uh the Peloton, which I didn't get until this summer. So it was not like a pandemic purchase per se. Um But I had been hearing from you and plenty of my friends like how much they love it for years. And and that wasn't even enough to put me over the edge.

43:03 I I had uh I got a digital subscription, so I was just I had a crappy old bike in my garage that I was using it with. I 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 Telitons there. And I was like, Well, I'll try I'll see what the actual bike is like and then I was like

43:22 Oh, this is awesome and my two hundred dollar Amazon bike in the garage. It's night and day compared to this. It really is a great bike. It's the sort of magnetic um resistance. It's the belt instead of the The chain, I mean everything about it is it is a nice piece of hardware. It really, it really is. But yeah, yeah, you gotta

43:40 You gotta try it. Which it's in it's interesting you're describing the 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.

43:59 But yeah, okay, so you mentioned price. two thousand dollar bike. So The at the Kickstarter, I think they priced it like fifteen hundred on the Kickstarter, I think, as early. But then when they first tried to start selling these things

44:15 They priced it at twelve hundred dollars. And it wasn't Sally, this is like fascinating. This is a fascinating little detail. And then They talk to some people about this, so you're getting customer feedback. And what they realized was that

44:29 For twelve hundred dollars, like they're thinking like, hey, the strategy is to sell the hardware you at cost or at a loss. It's like the video game console strategy. Like get the video game console in there and then we 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. People thought it was The hardware couldn't be that great if it was twelve hundred dollars and they realized That If they raise the price, they raise the price up to two thousand two hundred and forty five dollars.

44:57 That then in people's minds this becomes this like jewel premium expensive aspirational luxury product. Like I'm treating myself to this. splurge'cause it's so awesome and I'm gonna like love it. And at the twelve hundred dollar price point. They it was

45:16 It was Hurting. That it was it was preventing that from happening. That's absolutely fascinating. So it didn't change a thing about the bike. They just raise the price by a thousand bucks. You know, in the in the Buffett parlance of price is what you pay, value is what you get, they're using price to signal value.

45:31 And that's supposedly another one of the big things that really helped Uh really help sales. Take off. Yeah, so that I I'm gonna pull forward a playbook theme here.

45:43 So The N 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 p picking customers who have extremely low price sensitivity.

46:00 And what happens when you pick people with extremely low price sensitivity and you select for only people who are willing to throw twenty three hundred dollars 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,

46:18 their annual churn, if you sort of take their monthly churn and annualize it, is something like nine percent. This is an un unbelievably sticky business when you look at most consumer businesses they're like fifty percent annual churn. Yep.

46:35 Last. Summer. June thirty, fiscal year and so when they reported their last full year fiscal end, I believe Chern was like point. six monthly churn was like point six percent worked out to about seven percent annual turn.

46:50 Wow. But like that's those are Netflix numbers there. I'm not sure. Yeah. I th I think it's meaningfully better than Netflix. Maybe maybe I should look at what Netflix's turn 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 twenty four hundred dollar bike. On the other hand, once you get'em, Boy is that sticky. So I don't know what revenue was for

47:11 twenty fourteen. uh which is their first kind of full year of sales and uh they implement some of these strategies. I believe it was Ten million dollars ish. In twenty fifteen though. They do sixty million dollars of revenue. And ahead of that.

47:27 the end of twenty fourteen. They are able to raise their first Institutionally led. Round of capital. This is twenty fourteen. led by the legendary, you know, early stage investor. It is technically a series B, but the

47:41 The seed was The two hundred or four hundred thousand dollar route and then the the A was the You know, still individuals three and a half million dollar round. Led by the legendary seed investor. They are quite now a legendary seed investor.

47:54 Tiger Global. Get out of here. This is amazing. It's an unbelievable bet. In twenty fourteen, it was a ten million dollar total round on a thirty five million post where Tiger put in

48:13 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.

48:27 Everything that would be to come. In uh in tech over the years. Uh an adventure. Yeah, Tiger leads the first institutional round. I do think, by the way, this is one of the things that w gave among many other very successful investments, but was a big part of the story for a Lee to

48:45 when he's left and started addition and wrote and raised over a billion dollars for addition's first fund. Uh Peloton was a big Big part of that. Yep. Yep. For Lee, for addition. You went for Tiger itself, too. I mean. Gotta imagine that that

49:00 Was it big part there notoriously? tight lift our friend Mario Gabriele wrote I think the best piece out there on them, uh, which was still without without insider access. Um But shape their strategy too. Yep. So

49:14 Sixty million dollars in revenue in twenty fifteen. Twenty sixteen they do a hundred and seventy million dollars in revenue. Twenty seventeen there is three hundred and twenty five million. At a one point three. billion dollar valuation.

49:26 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? Yep. 'Cause he he pitched everyone. Everyone. Literally everyone. Mm-hmm.

49:38 Twenty eighteen, they introduced the tread. Product. uh the treadmill. And the digital app subscription. It'd be fun to talk about that. The you know, I started as a digital app subscriber and then Which is how it's like thirteen dollars a month.

49:52 Yep, it was twelve ninety nine. I think I originally started because I think there might have been like a Some a deal with Apple or somebody like a first fr tri a free month trial or something like that. Were you a part of the Covid offering, the three month COVID thing? Yeah, I think that might have been. So that

50:09 That was totally nuts. So John Foley talks about this. He says, uh uh about the beginning of Covid. He said six months ago we had about a hundred thousand digital subscribers for the business and within forty five days of COVID hitting Uh they they um 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 one point two million people who had jumped on the trial. So call that a 10x increase in weeks.

50:38 Wow. So that was a Very I mean w again, we'll get into the unit economics of it later, but uh at least from a customer acquisition perspective, that was a great way to spike the number of subscribers they had. Totally.

50:51 Um And the digital app experience is like Surprisingly. Full fli full featured. You know, I I use just that for quite a number of months before I before I got to try the actual hardware at a hotel.

51:05 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 iPod on an old uh 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. You're um it knows you're doing the ride and it knows how far into the ride you are, but it doesn't actually know.

51:35 You 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 you can hack together, you can do a hack a peloton and get some of the integrations with third party sensors. Um

51:49 But I think to get like a similar quality bike. You're gonna be spending Roughly the same amount anyway. And so like why wouldn't you just like that's what I kinda decided is like, well I'll just get the whole ecosystem. W why wouldn't you get one anyway? Because the connected fitness digital only subscription is thirteen dollars a month and once you have a bike, you're it becomes forty dollars a month. You're paying forty dollars a month. Uh okay, so I know you've got some fun stuff on this. Twenty nineteen, people start talking about

52:18 Everybody of Silicon Valley knows this is a great business now. People start talking about An IPO going public. Which happens in September twenty nineteen. But leading up to that there's Kind of an issue with the business that they gotta sort out. Which is Uh.

52:34 Earlier in twenty nineteen, they get sued for first a hundred and fifty million dollars and then they up it to three hundred million dollars by the music publishers, national music publishers association. Mm-hmm. Because They're obviously using all this music. as part of the classes of Peloton.

52:50 And they didn't have Proper sync licenses. Yes. So This is my

52:56 B one of my larger bear cases for Peloton. So uh m music licensing and gross margins. Uh a a a treacherous tale. Well, if you look at Peloton's income statement today and and across recent quarters, so we're at sort of a relative point of maturity here. Uh about a third

53:17 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, uh this is not eighty six percent gross margin like SAS's.

53:41 it's more like sixty six percent gross margins. So a little examination. Why do we think that this mostly goes to music? Well, in part, the variable cost for everything else should be pretty low. I mean, maybe bandwidth is probably the next highest cost for for streaming video. I have some particular beef, uh As a pedantic person with the video that they do stream, I find it to be too low frame weight.

54:08 too low frame rate, uh to have some motion blur, to be a little bit compressed, but all that aside, it it's still expensive to stream for video. Now, d do you know do they put um content production cost in Variable cost here too. Hype Don't know if that is in

54:26 the cost of revenue for the subscription. I would guess not. I would guess they would put that uh down in in either G and A or I don't know, it might be in there. But you know, I I and I don't I don't know. I haven't dug in deep enough to know, but I 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 economies and all that. But uh my understanding is that the top

54:55 Peloton instructors make like five hundred K 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 uh of subscription annual revenue. That's a drop in the bucket. Totally. So okay, let's assume that the largest part of this thirty three percent of cost of revenue is 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 I knew you were gonna get into this, or the radio.

55:28 Peloton actually requires multiple licenses for the particular way that they use the music. So first uh Peloton, I think is technically just like the radio, a live performance. So uh live performance royalties must paid out 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. Uh but they are also need a sync license in addition to synchronize those songs. with the video content. Yeah, if you're gonna, you know, use a license in

56:05 A commercial or a movie. Exactly. And just as a quick aside, an aside from an aside, the interesting bit about sync licenses is they require the approval both of the sort of songwriter, the person with the publishing right, and the performing artist who owns or 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 uh the service, which a lot of people were really upset about, It was weird because so you're like, Wait, but some of this artist's songs are on there and some rides with those artist songs got removed, and that's because those songs had different

56:49 Songwriters. Behind them. Ah, so many people with veto power. What a Byzantine Industry. Crazy, right? Okay, but back to

56:59 sort of this slight gross margin problem. So according to a piece uh uh from Tricordist, which is a music industry site, Peloton pays out 3.1 cents every time that you are on a ride and hear a song. 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 Three point one cents. If you ride every day.

57:24 And people don't ride every day, but I think people ride about twenty days or they use the the product about tw twenty times per month. But let's say you ride every day and assume there's about ten songs per ride and I went back through my recent rides and looked, that's about right. That's nine dollars of your subscription. revenue that is going straight to music. So if you're on the bike subscription. That's like twenty three percent of your subscription that you're paying to Peloton goes immediately

57:51 to the labels. Which Kinda checks our math above that the biggest part of that that you know one third. of the cost of revenue.

58:00 is actually for music. Yeah, uh of course. If you're on the digital only subscription. That's really high, because if that's only thirteen dollars 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 uh large enough that they've negotiated a

58:19 specific revenue share, you know, somewhere between fifteen, twenty five, thirty percent, something like that, uh, 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 only 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. A hundred percent. I mean it is Mm.

58:51 Okay, you you're leading the the horse to water, I'm the horse, here's the water. So uh 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.

59:16 But really no incentives for you to actually go to the gym all the time. They kinda want you to do the minimum amount of Like to stay subscribed, like stay engaged enough with us. But don't cost us any money.

59:31 You know, we wanna like minimize the amount that we have to pay the music labels on your behalf. Which is interesting. So I was thinking about this, you know, like uh prepping for the episode and I slept on it. When I woke up this morning, I kinda realized Because 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.

1:00:02 with the music labels rather than paying per stream. Because Peloton 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

1:00:20 You know twenty percent or twenty five percent or whatever it is ends up uh 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. Very much so. Uh if they don't, they should.

1:00:38 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, a fifteen hours across a month. So I was thinking the same as like, you know, a thirty minute ride every day for a month. And instead of the nine dollars that I sort of estimate that Peloton has to pay.

1:01:08 Spotify is closer to like a buck twenty. 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 we pay a pittance to to You know? the the labels and the artists. And in this world, because of the license structure,

1:01:31 It's a meaningful part of Cogs. one way to look at it is it's the meaningful part of Cogs and sort of in the the bare lens. Another way to look at it is like Artists should really embrace Peloton. Yes, very much so. Which you gotta wonder, is that part of what's driving like

1:01:48 The Taylor ride series and the Beyonce ride series, and the Peloton is notoriously very collaborative with the most popular artists. So September twenty nineteen. Dave. Settled this lawsuit, they figured things out, at least with the sync licenses.

1:02:04 Uh They go public. The IPO happens. S one hits. Fiscal year twenty nineteen. So fiscal year ends June thirtieth, as I've said. So for the twelve months leading up to June thirty, twenty nineteen.

1:02:18 It did revenue of nine hundred and fifteen. Million. For a five year old company, that is or a five year product that's been in market for five years. That is Impressive. That is up. Over a hundred percent from four hundred and thirty five million.

1:02:33 The year before. Of that nine hundred and fifteen million, a hundred and eighty one million. is subscription revenue, which is up from eighty Million the year before, so growing even. Faster.

1:02:45 Um We already talked about Um margins on the subscription revenue. Interestingly, The hardware.

1:02:52 Revenue connected fitness products is the segment they call it. Also about a forty percent. Cross margin. So they're This is the benefit of you know raising the price a thousand dollars.

1:03:05 Right, right. They actually make pretty good margins on selling the bike itself. So uh I couldn't find This mostly'cause 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. Acquire.fm slash slack, and we would love to talk about this.

1:03:24 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

1:03:44 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 multi-million dollar homes writing in fancy places. It's expensive to o you know convince people to do this new behavior. And Uh I think The the

1:04:04 plan at the time is like, okay, don't just don't lose money acquiring 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. So 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 a

1:04:30 may not be applicable anymore. But in the most recent full fiscal year. Which ended June thirty.

1:04:38 twenty twenty one. They spent seven hundred and thirty million dollars on sales and marketing. Uh and they added about one point four million gross ads on subscribers. Uh 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

1:04:57 Cack on that is five hundred and twenty one dollars. Per gross subscriber added. That is, to your point A lot of money. That is a lot. That is a very, very high CAC. Five hundred and twenty-one dollars per new. Subscriber. Not in the B2B world, but it's almost unheard of in B2C.

1:05:16 Like a getting a consumer Like paying five hundred dollars for a consumer, like no one does this. If you go out and, you know, put that in your pitch deck around Silicon Valley, like you're gonna have to have a very high L T V. Well now Uh. The eighteen ninety five one thousand eight hundred ninety five dollar price point for the bike, which is what it was until they started doing crazy stuff with their pricing. Uh, but they had lowered it from the twenty two forty five to eighteen.

1:05:46 Ninety five. at a forty percent gross margin on that hardware, that's seven hundred and fifty eight dollars. So they're more than making their money back. Right. They're making they're making a little, maybe a a hundred, couple hundred bucks. Total. On each bike.

1:05:59 Yep, they're making they're making Some amount of contribution margin on the bike. Um But then you attach the subscription Which You know, with the crazy low churn rates that they have the implied life forty dollars a month is over ten years. Sixty six percent gross margin.

1:06:16 Right. Let's cap it at five years for a customer lifetime'cause Ten years too crazy. Let's assume that that's not gonna happen. At forty dollars a month, that's two thousand three hundred and forty dollars. in subscription revenue. Over five years.

1:06:30 Wow. So Yeah. Pretty. Dang good business. Interestingly,

1:06:37 At the IPO. happens right after the whole we work debacle. Which we covered on this show with Dan Primack. Also a big Peloton fan. Uh At the time. That was that was fun. Um

1:06:50 The IPO is is not a good one. Uh prices. around eight billion dollars. But then trades down eleven percent on opening to a seven point two. billion dollar.

1:07:00 market cap. So we're talking like Seven X trailing twelve months revenue, but like this company's growing over a hundred percent a year, so you know Three X forward revenue with pretty good unit economics that we just discussed, like Yeah. Interesting.

1:07:19 Yeah, and this is in an era too where you don't have a lot of busted IPOs. So d this is you know, before Covid, but it was still pretty go go times for these tech businesses. A little uh disconcerting that

1:07:34 Traded down from their IPO price. Indeed, indeed. And then they don't really help things. Shortly after the IPO and the holiday season twenty nineteen rolls around. Wait, wait, wait. Before we 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'cause I want to hold that in my head as we continue through here. Okay, so rough, rough numbers. Five hundred, five hundred and twenty bucks to acquire a customer.

1:08:02 And break even to slightly profitable on that with the hardware. And then two thousand three hundred and forty dollars of lifetime.

1:08:13 Revenue. Assuming a five year twenty customer lifetime. Twenty three hundred of L T V and is that Contribution Or is that That's revenue. So then two thirds of that. Hm.

1:08:25 Your analysis's contribution. Okay, so we're looking at something in the neighborhood of like fifteen hundred dollars of contribution on the subscription, even if we cap it. Yeah. Five years.

1:08:37 So every single person they acquire, not only are they breakeven or probably a little profitable just by selling them a bike, but then they make another fifteen hundred plus dollars in Pure profit. by retaining them over time. Yep, yep. So you would

1:08:56 This 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 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.

1:09:24 And thus we end up with the holiday twenty nineteen Peloton Wife commercial. Yeah. Uh which kinda is a funny story. I mean like you know, it's uh Does 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's good for everyone. It ends up being good for that actress. Yep, good for Ryan Reynolds.

1:09:42 Oh my God. The aviation gin thing that came out the next week is just genius. We'll we'll link to it, but people go go Google. Peloton wife aviation chain and watch that that commercial. I also thought the Peloton wife commercial thing was like pretty overblown. I mean it it it feels like every year stuff gets more and more insane. So

1:10:04 Uh uh 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 I didn't go back and watch it, but my recollection of it

1:10:20 Put the controversy aside is that the commercial itself was like Yeah. Fine. You know? Uh Like

1:10:27 But then they got so much. hype out of it. But this sets Peloton's track record for uh they can become a dominant trending topic in a pop culture y way, which Yeah.

1:10:40 Uh every time they would come to dominate headlines after this It's not really good for them. Other than the one which is like Hey.

1:10:51 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 treadmills and the the treadmill recall and the yeah, like it 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.

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1:13:01 I was the most fortunate person in the world to uh in January twenty twenty Have just so happened to have bought a Peloton at that moment in history. I didn't realize you so you bought it before the pandemic. I bought that and my car.

1:13:18 In January of twenty twenty, totally randomly and by happenstance, which both ended up being unbelievable assets to have. I actually bought A uh Olympic weight set off Craigslist right at the same time. So not as not as high value as you, but like stuff that like immediately became unavailable.

1:13:37 A hundred and eighty bucks maybe for like a full Olympic weight weight set. Which now is like a thousand dollars. Yeah. So great. So the pandemic hits, you know, like you said.

1:13:47 If Peloton had Very good product market fit with a Certain narrow Customer segment. Before

1:13:55 The pandemic was great business. The pandemic. Made it have. instant product market fit with many, many more segments. They add roughly a million Subscribers.

1:14:05 In the next year. Revenue. And uh the fiscal year ended June thirtieth, twenty twenty is one point eight billion. in the fiscal year ended june thirtieth, twenty twenty one is four.

1:14:17 Billion. Yeah. the stock trades up as we've talked about to a peak of over a hundred and fifty dollars per share at a forty nine, I believe, billion dollar. Market cap people think this is

1:14:31 Going to the moon. And like rightly so. I mean, it's an amazing product. Uh if you know, fitness has now become fully digital, they are the leader in the category. Uh You know, so much. So much to love here. Th 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 and Oh yeah, there's like echelon out there. It's crazy. But also pioneering this category of connected fitness, which says, sure, Peloton's gonna do a tread and a and a bike, but they're not gonna do a mirror and the and uh, you know, band based weight set and uh you know there and a yoga thing. Like the the there's all these brands they're saying like ah Peloton

1:15:14 does a little bit of that, but that'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 I'm curious your thoughts.

1:15:27 Connected fitness. both within the Peloton suite of products and competitors. Is it a broad thing? Or is this something that just works really, really well for spin classes? Great question.

1:15:42 I've done a bunch of the Peloton strength stuff. I think that works well and I think that the Peloton strength uh classes definitely appeal to a crow who is not going to buy an Olympic weight set in their garage or is not going to go to a gym. Um I know people with the mirror who are very happy with that.

1:16:03 Uh I think it's pretty broad. I think the bike is c is the first and best. instantiation of it. Interestingly, fully and 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, thinks 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, than stationary bikes. Well, they also sell the treadmill for a lot more money. That's true too. It's interesting, right? Like the running it's different though. Like the

1:16:34 I'm sort of halfway in between on this. I agree with you. I I both have an Olympic weight set in my garage, but I use the Peloton strength stuff more often, especially as I like get a little older and the idea of, you know Squatting and bench pressing is less appealing to me. Um Uh, I think the s the strength stuff is pretty good, but I can't imagine buying a treadmill or using a a connected fitness for running. We're lucky we live on the West Coast. We can run outside year round. There's plenty of places where that's not possible.

1:17:05 Yeah. I mean it says a lot that like ultimately all connected fitness is a digital Uh. facsimile facsimile of a real world experience. And there was a very, very popular real world experience of spin classes.

1:17:21 And It's interesting that that behavior never really existed in the real world for running. I mean there's like Barry's boot camp, but That is not a sweeping well, part of it is, like what a a third of it is or half of it is. But there's not like a sweeping

1:17:39 international movement the way that there was with spin, where it's running to an instructor. Yep. Yeah. So to maybe maybe to like super simplify your question. Uh my answer to your question. It's anything that's instructor led. That

1:17:54 Is A big market. on the offline world can be an instructor led large market in connected fitness. I I agree with that. Um

1:18:05 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

1:18:17 Be outside in beautiful places and just kinda go. And you have a bias there. Like I I'm the exact same type of runner, but You know, uh 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 glasses, like these are two different products. Yes. Anyway.

1:18:37 September of twenty twenty. This is where I think things start to get a little wonky with Peloton. They introduced the bike plus. In September of twenty twenty. And we should say by by September of twenty twenty

1:18:49 it's basically i impossible to get one of these the the the Peloton bikes at all. There's like a four month backlog. Pandemic hits and unless you're getting one in the first week or two, you're out. months before you can get one because Peloton doesn't make any of their own bikes. Uh they certainly don't make any 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.

1:19:21 You would think. a reaction that would be to raise prices. Like they certainly they have a total pricing power. Now to the their philosophy and like we've been talking about, they want as many people to access Peloton as possible. Blah blah blah. Okay, great. But So they introduced the bike plus. They price it at twenty four ninety five.

1:19:39 The original. Bike remember had been twenty two. Forty five. And David, you you bought a bike plus, so you know the differences of this product firsthand. So they lower the price of the original bike to$18.95. Like why would you lower the price of this right now? Like there's insane demand for it. And why would you

1:19:58 introduced the bike plus at only twenty four. ninety five. When you're selling treadmills for three, four thousand plus. Clearly there's like Appetite for

1:20:09 your core segment to buy expensive Products here and they're not that price sensitive. Yeah. So the bike. Plus

1:20:17 Yeah, after when I decided to buy a Peloton. I w 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.

1:20:34 It arrived. And I gotta say, like this is only my experience. It was a super crappy product. The bike plus. Yeah, I thought it was actually a worse product. Than the bike.

1:20:46 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 drive me up a wall.

1:21:15 That was I was gonna get to that last, but yeah, a few other things like the um my garage is 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. Um

1:21:34 It's just a whole bunch of like really weird little things like that. The main gimmicky feature is you can flip the screen out sideways 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. Did you ever try that? Yeah, A I don't use that that much. Usually when I'm doing strength I'm doing. strength in what I'm doing. the bike I'm I'm cycling. But B, there's like a forty dollar little bracket you can buy that I did for the original bike.

1:21:58 That you can install pretty easily to then have the screen swivel and it's like wait, why would I pay a thousand dollars more for that? Anyway, but yeah, what you said about the screen, that was the that was the Dagger for me. I was like This is a worse experience because they have a Higher

1:22:13 Mm. Bigger screen. But they're using the same ten eighty P crappy video on it and it looks way worse. It was just like it it just didn't make any sense to me.

1:22:24 So I returned the bike plus. So now let's think about me as a customer for Peloton. By the way, I love that in these episodes, like where we have personal experience, like half the Airbnb episode was my experience as a host. And now here's here's David's Peloton buying experience. People are probably like Okay. This is irrelevant. But no, I think this is illustr this is illustrative, I think, of some of the problems with Peloton. The product was not quite right. The pricing was

1:22:49 weird that they did with the product suite here. So they ch they roll a truck to do the delivery for me as a customer. For the bike plus which is crazy expensive. Crazy expensive, right? But they're selling. Yep. They roll they roll a truck. In

1:23:08 Oh. cable parlance of a truck roll for a customer service. They install the bike plus for me. The shoes that come with it, the cleats didn't fit, so they had to send me new cleats. So all right, that's another, you know, shipping cost, customer service, et cetera, uh customer service call.

1:23:26 Uh I use the bike plus for lumine. I'm like, this is Not that good. I return it.'Cause they have thirty day, you know return policy. They roll a truck. They pick it up.

1:23:36 I But The original bike, which by that point in time the price had dropped to fourteen ninety five. So I had just I had spent twenty four ninety five. They've rolled a truck. twice already. Now I just spent a thousand dollars less. I got the bike, they rolled a truck. There were some problems with the pedal. They rolled a truck to do another customer service for me. So four truck rolls.

1:23:59 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 uh it's brutal. And I can't imagine that my experience is wholly unique here.

1:24:16 I wonder. I've yeah, we only had the person come out once and it all thankfully worked worked really well. So I'm a very happy customer, but yeah, to your point, like how long do they have to retain me to even break even on me now? Right. Right.

1:24:29 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

1:24:44 keep attracting that next concentric circle out from the core affluent. customer. 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.

1:25:03 The And let's not talk about supply chain and inventory and stuff yet. Uh made their business really not resilient, all the the things that they did there. But they probably should have

1:25:16 Easy to say in hindsight, but not shipped the bike plus and not dropped prices yet, even though they need no they need to do both of those things in the longer term. Yeah, the Bike Plus was a product that needed more work before shipping. Uh And then and then In terms of like

1:25:31 cannibalization of their existing customer base. And I think they really hurt themselves a lot on some of the aspirational aspects of Of the Peloton brand around this. Also simple things like

1:25:44 The bikes that the instructors use in the classes are the original bikes. If they really want to push the bike, like why don't they use pluses. Totally. I thought that was so weird. Like 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.

1:26:06 Anyway, there's just a bunch of puzzling decisions here. And perhaps the most puzzling is In December twenty twenty. They announced.

1:26:17 That they're buying pre-core. For Four hundred and twenty million dollars in Cash. In cash. And you and I both went and looked this up because we were like, I remember the four hundred and twenty million dollar precor acquisition, which is a Washington based company, by the way. That's right.

1:26:33 And uh windmill, right? Yep. And I was hoping they use some stock to pay for it, given their stock was you know, trading ludicrously high at the time, but alas They spent the uh the the the rare asset that they have on k on hand there, the cash.

1:26:48 uh and primarily bought precor for their uh manufacturing prowess to have some you know, uh US based manufacturing to alleviate the supply chain stuff and to just have in house capacity because at some point maybe they wanna Yeah. Uh a secondary benefit that comes with it is pre-core is really, really good at selling.

1:27:11 in commercial distribution channels. So Peloton sort of then can inherit all those relationships with all the hotels to get more more pelotons 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 um starting to do some work leveraging Pre-cores. uh manufacturing to hopefully start manufacturing some some Peloton bikes. Alright, that feels like kind of a

1:27:35 Uh I wanna say pipe dream. Either a pipe dream or a very, very far out investment. The idea that you would retool precoz manufacturing to manufacture bikes. The commercial relationships, that that makes a little more sense to me, but um So it was a little puzzling at the time. Then they announce

1:27:55 In uh Spring of twenty twenty one that they are going to build the Peloton output park to in source their own Manufacturing in Ohio. So this is now both both of my homes they're uh trying to manufacture in. That's right. That's right. We'll come back to that in a bit. But that's another four hundred million that they announced they're breaking ground on.

1:28:15 Yep. Again, cash outlays. Uh and uh And then in in the spring of twenty twenty one there's the treadmill recall and some of the tragic accidents uh around um You know, with the treadmill, the company doesn't handle that super well. At first they sort of say, Oh, you people aren't using it right. It's like well Kids are like

1:28:35 Dying and getting hurt here. Like that doesn't matter. Um Uh stock drops fifteen percent around that. They have show me a culpa and say, you know what, we are gonna play ball with the investigation. We feel super bad that we mishandled this originally. And then November of twenty twenty one, last fall.

1:28:53 They miss earnings. They cut their Outlook. And the stock gets. Hammered down thirty two percent.

1:29:01 In one day. With the earnings announcement. Mm. They have some more holiday season, uh media commercial uh uh

1:29:10 This is also probably good with the the new sex in the city, where Mr. Big dies on a peladonna. Uh no,'cause that tanked their stock price and it never recovered. It did, it did. Although I know That to me feels like a the wrong reason to uh to sell the stock. But It's indicative of uh the

1:29:31 I think when something like that happens Mm. So Someone died on Sex in the City. And

1:29:39 uh was on a Peloton and Peloton stock drop. And you might say, That's so stupid. But I think though 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.

1:29:59 And That says a a lot. That says way more than the Sex in the City episode. Yes. So then The other shoe drops. The other cycling cleat drops. On January twentieth.

1:30:13 news comes out that supposedly Peloton is completely stopping production. Of new hardware. As they have an inventory glut. that they can't sell

1:30:24 Demand has completely dried up. It all got pulled forward. Through the pandemic. Um This is bad news. There's a one point three billion dollars worth of inventory that they're sitting on.

1:30:35 Now. Yeah. Yeah, so we went from literally they can't make this stuff fast enough. There's a 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.

1:30:50 They can't sell these things. There's a lot of things to applaud the management team about and John Foley and the doggedness and the entrepreneurism and the in invent pure invention of a movement. And recognizing talent and hiring the right instructors and finding ways to align incentives and building this pr like so much. The one that is really Really.

1:31:12 Damning. Is all the quotes that Fully 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.

1:31:31 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 nine percent in Q four and then five percent.

1:31:45 in revenue in Q one. And this company just believed that there was way, way, way more demand out there and sure the the pandemic accelerated us, but we're not gonna have to sort of make up for everything that was pulled forward. It's just gonna continue to be high demand from here and they were just flat out wrong.

1:32:02 Totally flat out wrong. And we'll Mm-hmm. Well we'll wrap up the few last points to bring us to to Literally today, present day, but uh One of the things when they release earnings yesterday.

1:32:13 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 three point seven to three point eight, 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 that is not good. That is not good for a growth company.

1:32:34 No, and you look at the the level of certainty that they had that it was that They just needed to keep expanding to service all this demand. Not only did they plunk over eight hundred million dollars into manufacturing capacity between pre-corps, which has its own business, so it's justifiable, um, assuming they paid a reasonable price for it. And of course the the Oh the Ohio factory. But You look at their employees.

1:32:59 I mean they were growing employees pretty quickly. From twenty fifteen, sixteen to twenty twenty. But when you look at As of January twenty twenty one, they had four thousand employees. That ballooned it over the next year to about nine thousand before these recent layoffs.

1:33:17 Now, this is a very complex business, but like nine thousand employ and that's Just corporate, right? No, that's that's everyone. Oh, that's everyone. Okay. Yeah. Yeah. And the layoffs of of course were twenty eight hundred people across the whole business and I think about twenty percent of the the corporate staff, but they were really, really investing, uh and very certain this demand was there.

1:33:39 Yep. So After that news on January twentieth, a couple of weeks later. An activist investor called Blackwell's Capital. comes out and announces that they've accumulated a five percent stake.

1:33:52 In Peloton. 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.

1:34:03 And they publish a deck calling for Foley to resign and for the company to Initiate A. strategic sale process. Uh And that brings us to yesterday.

1:34:13 February eighth. Twenty twenty two, where They now's earnings. They're bad. They lower guidance. Significantly.

1:34:22 They pull the plug on Peloton Output Park. They cancel The plans to build the manufacturing. facility in Ohio. They lay off twenty eight hundred people. And

1:34:34 Barry McCarthy. It's writing in. the new CEO. And the way they sort of message this is that John Foley is stepping down as CEO, which is the Or at least that's what people hear.

1:34:46 That's what people hear. And it's Somewhat to appease these activists. Investors. But let's like zoom in on what mechanically is actually happening here. So John Foley becomes the executive chairman. Now what an executive chairman is as compared to a non executive chairman is they're still the chairman of the board or the chairperson of the board. Uh they no longer have

1:35:09 day to day responsibility running the company. Uh however, I believe they still are a compensated employee. They still draw a salary. They're still like a an employee of the company. In addition to being Um uh just a board member. So they share both this sort of like

1:35:26 director level And um pseudo operational. It's more like they're working with the current CEO uh to 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. uh who is an employee of the company.

1:35:47 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.

1:36:01 And and here's the real kicker on this whole thing. As many of you will know We've been on our heck of a run over the last 20 years of having dual class structures put in place for founder led companies. Uh and here's a quote from Matt Levine at Bloomberg.

1:36:18 Peloton has a dual class structure. uh in which the founders and some insiders have stock with twenty votes per share, and Foley has a lot of it. According to Peloton's proxy statement, he controls thirty-nine point six, so right around forty percent, of the voting power of Peloton's stock, and his co-founders own another eighteen percent. So there you go. That's enough to that's over fifty percent of the voting power of the company right there. Right. Fully can't do it alone, but with

1:36:48 One probably it's certainly both of his other co founders. basically can make a unilateral decision. So The message Peloton wants Blackwells and other upset shareholders to hear is John Foley has sort of

1:37:02 moved on, stepped down as CEO, uh, 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

1:37:16 Barry would. Take this job if he didn't feel like He had full autonomy. Totally agree. And the memo that he writes to staff, which

1:37:26 We've already read some. From some of it 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? Yeah. Oh, what a leader. So He writes. I know today's restructuring news has been difficult.

1:37:39 There's no sugar coating it. It's a bitter pill, and in my experience, this thing has a long half life. But the hard truth. is either revenue had to grow faster or spending had to shrink. The math. Simply didn't work otherwise, and the status quo was unsustainable.

1:37:55 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

1:38:09 The truth is uncomfortable. Or inconvenient. to deal with. And then Ben, I think you you read the The great s the great part about the the comeback story.

1:38:18 Uh after that. You know, and then he closes it, 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. Full stop. That is what we are here to do.

1:38:40 And that will require us to take risks to 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 Wilbers. It is great. Yes, the whole memo is up uh is like kicked off with you know, it rather than like hi, I'm your new CEO. It's boy do I love riding with Dennis Morton and Matt Matt Wilbers. Who and then 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 Well Barry has no social media presence. He's basically not on the internet. You gotta wonder, has he has he met any of the instructors yet, too? Probably not.

1:39:24 Probably not before yesterday at the earliest. It's wild. I wonder what the instructors think of all this. 'Cause they're like they've built such brands. I mean the Instagram following and and the Twitter following of The top instructors is like

1:39:38 They have immense power. Emma Lovewell and Ali Love I mean, they're getting up close to a million followers. Robin Arz and Alex D S. And they've all parlayed this into other things too. Like Allie is the h like the the in arena host for the Brooklyn Nets, or at least was last year. And uh, you know, everyone's got you know, noon subscri noon deals or underarmour deals or I uh uh even though they're making five hundred to a million from Mm. Peloton in salary or whatever their contract is. I bet they're making a lot more from their other engagements. Oh yeah. They're like professional athletes, like the the earning power from

1:40:13 endorsement another. DLCs. Way higher. All right. So there we are on his We thought this would be short with the emergency pod on.

1:40:22 History and facts, but uh 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 kinda 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

1:40:39 his friend like prototyping the experience on a Disney cruise. Did you Read about that? No, I didn't get that. That's awesome. So I'll pull that one out, even though we skipped over it. Uh so John Pleasants, uh, who got a b a big job at Disney, uh Got convinced. fully to come on a Disney cruise with him. And so they're on this Disney cruise and fully rolls out a couple of spin bikes and s stood there like f for the first like ten minutes of the ride, like coaching John Pleasants on what to do. Yeah, like and being like, Okay, imagine there's a screen here and like, you know, the really giving him and then

1:41:14 Pleasants becomes one of the first angel investors in that four hundred K round, right? So it's like a pretty cool there there's there's so much crazy lore in the building of Peloton. Um Which I think we would have done if we gave this the three hour treatment, but What? Let's go into our uh our narratives. So like what's what what is the media narrative right now for the bull case and the bear case?

1:41:36 Well Uh On the bull. There's just an insane level of customer love for this company. I mean the NPS is around ninety. You're wearing a Peloton hat.

1:41:46 As we do this. I'm wearing a Peloton hat because I referred you and they sent me a hundred dollars of free credit to buy uh gear for myself, which I proudly wear around, and I hope Peloton Stay is a prestige brand because I've definitely bought a decent amount of the merch. Uh Yeah. Eve even if they sell, I I have to imagine this'll stay a prestige brand for a reasonable amount of time. Like I won't it's funny how I feel like a little bit weird wearing my Soul Cycle like sh shirt and stuff now,'cause I just haven't been in two years.

1:42:18 But the the Peloton stuff. Maybe it says a lot about me, but Happy to wear it. Uh Th so that a huge component of the bull case is 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, uh, because we're recording early in the morning and I missed my morning ride this morning.

1:42:40 Uh another huge component is Uh say what you want about growth right now, but how could How could they possibly be worth less than they were worth before COVID? the they they grew membership from seven hundred thousand to nearly three 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 turn rate and high NPS.

1:43:01 Yep, totally agree. They invented the connected fitness category and they're still the largest player in it. Uh we'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. You know, th there there is some amount of lock in that comes from that. Uh the biggest thing we talked about is um this insanely low churn rate and to date

1:43:25 The fact that You know They selected four customers that aren't gonna turn. And that that's slowly shifting because that's the other side of the sword of selling a product that is cheaper than it used to be, is that you're gonna have customers that are more

1:43:39 more sensitive to price all around and so we're gonna turn Um more often than Your initial cohort. Even still. The the turn has gone up, but it I think it's gone from like I'm gonna get the numbers wrong, but it it was at like point six percent per month. So like point eight percent per month, so.

1:43:56 Like it's still good. Totally. I do want to call out, and this is sort of between a bowl and a bear case, but it's just an interesting stat to know. So when a firm went public

1:44:07 there was uh some information in their S one Where at the time Peloton was the largest customer or the f the largest source of revenue to a firm. Now a firm has grown a lot and diversified. Uh but

1:44:22 I Took up. the I I 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 in cash outright because it was a zero percent deal. S 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

1:44:42 Some money while uh you know you can 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 uh it's funny how much I've thought about this for how little the actual dollars are that that is like marginal for me to have done this versus paying cash, but I did. Yeah, that's the most Ben Gilbert thing that is possible. I love it. But what's interesting is the fact that they offered it at all. So when you look under the covers of why was Peloton willing to offer zero percent or why was a firm willing to offer zero percent? What does that deal look like? Well Peloton and a firm did a back end deal where Peloton said if you agree a firm

1:45:24 to do zero percent financing, we will pay you. An amount. in order to make it worth your while. And so you tell us what, you know, that amount is. At the time of IPO, of a firm's IPO, twenty eight percent of all of the revenue in the previous year Leading up to the IPO.

1:45:43 was from the Peloton deal. Wow. If 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 zero percent.

1:45:59 percent financing thing. So that gives you a sense of how much Peloton knows and knew even then Oh my God, we need to expand down market. Because we are saturating. R

1:46:14 Wonderfully price insensitive. core customer base or initial customer base. Wow. That's That's huge. And and the whole

1:46:24 You know, if we we uh we're about to release a great L P show episode with Christina Milas Kiryazzi, who uh just joined Bain Capital Ventures, been a long time friend of mine, but was an early employee at a firm, and we talk about with her about the whole buy now pay later space and But that's The key. the key one of the key value props to merchants is this enable sales that wouldn't happen otherwise. But oh my gosh, yeah, but like I think that's just uh you're right, this is between a bull and a bear.

1:46:50 But trending into the bear category here, like The focus on their core customer is really like things have gotten so wonky in the past. Year plus. Well the bear case to make out of that is like the when you look at their demand recently, like the fact that they only grew nine percent in Q four and five percent in Q one, even though they have this affirm 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

1:47:17 more interesting at more price points to a much broader swath of people. H It's not really working. So then I think unless you have more, I think the last year.

1:47:29 Hey, you know, uh I don't like to put Faith in. single people, uh 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

1:47:43 There have been been just a Bad product and marketing decisions. Over the past year. I'm almost that is that is not a controversial statement at all. There have a hundred percent been bad product and marketing. Well, and bad Bad strategy, bad financial decisions. Bad forecasting.

1:47:59 You gotta think that Barry can make a huge difference in fixing a lot of these issues. Yes. For sure. I mean Barry's not gonna be the product person by any by any means, but uh you know, that's why Fully's there, that's why all the great people that they brought on are there and hopefully Barry can provide the right.

1:48:18 Sort of. It's almost like the check and balance to make sure that Peloton can do its thing of creating products and brand and experiences that people love without Screwing themselves over financially.

1:48:32 Yep. Yep, yep. And the market. The market liked the news. Peloton was up twenty five percent yesterday. Yeah.

1:48:41 It's kind of a bear case to bring in a CFO, a career CFO as a CEO. Like that that is a strong admission of how in trouble a company is. Um but I suppose at the uh uh uh trading down where it is, that makes it a bull case to want to invest. Uh. Yeah, fair.

1:49:00 If you feel like that person can sort of turn it around. Yep. 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 to Apple.

1:49:15 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 contractual legal person.

1:49:36 Uh, and and and you know, maybe Barry can be the Tim Cook of Peloton. Yeah. That's actually great. Um

1:49:44 I certainly think he's capable. And I 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 bare narratives. Uh so we talked about the slowing growth. We talked about the fact that they revised down not only The Revenue targets, but also

1:50:05 the subscriber targets. They're they're only predicting they're gonna be at around three million. at the end of the year rather than three and a half. they have piled up one point three billion dollars worth of bikes and treadmills and it's not good. To hold it on the books. Um another interesting narrative that I haven't seen as much around Peloton specifically, but

1:50:27 Seems to be a fairly widely held. uh belief is that In the last Ten plus years.

1:50:37 There has not been A Breakout. consumer hardware piece of technology. that is that survives as a standalone company. And you look back at

1:50:48 Fitbit and GoPro and Jambox. Uh I I even want to call out this one's the gonna be a s serious callback, but flip video. Oh, some of these companies that kind of invented a new category and they Built. you know, real they they imbued it with meaning and they pioneered it on you know, technology that was hardware that was just now available.

1:51:13 Uh But that investment doesn't pay itself back. Lots of cheap facsimiles come in and they can't defend the castle. And you know, you look at Jam box. they made a three hundred dollar Bluetooth speaker and now you can get twenty dollar Bluetooth speakers that are

1:51:29 reasonable and Jambox, of course, went out of business. Flip video sold to Cisco in a very strange MA, uh, 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 uh and ultimately landed at Google. Uh I think there's probably a case. A similar story around Nest, again, a little bit weird and some bungled MA, but I'm trying to think of like

1:51:57 What I I suppose Sonos might be the only example of a recent consumer hardware company that has been successful and with Sono successful kind of in quotes as a standalone public business. I I thought about bringing this up earlier in the episode and and I decided not to'cause I decided it was unfair to Peloton. I still think it's unfair, but Is an interesting point of comparison.

1:52:23 The only very strong counterpoint I can think of is Tesla. I was I thought you were gonna go there. Yeah. And Um Lots of different dynamics there.

1:52:33 But You know, if you just look at what Tesla has done with a in many ways a very uh Resonant uh strategy a s a similar, you know, harmonizing strategy with Peloton of like start with the high you know the the Elon master plan, right Um and then how they've adapted that.

1:52:52 over the past several years. You know, it was not that long. Uh after Peloton was started that the model S. Came out. And like what has Tesla done with their brand strategy and their pricing and their marketing and their position within the market and their sort of product development and their software development, you know, gosh, model S to model X, like double down on

1:53:17 The high end. brand. And you know and then the model three, which was affordable, but it was like It was still it's still aspirational, right? Like you're competing with BMW now. Uh you're not going all the way down to like Toyota. Um You know, the autopilot launch, like just the

1:53:33 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 a ton of capital on extremely favorable terms.

1:53:50 I'm using manipulate it with a lowercase M, not accusing them of doing something. that has legal implications. And they are to to that point they had their near death moments too. Totally. But Peloton has

1:54:02 been exactly the opposite uh at manipulating financial markets for their own favor. I mean They they had a massive stock run up and then did a four hundred and twenty million dollar all cash deal. Err. 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.

1:54:24 by our good friends, the activist investors, which is Hey everyone, did you know John Foley sold ninety six million dollars of Peloton stock in twenty twenty one 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

1:54:45 Insidery things. Uh uh uh doing things that are against sort of company policy, but they're also trying to drive home the point that Um Mm-hmm.

1:54:56 the 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 five hundred million dollars. So I don't care if you have ninety six million dollars.

1:55:16 Potential of turning that five hundred million into one two three billion that's motivating. So Come on. And also like it's hard to, you know.

1:55:25 Like he uh He started Peloton in you know, late twenty eleven, early twenty twelve. It's been a long journey. You know, and he talks about on the how I built this episode. You know, it's not like even though he had done well in his career. Like it was he didn't have any big wins, you know, he wasn't

1:55:39 fabulously wealthy before starting um Uh, you know, before it started, he wasn't a Ramen founder, but he wasn't, you know, the he didn't have ninety six million dollars. Let's put it that way. So I can't begrudge him that. Despite being of the Harvard Business School network and having worked at IAC and you know, been close with A lot of uh you know, CEOs and executives

1:56:06 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 Uh, you know, I he had good jobs and but he had a family to support and he was he he knew a lot of wealthy people, but that actually didn't really accrue to him successfully

1:56:31 Capitalizing the business for a long time. Look, sometimes activists have good points, and they're good points to be made against Peloton here, and I think we've been making them. But like they're also just so whiny and like the like the incentives are so misaligned and of course they wanna never be happy because they want to keep buying more to then, you know, sell uh anyway. Okay, power. Uh branding.

1:56:54 Yes. I mean other stuff too, but like Did I pay two thousand dollars, twenty three hundred dollars for a bike? because it was a Peloton bike that otherwise I would have paid maximum I don't know, a thousand dollars for her? Yes. Yes, I did.

1:57:08 It'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 hackeloton. I kinda enjoy doing stuff like that, you know. Um And to get the same quality of bike, you really yes, you can do it cheaper.

1:57:28 with a hack of help, but not that much cheaper. Like They um Uh It really is a like it's a very high quality bike.

1:57:37 relative to the price. So but yes, agree on brand. Um I Definitely to me one that stands out and I think one that attracted Uh Barry.

1:57:46 Is is scale economies here. Like You know. T. Amount of

1:57:50 that Peloton can invest. Even with the music. Mm. variable cost overhang, but the amount that they can invest in in content and in the best instructors, I think which is where this plays out the most important. uh relative to a soul cycle to a flywheel to

1:58:06 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 Desant started with Flywheel, I believe. I can see that. Yeah, it just makes total sense that Peloton would say, like, uh we can make this much more interesting for you both in terms of fame, dollars, career advancement, because your rides are gonna be five thousand people instead of forty. And

1:58:46 Duh. You're going to get the best. Instructors and content. Which does that make d Do 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?

1:59:00 If if my m at least my perception is that is the best On demand. content that I can get for working out. Yep. Certainly the library of content. And and you know it's interesting with all I'm curious we You're

1:59:14 feeling is on this as a from a user perspective. Um I It is valuable to me.

1:59:22 That my favorite instructors Mostly just Alex. He's so awesome. Uh It's constant are constantly adding new content. And stuff like the ride to greatness. It's all we'll get into that more later later. Um That's extremely valuable to me if he stopped adding new content. I would seriously consider churning.

1:59:40 But The years worth of library. Like I do go back and do old Old library. Content. Um

1:59:47 And that's quite valuable to me too. And so even if we switch to another platform Then yeah, like, you know, it would take a long time to build up Like, I've got a few twenty minute rides that he did years ago that like are Really high quality for me. By the way, there is someone who switched to another platform or at least left. I can't their name's escaping me. I I looked into this a couple years ago. And I think Peloton pulled all their content down, which was an interesting move because it

2:00:14 It's basically saying we don't want to continue to build your brand for free to compete against us. Right. Which I found fascinating. Cause I bet 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 I would kill to be able to look at the the that

2:00:36 All those contracts and understand how all that works. Totally. Okay. I think those are the big ones. Those are the big ones. So a few interesting little what would have happened otherwise to go to a

2:00:48 Old acquired standby section. Uh So what Yes. They actually had pursued a deal with Soul Cycle. And I'm gonna s use Soul over Flywheel because I think even though

2:01:00 the soul wasn't given him the time of day at the moment. That's the more interesting one. Uh SoulCycle has not had a very good last couple years. And First there was the Trump fundraiser and then there was the like failed go public of the soul cycled equinox

2:01:19 um fitness conglomerate. And then I think I mean I I'm not a doctor, so

2:01:27 This is the uh we're 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 fifty people breathing as hard as they possibly can for forty five minutes in a room. But they have candles in there. That that helps. I was trying to think like where is the the single last place on earth that I want to be during the p during the pandemic? And it's s at a Soul Cycle Studio, even though I used to do that a lot before I got my Peloton. And um 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.

2:02:05 If you want to stay healthy. I would only consider it in like you and I when when we would get together, we used to get the salt cycles. It was really fun to do it with friends. I would maybe consider that again in the future, but definitely not on a Yeah. Day to day basis.

2:02:21 So would it ha so obviously SoulCycle came out with a Peloton competitor after a Peloton. You know, did very well. And it was It wasn't fully Soul Cycle, it was like part Soul Cycle, part Equinox Parent Company. I think that I have to imagine that thing was a total flop. Uh

2:02:39 what would have happened if you had this sort of like J V between Peloton and Soul Cycle five years in in a strong position, six years in when Covet hit. It's interesting. I I I wanna say I don't think the J V would have worked nearly as well as Peloton did as a standalone full stack. Entity. Put you know, putting cameras in, building a little Soul Cycle studio

2:03:04 There would have been too many, um 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

2:03:26 make them dedicated to the online offering, right? Like It There would have been some weird dynamics there. Every class kinda prints money, so if you're running one of those local studios, you you're like, Well Right now you could just record that and put it on the on this J V with Peloton, but I think that would be lower quality content than what a like full

2:03:44 Yeah. Oh it the Peloton rides are so produced. I 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 there are T V production company with celebrity instructors who happen to be good at

2:04:02 Riding bikes, but It's a TV studio. And it would be very hard to turn any of these Soul Cycle You know, places into TV studios. Yeah.

2:04:10 And so I feel like making the decision is Soul Cycle, like I'm gonna take our best content and instructors dedicate them to that for this thing that I revenue split with Yeah. I don't know. Okay, well, there's another one here, which I know you want to do is how should Peloton have managed over the last couple of years? What what could they have done that would have enabled them to come out?

2:04:32 Really strong. You know, it's easy here to sit here and say like The Pre core acquisition was dumb. The Peloton output park was Misguide. Yeah, probably good in the long run to

2:04:45 bring your production in house, but like That big using cash at that moment in time, probably not the right thing. Um I've Talked everyone's ear off about my feelings on the Product and pricing decisions. At the same time.

2:05:01 I think we gotta be intellectually honest here with ourselves and with Like The market too. It was easy to believe. Like it would have been hard. Two

2:05:12 really think about the downside over the past year as Everything was up and to 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 in of all time. Yeah.

2:05:31 On the other hand. Other companies I I think the difference is A lot of these other companies demand didn't go away. Like Amazon saw a spike.

2:05:44 But then it kinda kept rising from there across all their businesses. Uh whereas Peloton saw a spike and then a decline. Yeah.

2:05:54 It's funny, I was thinking about w 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. Both of these were pandemic era go-go stocks that have totally crashed. Peloton down over eighty percent from peak, Zoom down over seventy percent. But for Zoom, despite the fall, I think it's still growing revenues at close to a hundred percent year over year and is a free cash flow positive machine.

2:06:23 Whereas Peloton is deeply unprofitable on a you know full bottom line, uh, still raising billions from the public market with new stock issuances, they seemed convinced that this demand spike would last forever with these acquisitions. uh and and expensive investments. It's And it's funny, like I I don't wanna blame the management

2:06:45 as much as I kinda wanna blame Well, maybe it is management, but it's like kind of inability to forecast and know that demand was drying up. And And being in a business that just requires a lot more moving pieces, a lot more atoms. And that's just really hard.

2:07:03 This Demand. Spike. created huge complexities for Peloton as a business in a way that You know, for Zoom, like yeah, I created some complexities for Zoom. Like I don't want to say like it was just easy, but like

2:07:16 Yeah, they're shipping software. Like is it's it's different here. All right listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is uh no longer the hard part. Yeah. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making.

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2:08:56 Who's managing them all? So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale. Go check out service now dot com slash acquired and tell'em that Ben and David sent you. Alright, uh let's grade this one. So I think what we should do is paint the The A scenario and maybe a C or an F scenario. Uh for what

2:09:19 Barry does from here and and you know what? what those outcomes are. Yeah. Well Maybe let's start with the

2:09:29 C scenario.'Cause I think that's the 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. Right. I don't I think a C is it's selling in the next six months. Six to twelve months. I agree. Four.

2:09:51 Eight to ten billion dollars. Yep. Yeah. Or even Twenty billion dollars. Selling within the next year for a nice short term.

2:09:59 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 twenty billion dollars. I totally agree. I think shareholders would be happy. But I think that's like You know.

2:10:13 I think it would be sort of sad. If that happened. And I Doubt you know, I I we don't know Barry at all. We've never talked to him. Barry, open invitation. When this chapter is over.

2:10:22 You gotta come on the podcast and we gotta do like A recap. Or if you want to do a follow up now, what we get what'd we get right, would we get wrong, we're happy to host. Totally. Uh we are such huge fans of yours. Um But

2:10:35 I don't think he would have taken this just to package it up for a sale in six to twelve months. Like why would you do that? Yeah. Agree. Agree. I will say I don't

2:10:48 Think this is a independent enduring company at this point. I think it's gonna 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 uh you can have sort of tight financial controls where it's run like a good company. Um and and some smart

2:11:09 And make make smarter investments. But I have a hard time knowing how they're gonna grow fifty percent year over year. At any time in the future. Like w w where are they gonna go find more demand? Or where are they gonna

2:11:24 really meaningfully alter their product lines to go find more demand. I mean that that's the A plus. Like that's the A is if they can figure out how to stay a an independent company and become a big, profitable independent company and meaningfully find demand in concentric circles outside their current current customer base. That's That's it. That's the dream. So right, yes, that's the A plus.

2:11:46 That's the dream for sure. Let's think about that. They 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 m several countries. I could think about

2:12:01 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 US and one third elsewhere. That may be generous, but like let's just use that as a swag. So that's two million. U S.

2:12:14 subscribers out of a nation of three hundred and thirty million people. There are 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.

2:12:30 I graduated up, but like it's a really good experience. Um You know, Apple is investing in a similar strategy to the digital fitness app. And I think for twelve ninety nine a month. For

2:12:43 Super high quality class like this is the Netflix model, right? For the best content out there with the best instructors. For twelve ninety nine 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

2:13:01 Segments. Uh maybe you call those two. Two segments. I think you I think they can address both. affluent people who don't care about Cost and aspirational people who do care about cost but are willing to invest in

2:13:14 This is the Um And then you layer on the the digital product. I do think it could there is a world where this could

2:13:23 A you know, maybe not forever, but a longer term standalone company that actually d is justifiable of a forty nine billion dollar market cap. I like it. Well I don't think that's the most likely outcome. I think

2:13:37 Two 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 said all that on air. Uh well we'll revisit with Barry in a couple years. We will. How about that?

2:13:55 We're shaking hands on it. Over uh video chat here. Uh carve out. Carve outs. Uh so

2:14:05 As I said at the top of the 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

2:14:18 So Good. Uh and really the only artifact uh long form. interview with him dedicated to just him. There's some stuff where he talks about direct listing on the 16Z podcast and and others, but uh Um that's just about him and his career. It's worth watching and

2:14:34 There's a great nugget in there. He talks about his um uh strategy exercise that he likes to do. that they did it Netflix and they did Spotify and I'm sure he will bring to Peloton. Of Uh.

2:14:47 How to How to Plan and build your organization to be resilient and robust for the future. And uh his four to five year strategy exercise. I won't spoil too much of it, but Um

2:15:00 It it it's very good and worth. watching uh and 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

2:15:12 And uh There is a awesome episode called the James Bond spy craft. Theme? Spycraft sound.

2:15:21 And uh the hosts are just awesome of uh of Switched on Pop. The show is reliably great. It's it's sort of like acquired for music, uh is another is 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. And 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 uh and how that gets used through the decades and all the different um all the different movie themes. So highly recommend that song. Super fun.

2:16:05 I went and listened to that episode after Yeah, we were texting about it and it's So good. The whole show is so good, but uh Oh yeah, it's so good. And and one of my favorite parts about it was it uh reminded me

2:16:17 That Chris Cornell's song for uh 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. Now is a great time to talk about one of our favorite companies, StatSig. Yes, there is a reason why the best product teams rely on StatSig, whether they are iterating on their core product features or shipping AI powered experiences at scale.

2:16:48 Yeah. In the crazy speed of today's AI world. Shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next. This is where StatSIG comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed.

2:17:18 to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. Listeners. Thank you for going on the journey with us. Go check out the L P show.

2:17:35 our latest episode with the NZS Capital folks is uh is really good. Like I I they're just so smart and if you're Staring at stock tickers, getting anxious. Uh This this is this I mean not investment advice, but like it will help you bring a cool, steady hand uh to it. Otherwise trying times. Yes.

2:17:58 Uh, and uh if you want to join us for the Zoom call tonight, if you're listening to this on drop day, then uh join acquired.fm slash LP and uh we will we will see you in the Zoom later tonight. We have a job board. Acquire dot fm slash jobs. Find your next one. Great career move.

2:18:19 And uh Yeah, tell your friends about this. You can find us on Spotify, uh right alongside Taylor Swift and many other great artists and podcasts, or anywhere where you get your your podcasts and um We'll see you next time. I'll see you next time.

2:18:36 Who got the truth? Is it you, is it you, is it you Who got the truth now

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