Every company has a story. Learn the playbooks that built the world’s greatest companies — and how you can apply them as a founder, operator, or investor.



Thu, 10 Feb 2022 18:02

The Peloton journey has been one seriously wild ride. From can’t raise money to one of Tiger Global’s first venture investments, to pandemic darling to the stock being down 85% in 6 months... there’s never a dull moment in this company’s history. And guess who’s leading the pack for its next chapter: that’s right, THREE-TIME ACQUIRED SUPERHERO, the one and only Barry McCarthy. We had to tell this story.

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Ride to greatness. We're not here to work out. We're here to out work. I sent that to Jenny the other day and she was like, what are you talking about? Outwork! Just internalize all the Peloton instructors' logins. David, just make sure you live, learn, love well. See you next time. 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 based in San Francisco. And we are your hosts. Well listeners, we have been waiting to do a Peloton episode for a long time just searching for that right moment. We didn't do it at the IPO and then there was the big stock run up and we thought about that and we got a zillion less than a request and of course the pandemic hitting and David and I both becoming customers and these crazy commercials and somehow none of these ever felt like the right moment. So we figured, well how about this wild company changing news? We just scramble over 24 hours to prep and have done basically nothing in the last 24 hours except learn everything we possibly can about this company that we are so intimate with already. Well, I mean anytime, very McCarthy gets involved. We were texting. Ben texted me the news and I was like, that's it. We got to do it emergency pod acquired superhero, Barry McCarthy literally writing again. Yes. Just so excited. And you know, there's this fun thing too of like I've seen articles that are like John Fully stepping down as CEO, technically, technically, people are saying he's staying involved. He's staying very involved and we'll definitely dive into sort of how this duo is going to conquer the road ahead together. Well, first we want to say we were recording this on February 9th and that is important because yesterday, February 8th was the day that the news broke about all of this peloton stuff. Today February 9th was Barry McCarthy's first day in the CEO seat and I think he frames this better than we ever could have in his email to the company this morning. He wrote, and now that the reset button has been pushed, the challenge ahead of us is this. 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. Indeed. All right. Well, we spent the last 24 hours getting everything in order. All of our thoughts. I've done 167 workouts since January of 2020 when I got my peloton bike to make sure we are as knowledgeable as possible. And first, we want to introduce you to our presenting sponsor, Vanta, the leader in automated security and compliance. Now, as you know, from the Taylor Swift episode, we are huge fans of Vanta and their approach the whole compliance process. They do sock to hip a GDPR and more and we've got CEO and co founder Christina Casio Bo back with us today. So Christina, last time we talked about a little bit the origin of sock two and how it's administered. What's the checklist? One of the interesting things about sock two is it's folks definitely referred to it as having a checklist, but there isn't really one. So if you go to the AICPA website and you look up the standard itself, it's really high level. It has things like written in more complicated, you know, compliance speak, but basically says, you know, hey, do you have, you know, systems in place to control how data is accessed in your company? Right. And then that can be implemented in any number of ways. So actually in the early days of Vanta, when we talked to engineers who knew compliance or actually when we talked to investors who are engineers, they basically told us they're like, how do you automate that? Right? That's that's too high level to be able to automate, which they're correct. One of the things we did with Vanta was just break down those high level statements into specific things that could be automated and a company could implement. This obviously helped us actually build software for a category that never had software before, but it also helps companies because we realized one of the reasons smaller companies didn't pursue these certifications earlier, even though they helped them grow, because they just didn't have the time bandwidth attention to figure out what those things meant. What are the most obvious no brainer things that should be a part of that? So it's really, really high level. A sock to or a compliance certification is trying to figure out if you are kind of running a reasonable organization that protects data. And so you can break it down into three pillars. One is cloud infrastructure. Do you have your AWS, GCP, Heroku, whatever you're using? Is it set up reasonably? Right? And that can mean one of, you know, hundreds of things, but just do you lock all your doors and windows? One is around laptops, like devices employees are using. You know, are those reasonable? Because they're often have customer data on them or access, you know, websites that have all of the customer data? And then the final one is employees themselves. So the accounts they use their own practices, how they're trained and onboarded, you know, again, that gets broken down, but just three pillars, cloud infrastructure, devices, and employees. Our thanks to Vanta, the leader in automated security and compliance software. If you are looking to join Vanta's 2000 plus customers to get compliance certified in weeks and instead of months, you can click the link in the show notes or go to slash acquired for a sweet, sweet 10% discount. Other things you all know the drill and buy now. If you want to join the Slack, you should slash slack. You should listen to the LP show to get the nerdy or stuff like our updated thoughts on the markets and a little bit less us in 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 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 LP is excited to see in there. The LP show has been on fire recently. We've got like, I'm just so pumped about the guests we're getting and 10K diver. That was really fun too. Sudana misinterview. We've got some great founders coming up. Yep. Awesome. Listeners, as you know, this is not investment advice. Very much on investment advice this time. It may be product advice though. I've got some, I definitely want to discuss Peloton's product lineup because I have some thoughts. I bet you do. But it's not investment advice. I bet you do. You may have investments in these companies that we discussed. The show is for entertainment and informational purposes only. And before I head over to David for history and facts, we do want to acknowledge that a big part of the news yesterday and the restructuring is that Peloton laid off 2800 people, including 20% of their corporate office. And as fascinating as it is to dive into this business and the strategy and of course some of the drama. This is a super tough day, a super tough week for those 2800 people who had a really, really terrible Tuesday reading this news, talking to their managers, all that and our hearts go out to those folks. Yeah. Oh layoffs are tough. Have you, they probably weren't layoffs when you were at Microsoft or there? Like two months after I left, it was a massive round. Yeah. Yeah. There were layoffs at UBS, my first job at a college during the financial crisis. Ultimately, gosh, I think like close to 50% of the company was laid off while I was there. It's hard. It's so hard. It's, I mean, layoffs are just no fun. They're just, I mean, that's obvious statement, but it's hard. Yeah. And to transition us in, thinking about our previous episode with one of our previous episodes with Barry McCarthy, he was a part of that big sort of like company changing moment at Netflix where they had to restructure the whole thing. And I think that also had a huge round of layoffs before they sort of committed to a new, a new plan going forward when Netflix was on the ropes and about to die. Yep. 40% riff. But so he's, he's kind of clearly good at, at sort of taking a bare bones team and making the most of it. Indeed. Well, with that history and facts, I think that is the perfect transition. Barry McCarthy, the acquired superhero. We talked about him on the Spotify episode. We talked about him on the Netflix two-parter, both parts of the Netflix episodes because he ended up staying for 12 years at Netflix through all the crazy, well, that is such an amazing story. Like going back, reading the transcripts of those episodes, the Netflix journey is amazing. But we haven't talked about him too, too much since until today. And I thought in preparation for today, it would be fun to dive a little more into his background. First off, something that just like is wild. He's 68 years old. The spring chicken coming into turn and sing around. It's unbelievable. He's the same, roughly the same age as our parents. If not, if not maybe slightly older, I think, than yours, right? Maybe older than mine, meaningfully older, about a decade. But yeah, as other people ease into retirement, Barry accepts his first ever public company CEO job. I know. Oh, amazing. He's like the Sean Connery of Tech. He is James Bond. He will always be James Bond. So great. Well, a few quick things about his background. There's not a lot on the internet about or with Barry McCarthy himself. In fact, as far as I can find it, I looked pretty deeply. The only like dedicated long form interview 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. Instead of boarding school, it's a boarding school in the Philadelphia area. It was fun. I went to Tower Hill School in Wellington, Delaware, also in the broader Philadelphia area. And people would always get the Hill School and Tower Hill School confused. We had a little chip on our shoulders, but you're 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. A bit late. 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 100 views total on YouTube. Now it's up to like five or six hundred. It's still super small. If you do nothing else from this episode, go watch this interview with Barry and you will get a sense of this man and his experience. It's also six months ago. So it's like very recent. I mean, for a very long time, he had basically no public appearances. And very, very relevant to this news today that I was going to save this for later in the episode. But what are the final questions that the headmaster, who's a wonderful interviewer, asked him is sort of like, well, you know, Barry, you board in retirement. Now that he's retired from Spotify, fully at this point, and his answer is, yes, I'd like to think that I have another game in me and how precious that would prove to be. So we all know that Barry becomes the CFO of Netflix when the company is very, very small, still start up. I think they're only about 40 people at Netflix when he joined. And it was certainly pre-IPO, pre-there being a real business there, which we'll get into. But how, you know, this was also not early in Barry's career. How did he end up becoming the CFO of Netflix? Well, he had been the CFO previously to Netflix of another company, actually a digital music streaming company. Did you know this fan? Really? No. Who is the CFO of a company called Music Choice? Music Choice. Do you remember back in like the early days of digital cable and satellite TV, there used to be those channels like, we had direct TV growing up, I think they're in like the six or seven hundred. It was sort of like serious XM in a way. It was like each one was a genre. It was exactly like serious XM, but just on your cable box or your satellite box, you go to XYZ channel and they'd have some crazy, you know, like 90's era visualizations. Yes. You'll see them in hotel rooms sometimes. Totally. That was Music Choice. Barry was the CFO of Music Choice. And what is it like? It's a cable, a couple of, like it's subscription, revenue, music streaming, music right? Like, what, how, prescient? Well primed for the ultimate Spotify gig that he would take when he took them public. Some other things that I learned most of this from that interview. How did he end up, so he had been a management consultant at Booz Allen, I think, early in his career and then an investment banker for a long time. And it's a well-trotten path from, you know, senior investment banker to going and becoming CFO of a company. Music Choice may have been public at that point in time. How did he find his way out to California in Netflix? He got fired as CFO of Music Choice. I don't know if it was part of a riff and if there were leg-offs or if he got fired directly, but he's very open about this. I mean, most riffs don't include the CFO unless it's performance-based. Right. Usually the CFO is the one, you know, orchestrating the riff. Yeah, he got fired and he was 45 years old. He had already had this, you know, sort of long career as an investment banker and then as a CFO, been fired at like, what an inspiration to go from that to having so many more chapters to come even now to a new chapter at 68 years old. Yeah. Gosh, I hope my life is that interesting. Label it what you want. Growth mindset or learning from your mistakes or anything like that. It does feel like this guy is compounding knowledge. And I wonder if also, you know, again, we talked at the top of history and facts about how this was a hard week for so many people at Peloton and, you know, our hearts are with them and it's hard to hear. It's like Barry went through this himself. Yep. So how does he end up going out to Netflix? Netflix was recruiting for a CFO and like nobody wanted the job because I think we talked about, we may have talked about this a little bit in our Netflix episode, but the early days of Netflix, like it was not a hot startup in Silicon Valley. No, it was far from it. You know, Mark Randolph had originally started it. He'd gotten involved a little later and I also did not know this or at least I didn't remember it from the Netflix episode. It was not a subscription business. The original business of Netflix was you paid parental. It was literally like blockbuster and that is not a good business. 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 more widely distributed. And when they were starting the company, like they sounded extra crazy because it 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 going to mail discs or no one has a player for those discs yet? Totally. This was a tough role to recruit for and that's how Barry ended up becoming a candidate. And then he and Reed immediately hit it off and he joined and obviously sort of in many ways the rest is history there. But also I think it's important. It wasn't a subscription business. Barry was alongside Reed, part of architecting the true incredible business model of Netflix of becoming a subscription business. So they had done before he joined just about a million dollars in revenue on the like paper, paper, red tall model. He joins, this is all pre IPO, they implement the subscription business model. It goes from one million to five million in revenue that year, the next year, 35 million and then hundreds of millions after that. And then they IPO, there's the fight with blockbuster, all that that we talk about in the part one of the Netflix story. In 2003, it's public company, 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. I'm ready for my next challenge. I want to go be 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 going to be stepping down. He's staying an extra year throughout the year, 2003 to manage the transition, do it right, find his next challenge. Netflix is boring. It's done. Like, everything's going to be smooth, sail, and unsuccessful from here on out. So I'll go do something else. And then Amazon. I don't know if they ever publicly announced, but like sort of word got out that Amazon was going to enter the market and compete directly with Netflix, which of course they did in a different way much later in history. The stock gets hammered. It dropped literally the stock price dropped 60, 60, 0% shades of what's happening with Peloton now. And 60 is a modest drop compared to what happened with Peloton. Yeah. Right. And it's crisis mode. It's wartime again at Netflix. And Barry, in one of the most, just like, one of the many reasons why we love him here to quiet in his story is he says, I can't, I can't leave. I got to stay through this fight. He literally word for word on a public earnings call 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 knife fight. It's just so good. Barry is Mr. wartime like in the parlance of Ben Horowitz's piece times CEOs and wartime CEOs. This is Mr wartime when things kind of feel easy and like they're going to keep growing you're over a year and we don't have a existential crisis in front of us. That's when he decides like to, you know, okay, you guys are good without me now. But by all means, if we're in battle, like put me in coach. I mean, he literally in the Hill School interview, he says, quote, you got to ask yourself, are you a wartime fighter or not? And I've always gotten my biggest thrills being in the fight. And that, of course, there's the car like in battle and the price was and all the all the stuff that happens at Netflix. He ends up staying until 2010. So many, many more years than he originally expected. When he finally does announce that he is leaving Netflix in 2010, he could totally, you know, retire at this point, he's in his mid fifties and that's 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 2004 that I wouldn't be leaving unless things were in very good shape. There is nothing that I know that you don't know that would cause you to be sleepless about your position in the stock. And I'm very saying that you can take that to the bank and then bent in what you were saying. This is also from the Hill School interview about him, you know, really being getting fired up by wartime and peacetime is not as interesting to him. The headmaster asks, you know, why did he leave Netflix? And he says, I got bored. The more successful the business was, the fewer the challenges there were for me. Fascinating. And listeners, as you can tell, we're spending a lot of time here on Barry, in part because I think it's really important to know as we think about the future of Peloton, you know, what is his MO? Who is this guy and why, you know, to the extent where you're excited about the future of the company? Why? And what's the track record of this person? So what's he likely to do when he comes in? And of course, he is, he has an amazing way of instilling confidence. Like he has a way with words and especially a way with words to investors to bring a sense of calm. And I think there is nothing we're necessary for Peloton than that then, then right now. Well, and I think the other thing, you know, that's sort of one half of the magic of Barry McCarthy to the extent he has magic, which I believe he does. You know, I think the other half is what he learns from this Netflix experience and frankly, going all the way back to music choice before that and then compounds, you know, with Spotify that we'll get into in a sec, which is like he is probably the number one world expert in managing subscription businesses. Like he helps architect the OG internet subscription business of Netflix. And then, you know, again, go back and listen to our episodes. So much of what he was doing during those wartime years was modeling out in incredible precise detail, the economics of not only what Netflix's subscription business was, but blockbusters and what Amazon could do. And like they had to make company decisions with the whole company on the line about how low they were going to cut prices and how long they were going to hold them low to fight blockbuster and Amazon. And so they had to understand the financing ability of those two other companies in addition to their own and their access to capital for how they were going to win that war. Like, 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 in the dictionary under the definition of strategic finance. Yes, particularly subscription business strategic finance. So then, you know, when he retires from Netflix, he goes and joins TCV, which of course has a storied history of investing in Netflix and helping them through all of their challenges as a financing partner. And we should say TCV stands for technology crossover ventures, which, well, it seems like everyone is doing this now, investing in both private and public companies. I mean, this was a unique enough strategy when they were formed that they named themselves after it. I mean, that says a lot about how long TCV has been doing that. So he joins them as a venture partner. And I don't know if he was thinking that he was just going to sort of be on boards and be an advisor for the rest of his career. But in 2014, he joins the Spotify board. And he's sort of so taken by both the Spotify business and Daniel Eck and the opportunity ahead and they need someone like him to really come and transform that business. We should revisit Spotify at some point because when we covered their direct listing, which he architected, buried like invent, you know, didn't invent, but modernize the direct listing and everything that's happening now. Yes, taking a page out of the Ben and Jerry's playbook. Indeed, indeed. So he goes and joins Spotify as CFO and not just CFO, but also eventually he would add head of their free business, the advertising supported business at Spotify. So not just the subscription business of Spotify. Oh, I didn't realize he's like an operational leader of the ad supported business. So originally he moved to Stockholm and was was CFO of the business in Stockholm and then moved to New York to set up and really drive the free 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 the company and for all the stakeholders. So he had this incredible chapter there, the DPO, everything. And then in January of 2020, he retired presumably fully at this point in time because he's 66 years old and rejoins the board of Spotify and and spends, you know, thinking he's going to go spend the next few years joining boards. Again, he joins the InstaCart board and reestablishes his relationship with TCV. Didn't he also join the board of Pandora from Remembering Rights, speaking of music subscriptions? That was back before Spotify. Oh, okay. Got it. But like just to add yet another credibility, piece of credibility on music related subscription businesses. Totally. So now let's, let's switch over to the Peloton track of the story here. Peloton as many folks probably know was founded in 2012 by John Fully, who, and this is where you know, the connection just goes so deep here. David, I think it's inappropriate to start the Peloton story in 2012. I just have to say, I know a year that usually the one who goes back, this story starts in 2006 with Soul Cycle. And I think without going into the whole Soul Cycle story, by the way, there are two awesome episodes of how I built this one on Soul Cycle with the founder founders there. And then another one actually interviewing John Fully on Peloton, which is great. And this, we don't think about the narrative of Peloton that much this way right now. But if you think back to when you first heard about Peloton, it was Soul Cycle, but on a screen in your living room. And Soul Cycle was this massive dominant brand. If you were touchy-feely and then there was flywheel, which if you were more numbers driven, you know, flywheel was more your stick. So I guess it was more of a flywheel than a Soul Cycle. But it had the prestige brand of a Soul Cycle. And I actually don't know the history on this, you may know, but there's very intertwined history with Soul Cycle and flywheel, right? There is. 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, think about Peloton in a vacuum, you know, the moment in 2012, and I think even 2011 when the residiation happening was totally, you know, I'm John Fully, I live in New York. Soul Cycle is totally taking off and this, you know, not yet connected fitness, but sort of boutique fitness. High-end group boutique fitness is taking the world by storm. And of course, there's John who's not really the most numbers oriented, schedule oriented, disciplined person, or a visionary product leader type person. And he's thinking, you know, I can't commit to five days from now, making sure that I schedule that spot in Soul Cycle. What if I could decide last minute and there was an infinitely scalable version of Soul Cycle where the room wasn't bound by four walls? Totally. Well, we'll get into who John is in a sec, but I was going to do the second, but you're absolutely right to start with Soul Cycle and boutique fitness and flywheel and Barry's boot camp and, you know, all the other similar businesses out there. Yes, so John and his wife Jill lived in New York, which is the epicenter of all of this. And there's so many great, great instructors at these places that have cult-followings people fly from all over the world to come to New York. That's where you want to be if you are in this, you know, an instructor, an up and coming instructor in this, you know, burgeoning sort of new category. And this is what's just brilliant, you know, hey, it's so hard, like you said, it's so hard to get spots in those classes. Like you got to, the instant they become available, like you even had to do this in Seattle, I remember, but like in New York, it's impossible. It was a meme to buy the shirts and the shirts said noon on Monday because noon on Monday is when you had to stop whatever you're doing and scrambled to reserve the spots. So anybody gets hard to get spots with the best instructors in these classes. John and Jill, his wife, they were super into this. They had two little kids. Like I can't, I mean, I've got one little kid, like I can't imagine, like 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 do this. Like there were a lot of people out there that were just wanted this product and couldn't get access to it. So the Peloton idea, like it was, it was revolutionary on a whole bunch of dimensions. You know, one was democratizing location, like you didn't have to be in New York to get the best stuff. Two was, like you said, elastically scaling access to the best instructors, not the average instructors at the low quality instructors, like literally only the best and infinite class size. So if you think those two vectors alone, infinite class size and geography agnostic, that's massively tam expanding. You know, the theoretically the tam for connected fitness should be way bigger than boutique fitness, but then there's even a third layer of icing on the cake, which is time shifting. So what if you can't make it to that 5 a.m. class? So to feather back in preview, a little berry element here, you know, one of the things that he talks about to the extent he does talk publicly and learned deeply from Netflix, but has just become kind of ingrained in him. And I think is now an obvious insight, but definitely at Netflix and at this point in time, when Peloton was getting started, not obvious is his quote is everything linear dies, everything on demand wins. And it's so true, like, you know, the being able this, this element of being able to access best in the world content 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 pop radio. That's why music streaming is better than listening on the radio. That's why Netflix is better than linear TV programming. Yeah. Which is mostly true, but not entirely true. You got like sports is probably the notable exception. Right. And that berry always says that your sports is sort of the one. There are a few categories out there. But here is this concept being applied to something a whole radically new market like fitness who would have thought like it's it's absolutely brilliant. And like we can't give enough credit to 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 chat based or document based forms of collaboration. That is a on demandness of something that was previously linear. Totally. Yeah. Like how many people still obviously have 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 email existed right but like it's slow. Anyway, that's what Peloton was. So who's John Foley? 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 Noble's Nook business there. E-reader business. Which is based in New York and it was like actually Barnes and Noble was a great company and eviscerated by Amazon and the Nook business and the Nook product. I think it was probably a decent product but it was just too late. And they were really a fierce competitor in this market. I mean they outlasted borders. Totally. But it's interesting too thinking about the book and E-reader market relative to Peloton too and maybe some lessons that Foley learned from that. You could have the best hardware in the world but you needed the books. 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 liking. Okay I do have to pull forward that thing from what would have happened otherwise because we can save the analysis for later but I should share what actually happened. So you might be giving Foley a little bit too much credit here. When he was starting the business they wanted to build the best bike. Beautiful piece of hardware like Apple. They wanted to build software that was equally elegant and really differentiated that bike. The original vision actually was a Connect Your Own iPad vision. They did not want to unify it but sort of learned over time that we really do need to unify it to control more of the experience. But here's the interesting thing. They actually didn't want to produce their own content. They thought if we have a bike, even if it's like a bike with our software that's interesting enough to people and we can partner with either Soul Cycle or Peloton or Flywheel or Flywheel. 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 Flywheel. I think Soul Cycle sort of gave them the cold shoulder as sort of they were so hot at the time and so big and so dominant but Flywheel they actually got to terms on what it looked like to make this thing not only content partner but I think also like a go-to-market partner like this was going to be the distribution strategy but Flywheel ended up pulling out and walking away from the deal so Peloton were sort of forced to do their own content and pivot to a really vertically integrated strategy. Oh my gosh. It's like about history turning on a knife fight. Wow, just like the echoes of the Blackbuster Netflix situation and Amazon. Remember Netflix tried to sell itself to Amazon? Yeah. Oh, amazing. Okay, so that's what Foley was doing immediately 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'm kind of annoyed at the number of people that try to characterize John Foley as someone who was breaking into the industry or didn't have a tech background or no, he was in the middle of this stuff in the late 90s early 2000s. We should do an episode on IAC because it is fascinating, Barry Diller, a media tech and him being really the first person to integrate all that. But for a long time, sort of the jewel of IAC was QVC and the home shopping network. And what is that? That is like literally streamed immediate out via, you know, television with an interactive component that people at home were, you know, buying and colleague and inter- like the DNA is just like so, so perfect. So what was John doing at IAC? I believe he was working on part of the city search team and then he also, they had a business called I think I'm not sure exactly what that was doing, but he had bounced around and I think a lot of people at IAC, you know, go between a whole bunch of their properties. Yeah. And I think, I'm not sure if this was IAC or his next gig, but he ended up taking over the 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 25 million in revenue or something. Still, you know, relatively small and they're compared to the grander scale, but, you know, had sort of done this, take a startup and rehab it and build it bigger. So he hadn't actually done a startup from scratch, but had built something meaningful with a small team. Man, evite, that's like the cockroach of the internet. Yeah. You just, it just won't die. Yes. Amazing. So you would think like, you know, gosh, we're telling this story now and hindsight is 2020, like incredible vision, proven demand for this product. Like, yes, it's going to be hard to build a full stack company around this, but like, financing hard stuff. Like, that's what builds modes. Like, this should be an easy fundraise. And Ben, as you referenced the John's episode on how I built this is great around all this. So we won't rehash all of it, but it was incredibly hard to get this funded. Like all the VCs passed again and again and again. They end he ends up raising $400,000 to start from friends and family at a $2 million post money evaluation. Oh my gosh. And of course, you know, folks probably all know now. I think it's later in my notes, maybe what the current market cap of Peloton is, but at its peak, it was a $45 billion public company. IPO at $8 billion went all the way up to, I think, $49 billion. And then today is floating a little above the IPO price between $9 and $10 billion. Wow. I mean, from a $2 million post money evaluation for that first time, and that's 20% of the company he sold for $400,000. Yeah, all from individuals, 25K and 50K checks. And then did a $3.5 million round. I believe also all from individuals after that. They do a Kickstarter in 2013. I had forgotten this. I can't believe this thing was a Kickstarter until I got pointed out in the acquired Slack. Like, it was a Kickstarter and it was like essentially a failed Kickstarter. Like it didn't technically fail, but it was not good. So here's the thing, I just pulled it up, we'll link to the Kickstarter page in the show notes, which by the way, has basically the bike exactly as it is today on their front eight years ago. Aside from what like the weights holders and they tweaked the water bottle location. It's the same bike. Yeah. So they raised $307,332 in the Kickstarter. Our goal was 250 and John says on the how I built this episode that half the people who backed the Kickstarter were already investors. So it's a very interesting thing here where we all know Peloton is a killer product. I mean, you and I rave about it. They have these ludicrous NPS scores. And yet when they laid out the vision and they showed a very well produced video with a very, you know, you get a sense of what the experiences like from this video, it was not enough to communicate to people that this thing is going to be awesome. And so I think it's worth pointing out that until you actually tried it, you didn't know it was going to be good, which makes it a pretty hard thing to sell. Totally. We're going to get into this more in a sec. But yeah, this is not at least in the early days. It may be different now, although maybe not. We'll discuss. Yeah, this product is not something you can really just sell over the internet. Like you got you like you said you either got to try it or you got to have a bunch of friends who are using it and be like, this is awesome. Right. There needs to be sufficient social pressure or your own experience. Well, let's go right into it. So like how do they start and end up selling it? They make the especially at that point in time completely orthogonal decision to how tech companies and startups were supposed to sell. They go to the short hills mall in New Jersey and they rent a store in the mall and set up a mall store and they start selling these by hand in the mall. It's a beautifully contrarian bet to say our strategy is to go to malls, which by the way they continue to do like hundreds and hundreds of in mall stores as malls across America are declining. But they did have the realization. I don't know if it was super explicit as a strategy, but the realization that hey until you try this thing, like you actually don't understand how awesome it is. Like you can hear it described to you, but it's not compelling enough to buy especially at this high $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 in the market to go buy gym equipment, but they're walking by. They try it. They have some one size of the bike for you. You throw on the headphones. Their goal, their sort of KPI is get you in the experience as soon as possible after stepping in the store. And this is by the way, how I bought mine. It is like you wander in and you bought it in the mall. 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 like it takes all of three to five minutes before you're like, oh, I see why this could be cool. And they needed the mall store as the way to sort of do this. Yeah. I'm just remembering my own experience before I bought the Peloton, which I didn't get until this summer. So it was not like a pandemic purchase per se, but I had been hearing from you and playing my friends like how much they love it for years. And that wasn't even enough to put me over the edge. I had, I got a digital subscription. So I was just, I had a crappy old bike in my garage that I was using it with. And 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 Peloton's there. And I was like, well, I'll try. I'll see what the actual bike is like. And I was like, oh, this is awesome. And my $200 Amazon bike in the garage, it's night and day compared to this. It really is a great bike. It's the sort of magnetic resistance. It's the belt instead of the chain. I mean, everything about it is, it is a nice piece of hardware. It really, it really is. But yeah, yeah, you got to, you got to try it. Which it's interesting. You're describing how you got hooked into it. That's like, sure, you want to sell bikes to hotels because it's nice to sell bikes. But I think a big part of the, we need to be in hotel strategy is just more and more ways for people to experience it and want to buy one. But yeah, okay. So you mentioned price $2,000 bike. So at the Kickstarter, I think they priced it like 1500 on the Kickstarter, I think, as early. But then when they first tried to start selling these things, they priced it at $1,200. And it wasn't selling. This is like fascinating. It was a fascinating little detail. And then they talked to some people about this a year again, customer feedback. And what they realized was that for $1,200, they are thinking, hey, the strategy is to sell the hardware at cost or at a loss. It's like the video game console strategy. Like get the video game consoles in there and then we've got this awesome subscription business that we're going to layer on top of it. And that's where we're going to make our money. People thought it was the hardware couldn't be that great if it was $1,200. And they realized that if they raised the price, they raised the price up to $2,245. That then in people's minds, this becomes this like jewel premium, expensive, aspirational luxury product. Like I'm treating myself to this splurge because it's so awesome. And I'm going to like love it. And at the $1,200 price point, it was hurting that it was preventing that from happening. That's absolutely fascinating. So they didn't change the thing about the bike. They just raised the price by a thousand bucks. You know, in the Buffett parlance of prices, what you pay, value is what you get. They're using price to signal value. And that's supposedly another one of the big things that really helped sales take off. Well, yeah, so I'm going to pull forward a playbook theme here. So the second order thing that I don't think they realized by jacking up the price is that now they're picking their customers and they're picking affluent customers. And in particular, they're picking customers who have extremely low price sensitivity. And what happens when you pick people with extremely low price sensitivity and you select for only people who are willing to throw $2,300 post tax at an exercise bike, they're pretty unlikely to churn even if your fitness subscription is pretty expensive. And so even to this day, their annual churn, if you sort of take their monthly churn and annualize it is something like 9%. This is an unbelievably sticky business when you look at most consumer businesses, they're like 50% annual churn. Has of last summer, so they're on a June 30 fiscal year. And so when they reported they last full year, fiscal end, I believe churn was like 0.6. Monthly churn was like 0.6% worked out to about 7% annual churn. Wow. Which like, those are Netflix numbers there. I'm not sure. Yeah, I think it's meaningfully better than Netflix. Maybe I should look at what Netflix's churn is, but I think that that is the best I've ever seen. So on the one hand, it's hard to acquire customers because you got to go sell them a $2,400 bike. On the other hand, once you get them, boy is that sticky. So I don't know what revenue was for 2014, which is their first kind of full year of sales and they implement some of these strategies. I believe it was $10 million ish. In 2015 though, they do $60 million of revenue. And ahead of that at the end of 2014, they are able to raise their first institutionally led round of capital. This is 2014 led by the legendary early stage investor. It is technically a series B, but the seed was the $400,000 round and then the A was the still individuals, $3.5 million round led by the legendary seed investor. They are quite now a legendary seed investor among others. Tiger global. Get out of here. This is amazing. It's an unbelievable that by Leifixl in 2014, it was a $10 million total round on a 35 million post where Tiger put in 5 million. Tiger would go on to become the largest shareholder at IPO owning just under 20% of the business. Amazing. There are so many little things about this story that just sort of, you know, pressage everything that would be to come in tech over the years and in venture. Tiger leads the first institutional round. I do think by the way, this is one of the things that gave among many other very successful investments, but was a big part of the story for a lead to when he's left and started addition and raised over a billion dollars for additions. First fund, Peloton was a big part of that. Yeah. For Leif, for addition, you know, for Tiger itself too. I mean, got to imagine that that was a big part there notoriously. Tied, lipped our friend Mario Gabrielle, wrote, I think the best piece out there on them, which is still without, without insider access, but shaped their strategy too. Yep. So $60 million in revenue in 2015, 2016, they do $170 million in revenue. 2017, there is $325 million at a $1.3 billion valuation. And this is where the Silicon Valley really started to wake up. Be like, oh my God, we missed this. How did we miss this? Yep. Because he pitched everyone, everyone. Literally everyone. 2018, they introduced the Tread product, the treadmill, and the digital app subscription. And we've had to talk about that. You know, I started as a digital app subscriber and then... Which is how it's like $13 a month? Yep. It was $12.99. I think I originally started because I think there might have been like a, some, a deal with Apple or somebody like a first, 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, that was totally nuts. So John Fully talks about this. He says about the beginning of COVID. He said six months ago, we had about 100,000 digital subscribers for the business. And within 45 days of COVID hitting, they, they gave this deal that said, you're not getting a month free, you get three months free because people need to work out at home. And within 45 days, we had close to 1.2 million people who had jumped on the trial. So call that a 10X increase in weeks. Wow. So that was a very, I mean, again, we'll get into the Uniteconomics a bit later, but at least from a customer acquisition perspective, that was a great way to spike the number of subscribers they had. Totally. And the digital app experience is like surprisingly full, full, full featured. You know, I, I used just that for quite a number of months before I, before I got to try the actual hardware at a hotel. And for people who are wondering, you know, why can't, why isn't it as good? If you, if you haven't ridden the, the peloton, like, why can't I just mount an iPad on an iPad on an old exercise bike? The biggest difference is that when the bike is not feeding information into whatever device you're using, you know, your iPad or something, it doesn't know what the resistance is and it doesn't know what your cadence is. And so you don't know things like your current spot on the leaderboard. Or it knows you're doing the ride and it knows how far into the ride you are, but it doesn't actually know. Yeah. 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 up peloton and get some of the integrations with third party sensors. But I think to get like a similar quality bike, you're going to be spending roughly the same amount anyway. It's like why wouldn't you just, like that's what I kind of decided is like, well, just get a whole ecosystem. Well, why wouldn't you get one anyway? Because the connected fitness digital only subscription is $13 a month. And once you have a bike, it becomes $40 a month. You're paying $40 a month. Okay. So I know you've got some fun stuff on this. 2019 people start talking about everybody of Silicon Valley knows this is a great business. Now people start talking about an IPO going public, which happens in September 2019. But leading up to that, there's kind of an issue with the business that got a sort out, which is earlier in 2019, they get sued for first $150 million and then they up at $200 million by the Music Publisher's National Music Publishers Association. Because they're obviously using all this music as part of the classes at peloton and they didn't have proper sync licenses. Yes, so this is my bit one of my larger bear cases for peloton. So music licensing and gross margins, a treacherous tale. Well, if you look at peloton's income statement today and across recent quarters, so we're at sort of a relative point of maturity here, about a third of the revenue that comes from subscription, so not like the physical bike sales, but if you just look at the subscription revenue, a third of that goes to cost of revenue. And while we don't know for sure, it's very likely that the majority of this goes to music licensing. So even though investors love a good subscription business, this is not 86% gross margin like SASS is, it's more like 66% gross margins. So a little examination, why do we think that this mostly goes to music? Well in part, the variable costs for everything else should be pretty low. I mean, maybe bandwidth is probably the next highest cost for streaming video. I have some particular beef as a pedantic person with the video that they do stream. I find it to be too low frame rate, too low frame rate, to have some motion blur to be a little bit compressed. So all that aside, it's still expensive to stream for video. Now do you know, did they put content production cost in variable costs here too? I don't know if that is in the cost of revenue for the subscription. I would guess not. I would guess they would put that down in either GNA or I don't know, it might be in there, but you know, and I don't know. I'm a dug in deep enough to know, but I don't think it's that expensive. Relative to the amount of subscription revenue they get, we'll get into powers later and scale kind of reason all that. But my understanding is that the top Peloton instructors make like 500K to a million. Yeah, I think that's about right. And then obviously you've got all the production costs around that, but like still compared to hundreds of millions of subscription annual revenue that's a drop in the bucket. Totally. Okay, let's assume that the largest part of this 33% of cost of revenue is to pay for music. So why is the music so expensive? Well, if you remember from our Taylor Swift episode, there's a bunch of different types of licenses and unlike Spotify, or the radio, Peloton actually requires multiple licenses for the particular way that they use the music. So first, Peloton I think is technically just like the radio, a live performance. So live performance royalties must be paid out. And if you are curious for how those are paid out, go listen to the Taylor Swift episode where we talk about the difference between the publishing rights holder and the performance master right holder. But they also need a sync license in addition to synchronize those songs with the video content. Yeah, if you're going to use a license in a commercial or a movie. Exactly. And just as a quick aside, I'm a side from a side, the interesting bit about sync licenses is they require the approval both of the sort of songwriter, the person with the publishing right, and the performing artist who owns or whose label owns the master right. So there's a lot of people who can say, no, I don't grant you a sync right, which is why in this lawsuit that you're referencing, David, when Peloton did end up pulling a bunch of stuff off of the service, which a lot of people really upset about, it was weird because say you're like, wait, but some of this artist's songs are on there and some rides with those artists songs got removed. And that's because those songs had different songwriters behind them. Yeah, so many people with VTOPHOWER. What a Byzantine industry. Crazy right? Okay, but back to sort of this like gross margin problem. So according to a piece from Trichordist, which is a music industry site, Peloton pays out 3.1 cents every time that you are on a ride and hear a song. That number should actually sound pretty high to you because that's meaningfully larger than what we talked about on the Taylor Swift episode per stream. So let's take that 3.1 cents. If you ride every day, and people don't ride every day, but I think people ride about 20 days or they use the product about 20 times for a month, but let's say you ride every day and assume there's about 10 songs per ride and I went back through my recent rides and looked at that's about right. That's $9 of your subscription revenue that is going straight to music. So if you're on the bike subscription, that's like 23% of your subscription that you're paying to Peloton goes immediately to the labels, which kind of checks our math above that the biggest part of that one third of the cost of revenue is actually for music. Now of course, if you're on the digital only subscription, that's really high because that's only $13 a month. If you're actually using that thing every day, I assume the royalty structure is similar. It may be the case that Peloton is large enough that they've negotiated a specific revenue share somewhere between 15, 25, 30%, something like that with the music labels rather than needing to pay out a fixed amount per song because if it's a fixed amount per song, then they could get underwater pretty quick on that digital only subscription. God, the parallel is to Spotify are just amazing with the two different tiers of customer experiences and vastly different implications of that for their back end costs. 100%, I mean, it is, okay, you're leading the horse to water. I'm the horse. Here's the water. So because there are very real marginal costs in this business, just like Spotify, at the end of the day, this actually does have the same incentives that a gym membership would have, like an old school gym membership, which is sign you up, keep you subscribed, but really no incentives for you to actually go to the gym all the time. They kind of want you to do the minimum amount to stay subscribed, like stay engaged enough with us, but don't cost us any money. We want to minimize the amount that we have to pay the music labels on your behalf, which is interesting. So I was thinking about this, prepping for the episode and I slapped on it, when I woke up this morning, I kind of realized 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 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 right. So I bet they did some kind of like blanket license type thing where, you know, 20% or 25% or whatever it is ends up of all subscription revenue, no matter what ends up going to the labels. Well, if they don't have that, they probably have a new CEO who could help me that happen. Very much so. Very much so. But if they don't, they should and now they probably can. Yes. One last like quick piece of math just to underscore the gravity of this, I ran the math on what it would cost Spotify to pay the labels for the same amount of music listening time based on the data that we used in the Taylor Swift episode. So you know, 15 hours across a month. So I was thinking the same as like, you know, 30 minute ride every day for a month. And instead of the $9 that I sort of estimate that Peloton has to pay, Spotify is closer to like a buck 20. Wow. That's massively different. That sync right and the performance licenses, very expensive. So you know, Barry is definitely used to this Spotify world of we pay a pittance to the, you know, the labels and the artists. And in this world, because of the license structure, it's a meaningful part of cogs. One way to look at it is it's a meaningful part of cogs and sort of in the bear lens. Another way to look at it is like artists should really embrace Peloton. Yes. Very much so. What you got to wonder is that part of what's driving like the Taylor ride series and the Beyonce ride series and Peloton is notoriously very collaborative with the most popular artists. So September 2019, they've settled this lawsuit. They figured things out at least with the sync licenses. They go public. The IPO happens. S1 hits fiscal year 2019. So fiscal year ends June 30th, as I've said. So for the 12 months leading up to June 30, 2019, it did revenue of 915 million for five year old company that is or five big product that's been a market for five years. That is impressive. That is up over 100% from 435 million the year before of that 915 million, 181 million is subscription revenue, which is up from 80 million the year before. So growing even faster. We already talked about the margins on the subscription revenue. Interestingly, the hardware revenue connected fitness products is the segment they call it. Also about a 40% gross margin. So there this is the benefit of raising the price of $1,000. Right. Right. They actually make pretty good margins on selling the bike itself. So I couldn't find this mostly because I was scrambling for just the last day to put together everything we did learn. If you have data on this, please come and share it with us slash slack. And we would love to talk about this. I remember around the time of their IPO, seeing some analysis that said that they basically were break even on the bike if you add in customer acquisition costs. So the cost of manufacturing the bike and delivering it and all that plus the cost to acquire, which was really expensive. You know, they're in these malls. They're sending you a ton of social media ads. They're really trying to convince you, you know, they're putting on super bowl commercials, which we'll get to. They're putting on other commercials where people are in these multimillion dollar homes, writing in fancy places. It's expensive to convince people to do this new behavior. And I think the plan at the time is like, okay, just don't lose money acquire a customer when we sell them a bike. And as long as we're kind of break even on that, then we can make a lot of money on the subscriptions. 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 know exactly. So this is not like a sharp pencil. This is back at the envelope modeling and these are pandemic numbers. So may not be applicable anymore. But in the most recent full fiscal year, which ended June 30, 2021, they spent $730 million on sales and marketing and they added about 1.4 million gross ads on subscribers. So now I'm assuming that like all those are bikes, obviously not a lot of those are digital subscriptions, etc. But let's just make it simple. So CAC on that is $521 per gross subscriber added. That is to your point, a lot of money. That is a lot is a very, very high-CAC $521 per new subscriber. Not in the B2B world, but it's almost unheard of in B2C. Like getting a consumer, like paying $500 for a consumer, like no one does this. If you go out and put that in your pitch deck around Silicon Valley, like you're going to have to have a very high LTV. Well. Now, at the $1895, $1895 price point for the bike, which is what it was until they started doing crazy stuff with their pricing. But they had lowered it from the 2245 to 1895 at a 40% gross margin on that hardware. That's $758. So they're more than making their money back. Right. They're making a little, maybe a hundred, a couple hundred bucks total on each bike. Yep. They're making some amount of contribution margin on the bike. But then you attach the subscription, which, you know, with the crazy low-chern rates that they have the implied life time. $40 a month is over 10 years. 66% gross margin. Let's cap it at five years for a customer lifetime because 10 years is too crazy. Let's assume that that's not going to happen. $40 a month, that's $2,340 in subscription revenue over five years. Wow. So that's a pretty dang good business. Interestingly, at the IPO, happens right after the whole WeWork debacle, which we covered on this show with Dan Primack, also a big bell-tun fan. At the time, that was fun. The IPO is not a good one. This is around $8 billion, but then trades down 11% on opening to a $7.2 billion market cap. So we're talking like 7X trailing 12 months revenue, but like this company's growing over 100% a year. So you know, 3X forward revenue with pretty good unit economics that we just discussed. Interesting. Yeah. And this isn't an era to where you don't have a lot of busted IPOs. So this is, you know, before COVID, but it was still pretty go-go times for these tech businesses, a little disconcerting that traded down from their IPO price. Indeed, indeed. And then they don't really help things, shortly after the IPO and the holiday season 2019 rolls around. Wait, wait, wait. Before we get to the Peloton ad, can I clarify something on, can you give me the numbers again on the cost to acquire customer and their LTV just because I want to hold that in my head as we continue through here? Okay. So rough, rough numbers, $500, $520 to acquire a customer. And let's say they are break even, dislately profitable on that with the hardware and then $2,340 of lifetime revenue, assuming a five year. Okay. So 20 customer lifetime. 2300 of LTV. And is that contribution or is that that's revenue? So then two thirds of that per your analysis is contribution. Okay. So we're looking at something in the neighborhood of like $1,500 of contribution on the subscription, even if we cap it at five years. So every single person they acquire, not only are they break even or probably a little profitable just by selling them a bike, but then they make another $1,500 plus dollars in pure profit by retaining them over time. Yep. Yep. So you would understand why 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 infinite amount of money so that we can spend on marketing so that we can go get as many people to buy this thing and get hooked on it because, oh my God, what a business we have on our hands. And thus we end up with the holiday Tony 19 Peloton wife commercial. Which kind of is a funny story. I mean, like, you know, it's just it end up being bad for Peloton or is this just good marketing in the end? I think it was good marketing. It is good for everyone. It ends up being good for that actress. Yep. Good for Ryan Reynolds. Oh my God, the aviation gin thing that came out the next week is just genius. Well, we'll link to it. The people go, go, go, go, Peloton wife aviation gin and watch that commercial. I also thought the Peloton wife commercial thing was like pretty overblown. I mean, it feels like every year stuff gets more and more insane. So this commercial at the time, I think had a lot of people up in arms, but you're like, this is not that scandalous. Yeah, right. Compared to everything that's happened since also, it was probably great for Peloton because I didn't go back and watch it, but my recollection of it put the controversy aside is that the commercial itself was like, yeah, fine. You know, like, but then they got so much hype out of it. But this sets Peloton's track record for they can become a dominant trending topic in a pop culture way, which it every time they would come to dominate headlines after this, not really good for them. Other than the one, which is like, hey, now that the pandemic hit, Peloton has perfect product market fit. But every single one other than that, which we're about to talk about, the shipping delays and the consumer, what is it? The treadmills. The treadmill recall and the, yeah, like, it basically was never good again. Yep. Well, before we get to the pandemic, I think this is the perfect spot for the second sponsor of this episode and all of season 10. One of our very, very favorite companies here at Acquired vouch, the insurance of tech. Vouch is business insurance for the modern tech industry, whether you're bootstrapped, seed stage growth, public or anywhere in between with Vouch. As you know, you can go online, get next day coverage for your company in as little as 10 minutes and then you can grow your coverage as your company grows. I was thinking about this and I was like, that kind of sounds like a geico commercial. And then I was like, wait a minute. That's the whole point. It is like a geico commercial. You can now go on with Vouch and get next day coverage for your business without filling out a million forms and going back and forth and mailing stuff and doing ridiculous to it. That's unbelievable. That's how it used to be. I can attest as the resident form filler outer here at Acquired. We are insured by Vouch and that was our experience. That's so awesome. It just, like, it really hit me for this one. I was like, yes, it is the geico consumer experience brought to business and that is an incredible innovation. And now not just for startups too. Like it's impressive that they can do this for growth stage for larger companies in sort of this same expedient way. Totally. Totally. So as many of you probably heard on the Taylor Swift episode beginning of the season, rather than just telling you the same story every time, every episode with this for Vouch, which is basically if you have a company you need insurance and you would be insane not to pick Vouch. Yes, yes. We're going to say that and it's true and we use it and believe it. They also have the awesome idea that we should use this time to do some little one on ones over the season to deeper dive into like what is insurance and how it works. So today in the great idea that they had, we are going to address the elephant in the room question, which is why do you actually need business insurance for a startup? Like you're already doing this thing that's really risky. Why would you even get insurance? And the reason that they said and I totally agree with this is that insurance lets you atomize different risks and separate out the good risk like the product risk, the market risk, the technology risk, all the stuff that you and your investors are betting on in your investment thesis with this company. Right. The real risk that they investors and you founders with your time that you're essentially underwriting. We are willing to take these risks that we can't find product market fed or that you're doing the underwriting on that with insurance, you can take other risks, you can atomize them and you can have somebody else do the underwriting on those and that's what vouched us. So stuff that's completely unrelated to what you're trying to do with the business, you know, data breaches, accidents, wrongful termination claims. You know, that's what insurance is, is atomizing these different risks and then you pay vouch the premium every month or whatever insurance company in return, they assume the risks. Because they're pooling and vouchers pooling these specific risks across many startups and tech companies, they're able to like, in aggregate model it and price it such that they're going to make profit and money on this and that that's why graph vouchers a great business. But it also is a total no brainer for you to offload these risks. Right. Another way to think about it is if the risks are part of your core competency as a business, take them if they're not and they don't make your beer taste better, outsource that risk to vouch. And the cool thing about vouch because they only work with tech companies and startups, they can actually price this risk right in a way that legacy ensures this is why it was so hard before you had to do all these forums jump through all these hoops as a startup or a tech business because legacy business insurers have no idea how to price your risk. So this is awesome. Now obviously you shouldn't leave everything to insurance. It's a last line of defense after like important stuff like having sound each hour policies, cybersecurity and using Vanta, etc. compliance. But the last thing you want is for a completely unrelated risk to tank your business or we even worse than that just suck away your time as a management team and vouch takes care of all of that. They are awesome. You can learn more at slash acquired and all acquired listeners. If you use that link or the link in the show notes, which is the same, you can get 5% off all of your coverages. Thank you, vouch. Thank you, vouch indeed. All right. So David, tell everyone why I was the most fortunate person in the world to in January 2020 have just so happened to have bought a peloton at that moment in history. I didn't realize you bought it before the pandemic. I bought that and my car in January of 2020 totally randomly and by happenstance, which both ended up being unbelievable assets to have. I actually bought a Olympic weight set off Craigslist right at the same time. So not as high value as you but like stuff that like immediately became unavailable. Cool. Yeah. 180 bucks maybe for like a full Olympic weight set. Which now is like a thousand dollars. Yeah. So great. So the pandemic hits, you know, like you said, if peloton had very good product market fit with a certain narrow customer segment before the pandemic was a great business, the pandemic made it have instant product market fit with many, many more segments. They add roughly a million subscribers in the next year revenue in the fiscal year ended June 30th, 2020 is 1.8 billion in the fiscal year ended June 30th, 2021 is four billion dollars. The stock trades up as we've talked about to a peak of over 150 dollars per share at a 49 I believe billion dollar market cap people think this is going to the moon and like rightly something it's amazing product. If you know fitness has now become fully digital, they are the leader in the category. You know, so much, so much to love here. There's a zillion copy cats, 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 there's like echelon out there. That's crazy. But also pioneering this category of connected fitness, which says sure peloton is going to do a tread and a bike, but they're not going to do a mirror and a, you know, band based weights set and you know, and a yoga thing like that there's all these brands that are saying like, yeah, peloton does little bit of that, but that's not their core competency and they're never going to take it seriously. So there really is this super real category of connected fitness that peloton totally pioneered. I'm curious your thoughts connected fitness, 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. I've done a bunch of the peloton strength stuff. I think that works well and I think that the peloton strength classes definitely appeal to a crowd who is not going to buy an Olympic weight set in their garage or is not going to go to a gym. I know people with the mirror who are very happy with that. I think it's pretty broad. I think the bike is the first and best instantiation of it. Interestingly, fully and I think he's right on this. I think this isn't one of his sort of like grandiose statements that ends up not being true. Things that the tread market is like three X, what the bike market is because running is a much more like treadmills are a bigger thing. I think the stationary bikes. Well, they also sell the treadmill for a lot more money. That's true too. It's interesting, right? Running, it's different though. I'm sort of halfway in between on this. I agree with you. I both have an Olympic weight set in my garage, but I use the peloton strength stuff more often, especially as I get a little older and the idea of squatting and bench pressing is less appealing to me. I think the strength stuff is pretty good, but I can't imagine buying a treadmill or using a connected fitness for running. It's so true. We're lucky. We live on the West Coast. You're around. There's plenty of places where that's not possible. Yeah. It says a lot that ultimately all connected fitness is a digital facsimile of a real world experience. There was a very, very popular real world experience of spin classes. It's interesting that that behavior never really existed in the real world for running. There's Barry's bootcamp, but that is not a sweeping... Well, part of it is. What a third of it is or half of it is. There's not a sweeping international movement the way that there was with spin where it's running to an instructor. So maybe to super simplify your question, my answer to your question, it's anything that's instructor led that is a big market on the offline world can be an instructor led large market in connected fitness. I agree with that. I'm just not sure that running... Maybe there will be some innovation at some point that is an instructor led running class, but as a runner, I don't really want an instructor. The joy of running to me is to be outside in beautiful places and just go. You have a bias there. I'm the exact same type of runner, but the hardcore cyclists wouldn't say the same thing. They're like a spin class, but the beauty of cycling is that... Right, right, right. And then the beauty of spin class is like, these are two different products. Yes. Anyway, September of 2020, this is where I think things start to get a little wonky with Peloton. They introduce the bike plus in September of 2020. And we should say by September of 2020, it's basically impossible to get one of these... The Peloton bikes at all. There's like a four month backlog. Pandemic kits, and unless you're getting one in the first week or two, you're out months before you can get one because Peloton doesn't make any other own bikes. They certainly don't make any of the U.S., so we're at the whim of international shipping, supply chain partners. They really haven't ramped any in-house manufacturing capability. And so good luck. Right. Which makes all of this even a little more puzzling, you would think a reaction that would be to raise prices. Like, they certainly... They have a total pricing power. Now, to their philosophy, and like we've been talking about, they want as many people to access Peloton as possible. Bob, Bob, Bob. Okay, great. But... So they introduce the bike plus. They price it at 24.95. The original bike, remember, had been 22.45. And David, you bought a bike plus, so you know the differences of this product first hand. 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 introduce the bike plus at only 24.95 when you're selling treadmills for 3,000,000 plus? Clearly, there's like appetite for your core segment to buy expensive products here, and they're not that price sensitive. So the bike plus... Yeah, after when I decided to buy a Peloton, I was... I don't know if my experience is universal, but I was like, you know what, I'm really going to invest in this. This is awesome. I want the best. I'm going to buy a bike plus, and I didn't even really think about pricing or how much it was relative to the bike. It arrived. And I got to 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 and cost more. And many of the 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. That was I was going to get to that last, but yeah, a few other things like the micrages 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. It's just a whole bunch of like really weird little things like that. The main gimmicky feature is you can flip the screen outside ways so you can do these boot camp rides where you're on the floor for part of it. You're on the bike for part of it. Do you ever try that? Yeah. A. I don't use that that much. Usually when I'm doing strength, I'm doing strength and when I'm doing the bike, I'm cycling. But B, there's like a $40 little bracket you can buy that I did for the original bike that you can install pretty easily to then have the screen swivel. And it's like, wait, why would I pay $1,000 more for that? Anyway, but yeah, what you said about the screen, that was the dagger for me. I was like, this is a worst experience because they have a higher, a bigger screen, but they're using the same 1080p crappy video on it and it looks way worse. It just didn't make any sense to me. So I returned the bike plus. So now let's think about me as a customer for Peloton. By the way, I love that in these episodes, like what we have personal experience, like half the Airbnb episode was my experience as a host. And now here's David's Peloton buying experience. People are probably like, okay. This is irrelevant, but no, I think this is the last, this is the last year, if I think some of the problems with Peloton, the product was not quite right. The pricing was weird that they did with the product suite here. So they roll a truck to do the delivery for me as a customer for the bike plus. Which is crazy expensive. Crazy expensive, right? But they're selling this. Like they own all their own distribution and they're driving around neighborhoods all over America. Yep, they roll a truck in old cable parlance of a truck roll for a customer service. They install the bike plus for me. The shoes they come with it, the cleats didn't fit. They had to send me new cleats. So all right, that's another, you know, shipping costs, customer service, etc. Customer service call. I used the bike plus for 11. I'm like, this is not that good. I return it because they have a 30 day, you know, return policy. They roll a truck, they pick it up. I bought the original bike, which by that point in time, the price had dropped to 14.95. So I had just, I had spent 24.95. They rolled a truck twice already. Now I just spent $1,000 less. I got the bike. They rolled a truck. There were some problems with the pedal. They rolled a truck to do another customer service for me. So four truck rolls, a purchase, a return, a restocking, mailing me new cleats. Wow, they're probably not profitable on you until maybe year three as a subscriber. Absolutely. It's brutal. And I can't imagine that my experience is wholly unique here. I wonder. Yeah, we only had the person come out once and it all thankfully worked really well. So I'm a very happy customer, but yeah, to your point, how long do they have to retain me to even break even on me now? Right. Right. And I think a lot of this could have been avoided with some different product decisions and some different price. Pricing decisions. There's a trend that they need to follow over the entire lifetime of their business, which is dropping the price point so they can keep attracting that next concentric circle out from the core affluent 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, and let's not talk about supply chain and inventory and stuff yet, because I think that made their business really not to resilient to all the things that they did there. But they probably should have easy to say in hindsight, but not shipped the bike plus and not dropped prices yet, even though they need, no, they need to do both of those things in the longer term. Yeah. This was a product that needed more work before shipping. And then in terms of cannibalization of their existing customer base, and I think they really hurt themselves a lot on some of the aspirational aspects of the Peloton brand around this. Also simple things like the bikes that the instructors use in the classes are the original bikes. If they really want to push the bike, why don't they use the classes? I've always known classes. Totally. I thought that was so weird. That hurts anything, and that's just great merchandising for higher margin products. I wonder if there's custom software that's written for instructor bikes that they didn't want to invest in porting to the new bike pluses. That could be. Anyway, there's just a bunch of puzzling decisions here. And perhaps the most puzzling is in December 2020, they announce that they're buying pre-core for $420 million in cash. In cash. You and I both went and looked this up because we were like, I remember the $420 million pre-core acquisition, which is a Washington-based company, by the way. That's right. And a windmill, right? Yep. And I was hoping they used some stock to pay for it, given their stock was, you know, trading ludicrously high at the time, but alas, they spent the rare assets they have on hand there, the cash, and primarily bought pre-core for their manufacturing prowess to have some, you know, US-based manufacturing to alleviate the supply chain stuff and to just have in-house capacity because at some point, maybe they want to take this fully in-house. A secondary benefit that comes with it is pre-core is really, really good at selling in commercial distribution channels. So, Pelotons are then can inherit all those relationships with all the hotels to get 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 starting to do some work leveraging pre-chores manufacturing to hopefully start manufacturing some Peloton bikes. All right. That feels like kind of a, I want to say pipe dream. Either a pipe dream or a very, very far out investment, the idea that you would retool pre-chores manufacturing to manufacture bikes, the commercial relationships, that makes a little more sense to me. But so it was a little puzzling at the time. Then they announce in spring of 2021 that they are going to build the Peloton output park to insource their own manufacturing in Ohio. So, this is now both of my homes. They're trying to manufacture it. That's all right. We'll come back to that in a bit. But that's another 400 million that they announced their breaking ground on. Yep. Again, cash outlays. And then in the spring of 2021, there's the treadmill recall and some of the tragic accidents around with the treadmill. The company doesn't handle that super well. First they start to say, oh, people aren't using it right. They're like, well, kids are dying and getting hurt here. That doesn't matter. Stock drops 15% around that. They have to be a copa and say, you know what? We are going to play ball with the investigation. We feel super bad that we miss handled this originally. And then November of 2021, last fall, they miss earnings. They cut their outlook and the stock gets hammered down 32% in one day with earnings announcement. They have some more holiday season media commercial. This is also probably good with the new sex in the city where Mr. Big dies on a peloton. No, because that tanked their stock price and it never recovered. It did. Although I know that, to me, feels like the wrong reason to sell the stock. I mean, yeah. But it's indicative of the, I think when something like that happens, so someone died on sex in the city and was on a peloton and peloton stock dropped. And you might say that's so stupid. But I think the what to read into that is people are on such uneasy footing about the future prospects of this company that merely imagining that something like that could happen is enough to spook investors. And that says a lot. That says way more than the sex in the city episode. Yes. So then the other sheet drops, the other cycling cleat drops on January 20th news comes out that supposedly peloton is completely stopping production of new hardware as they have an inventory glut that they can't sell demand has completely dried up. It all got pulled forward through the pandemic. And this is bad news. There's a 1.3 billion dollars worth of inventory that they're sitting on now. Yeah. So we went from literally they can't make this stuff fast enough. They're hiring delivery teams all across the country and around the world, delivering bikes into people's homes, picking them up, servicing them, bringing them back to now. They can't sell these things. There's a lot of things to applaud the management team about and John Foley and the dogiveness and the entrepreneurism and the pure invention of a movement and recognizing talent and hiring the right instructors and finding ways to align incentives and building this part like so much. The one that is really, really damning is all the quotes that Foley and other folks gave along the way saying sure this pulled forward demand, but we think it will only ever be more, we think we will only ever continue to sell more and more of this stuff demand is just going to keep growing and they were just completely wrong, like completely wrong. The incredible slow down, like the really, really scary slow down that has happened for them is to the point where they only grew 9% in Q4 and then 5% in revenue in Q1. And this company just believed that there was way, way, way more demand out there and sure the pandemic accelerated us, but we're not going to have to sort of make up for everything that was pulled forward. It's just going to continue to be high demand from here and they were just flat out wrong. Totally flat out wrong and we'll wrap up the few last points to forget to literally today, present day, but one of the things when they were released earnings yesterday is they cut guidance guidance had been for full fiscal year revenue of 4 to 4.5 billion. They cut it down to 3.7 to 3.8, which is actually going to be down, like revenue is going to be down sequentially year on year this year versus last year, like that is not good, that is not good for a growth company. No, and you look at the level of certainty that they had that they just needed to keep expanding to service all this demand. Not only did they plunk over $800 million into manufacturing capacity between pre-core, which has its own business, so it's justifiable, assuming they paid a reasonable price for it. Of course, the Ohio factory, but you look at their employees. They were growing employees pretty quickly from 2015, 2016 to 2020, but when you look at, as of January 2021, they had 4,000 employees, that ballooned over the next year to about 9,000 before these recent layoffs. Now this is a very complex business, but like 9,000 employees, and that's just corporate, right? No, that's everyone. Oh, that's everyone. Okay. Yeah. And the layoffs, of course, were 2,800 people across the whole business, and I think about 20% of the corporate staff, but they were really, really investing, and very certain this demand was there. Yep. So after that news on January 20th, a couple weeks later, an activist investor called Blackwell's Capital, comes out and announces that they've accumulated a 5% stake in Peloton, the share price and market cap, of which, by the way, have dropped below the IPO price, which, as we chronicle, was not a great IPO in and of itself. And they publish a deck calling for fully to resign and for the company to initiate a strategic sale process. And that brings us to yesterday, February 8th, 2022, where they announce earnings, they're bad. They lower guidance significantly. They pull the plug on Peloton Output Park. They cancel the plans to build the manufacturing facility in Ohio, the layoff 2800 people, and Barry McCarthy is riding in as the new CEO. And the way they sort of message this is that John Fully is stepping down as CEO, which is the, or at least that's what people here, that's what people here. And it's somewhat to appease these activist investors, but let's like zoom in on what mechanically is actually happening here. So John Fully becomes the executive chairman. Now, what an executive chairman is, as compared to a non executive chairman, is there still the chairman of the board, or the chairperson of the board. They no longer have day to day responsibility running the company. However, I believe they still are a compensated employee. They still draw a salary. They're still like an employee of the company in addition to being just a board member. So they share both this sort of like director level and pseudo operational. It's more like they're working with the currency, yo, to sort of set strategy with them. And so while they're not running the day to day, they are still the senior most person who is an employee of the company. And I don't think it would be correct to say that John Fully is currently Barry McCarthy's boss, but it totally is fair to say that John Fully is on the board is the chairman of the board. The board hires and fires the CEO. And here's the real kicker on this whole thing. As many of you will know, we've been on a heck of a run over the last 20 years of having dual class structures put in place for founder led companies. And here's a quote from Matt Levine at Bloomberg. Peloton has a dual class structure in which the founders and some insiders have stock with 20 votes per share. And Fully has a lot of it. According to Peloton's proxy statement, he controls 39.6, so right around 40% of the voting power of Peloton stock and his co-founders own another 18%. So there you go. That's over 50% of the voting power of the company right there. Right. Fully can't do it alone, but with one, probably it's certainly both of his other co-founders basically can make a unilateral decision. So the message Peloton wants black wells and other upset shareholders to hear is John Fully has moved on, stepped down as CEO, and we've brought in Barry McCarthy. In practice, dude still holds the cards. It's more complicated. Now all that is true. At the same time, I don't think Barry would take this job if he didn't feel like he had full autonomy. Totally agree. And the memo that he writes to staff, which we've already read some from some of it and I want to read a bit more. Because it's amazing. Barry is like, who wouldn't want to work for Barry? It's a great leader. Yeah. What a leader. So he writes, I know today's restructuring news has been difficult. There's no sugar coating it. It's a bitter pill. And in my experience, the sting has a long half life. But the hard truth 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. One of my core management principles is about getting real. We have to be willing to confront the world as it is, not as we want it to be if we're going to be successful. We have to be honest with ourselves and with each other in order to make that happen. Even when the truth is uncomfortable or inconvenient to deal with, and then Ben, I think you read the great part about the comeback story after that. You know, in any closing, he says, when he closes the memo, he says, in the months ahead, you can expect to hear from me about our strategy. And the choices we're planning to make to drive our success for the avoidance of doubt. We are in the business of driving growth. I just like full stop. That is what we are here to do. And that will require us to take risks 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 Wilbur's is great. And then it opens the whole memo. Yes, the whole memo is kicked off with, you know, rather than like, hi, I'm here to see you. It's boy do I love riding with Dennis Morton and Matt Wilbur's. And 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. Well, Barry has no social media presence. He's basically not on the internet. You got to wonder, has he met any of the instructors yet too? Probably not. Probably not before yesterday at the earliest. Wild. I wonder what the instructors think of all this. Because they like, they've built such brands. I mean, the Instagram following and the Twitter following of the top instructors is like, they have immense power. They have a love well and allie lot. I mean, they're getting up close to a million followers. Robin Harzah and Alex Tusson. And they've all partly this and other things too. Like, Allie is the like the the in arena host for the Brooklyn Nets or at least was last year. And, you know, everyone's got, you know, noon subscribers, noon deals or underarmor deals or even though they're making 500 to a million from Peloton and 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 earning power from endorsement and other deals is way higher. All right. So there we are on history. We thought this would be short with the emergency pod on history in fact, but, huh, never underestimate acquired. We're also incapable of just going on air unprepared. So of course, you and I like, well, we only had a day to do this. Like, we kind of put together a full. There are so many more deep cuts in the history that we didn't go into like John and his, his friend, like prototyping the experience on a Disney cruise. Did you read about that? No, I didn't get that. That's awesome. All right. So John Pleasants who got a big job at Disney, got convinced fully to come on a Disney cruise with him. And so they're on this Disney cruise and fully rose out a couple of spin bikes and stood there like for the first like 10 minutes of the ride like coaching John Pleasants. Being a man's doctor. Yeah. Like, and being like, imagine the screen here and like, you know, that really given him. And then Pleasants becomes one of the first angel investors in that 400 K round, right? So it's like a pretty cool. There's so much crazy lore in the building of Peloton, which I think we would have done if we gave this the three hour treatment. But let's go into our narratives. So like what is the media narrative right now for the bull case and the bear case? Well, on the bull, there's just an insane level of customer love for this company. I mean, the NPS is around 90. You're wearing a Peloton hat as we do. I'm wearing a Peloton hat because I referred you and they sent me $100 of free credit to buy a gear for myself, which I proudly wear around. And I hope Peloton stays a prestige brand because I've definitely bought a decent amount of the merch. Yeah. Even if they sell, I have to imagine this will stay a prestige brand for a reasonable amount of time. Like I won't. I feel like a little bit weird wearing my sole cycle, like shirt and stuff now, because I haven't been in two years, but the Peloton stuff. Maybe it says a lot about me, but happy to wear it. So that huge component of the bull cases. Oh my God, we've built this brand that people love. They love the product. They love the experience. David, after we record, I will probably go hop on for a ride because we're recording early in the morning and I missed my morning ride this morning. Another huge component is say what you want about growth right now, but how could they possibly be worth less than they were worth before COVID? They grew membership from 700,000 to nearly 3 million. And it's not like they're just selling bikes here. This isn't one time. They just added all that subscription revenue with an incredibly low churn rate and high NPS. Yep. Totally agree. We did fitness category and they're still the largest player in it. 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, there is some amount of lock-in that comes from that. The biggest thing we talked about is this insanely low churn rate and to date, the fact that they selected for customers that aren't going to churn. And that's slowly shifting because that's the other side of the sort of selling a product that is cheaper than it used to be is that you're going to have customers that are more sensitive to price all around. So we're going to churn more often than your initial cohort. Even still, the churn has gone up, but I think it's gone from like, I'm going to get the numbers wrong, but it was at like 0.6% per month to like 0.8% per month. It's still good. Totally. I do want to call out, and this is sort of between a bull and a bear case, but it's just an interesting stat to know. So when a firm went public, there was some information in their S1 where at the time, Peloton was the largest customer, the largest source of revenue to a firm. Now a firm has grown a lot and diversified. I took a firm up on their offer and Peloton up on their offer to finance my bike over the course of a few years rather than pay for it and cash out, right? Because it was a 0% deal. Someone was basically saying, do you want to keep investing your money and you can pay us once a month over the course of two years and generate some money? Well, you know, you keep the float and I was like, sure, I'll do that deal. That sounds like I know how the insurance business works. All day I will do that deal. And it's funny how much I've thought about this for how little the actual dollars are that is marginal for me to have done this versus paying cash. But I did. That's the most bend-gill-bright thing that is possible. I love it. But what's interesting is the fact that they offered it all. So when you look under the covers of why was Peloton willing to offer 0% or why was a firm willing to offer 0% what does that deal look like? Well, Peloton and Affirm did a back end deal where Peloton said if you agree a firm to do 0% financing, we will pay you an amount in order to make it worth your while. And so you tell us what that amount is. At the time of IPO of Affirm's IPO, 28% of all of the revenue in the previous year leading up to the IPO 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 0% financing thing. So that gives you a sense of how much Peloton knows and do even then, oh my God, we need to expand down market because we are saturating our wonderfully price and sensitive core customer base or initial customer base. Wow. That's huge. And in the whole, we were about to release a great LP show episode with Christina Malas Karyazi who just joined Bane Capital Ventures. It's been a long time friend of mine, but was an early employee at Affirm. We talk about with her about the whole buy now pay later space and that that's the key. One of the key value props to merchants is this enabled sales that wouldn't happen otherwise. But oh my gosh, yeah, but like, I think that's just the, you're right. This is between a bull and a bear, 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 that when you look at their demand recently, the fact that they only grew 9% in Q4 and 5% in Q1, 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 more interesting at more price points to a much broader swath of people is not really working. So, yeah, I think unless you have more, I think the last bull case, which I think really is a valid bull case is like, hey, you know, I don't like to put faith in single people in general, but like, I do think there is a lot of like fundamental, like to my mind, my experience as a customer with Peloton makes me believe that there have been just bad product and marketing decisions over the past year. I mean, almost that is not a controversial statement at all. There have 100% been bad product and marketing. Well, and bad, bad strategy, bad financial decisions, bad forecasting. You got to think that Barry can make a huge difference in fixing a lot of these issues. Yes. For sure. I mean, Barry's not going to be the product person by any means, but you know, that's why fully is there. That's why all the great people that they brought on are there. And hopefully, Barry can provide the right sort of, it's almost like the check in balance to make sure that Peloton can do its thing of creating products and brand and experiences that people love without screwing themselves over financially. Yep. Yep. And the market, the market liked the dues. Peloton was up 25% yesterday. Yeah. It's kind of a bare case to bring in a CFO, career CFO as a CEO, like that is a strong admission of how in trouble a company is. Not I suppose at the trading downward is that makes it a bulk case to want to invest 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 the apple when they transition. I mean, this was a much different high flying company at the time of transition, but transitioning from a product founder, you know, products person who was the founder of the company as CEO to an operational financial supply chain, contractual legal person. And you know, maybe Barry can be the Tim Cook of Peloton. Yeah. That's actually great. I don't know. I certainly think he's capable and I think the business is capable. You know, it probably will never be an apple, right? But I think it's capable of performing better than it is now. Okay. More, more bear narratives. So we talked about the slowing growth. We talked about the fact that they revised down not only the revenue targets, but also the subscriber targets. They're only predicting they're going to be it around three million at the end of the year rather than three and a half. They have piled up 1.3 billion dollars worth of bikes and treadmills and it's not good to hold it on the books. Another interesting narrative that I haven't seen as much around Peloton specifically, but seems to be a fairly widely held belief is that in the last 10 plus years, there has not been a breakout consumer hardware piece of technology that is that survives as a standalone company. And you look back at Fitbit and GoPro and jam box. I even want to call out this one's going to be a serious callback, but flip video. Oh, yes. Some of these companies that kind of invented a new category and they built, you know, built it with meaning and they pioneered it on technology that was hardware that was just now available. But that investment doesn't pay itself back. Lots of cheap facts. Simulies come in and they can't defend the castle. And you look at jam box, they made a $300 Bluetooth speaker and now you can get $20 Bluetooth speakers that are reasonable. Some jam box, of course, went out of business, flip video sold to Cisco in a very strange M&A GoPro. Still an independent company, but certainly not the high flyer it was when it first IPO'd Fitbit, you know, couldn't really survive Apple coming into their market and ultimately landed at Google. I think there's probably a case, a similar story around Nest again, a little bit weird and some bungled M&A, but I'm trying to think of like what? I suppose Sonos might be the only example of a recent consumer hardware company that has been successful and with Sonos successful kind of in quotes as a standalone public business. I thought about bringing this up earlier in the episode and I decided not to because I decided it was unfair to Peloton. I still think it's unfair, but it's an interesting point of comparison. The only very strong counterpoint I can think of is Tesla. I thought you were going to go there. And lots of different dynamics there, but if you just look at what Tesla has done, in many ways a very resonant strategist, a similar harmonizing strategy with Peloton of like start with the high, the Elon master plan, right? And then how they've adapted that over the past several years, it was not that long after Peloton was started that the Model S came out. And like what is Tesla done with their brand strategy and their pricing and their marketing and their position within the market and their product development and their software development, you know, got Model S to Model X, like double down on the high end brand. And then the Model 3, which was affordable, but it was like, it was still aspirational, right? Like you're competing with BMW now. You're not going all the way down to like Toyota. You know, the autopilot launch, like just the Tesla has executed incredibly well and incredibly strategically through again, different but resonant market dynamics. Well, they've also been able to manipulate the capital markets to raise capital on a ton of capital on extremely favorable terms. I'm using manipulate it with a lowercase M, not accusing them of doing something that has legal implications. And they are to that point they had their near death moments too. Totally. But Peloton has been exactly the opposite at manipulating financial markets for their own favor. I mean, they they had a massive stock run up and then did a $420 million all cash deal or and now they're more recently they're raising, they've raised more money after it's to I don't know. So, there's another bear case which is being floated by our good friends, the activist investors, which is, hey, everyone, did you know John Fully sold $96 million of Peloton stock in 2021 when the price was really high and he was talking about what a strong future the company still had in front of it. And their point in doing that is both to accuse him of incitory things, doing things that are against sort of company policy, but they're also trying to drive home the point that the incentives are now misaligned because he's taken a lot off the table. He's now a very wealthy person in cash. That that doesn't hold a lot of water to me though because his current remaining stock, even at the closing price on Monday was $500 million. So I don't care if you have $96 million. The potential of turning that $500 million into $123 billion, that's motivating. So come on. And also, it's hard to, you know, look, he started Peloton in late 2011, early 2012. It's been a long journey. And he talks about on how I built this episode. It's not like, even though he had done well in his career, he didn't have any big witness. He wasn't fabulously wealthy before starting, before starting. He wasn't a ramen founder, but he didn't have $96 million. Let's put it that way. So I can't begrudge him that. Despite being of the Harvard Business School network and having worked at IAC and been close with a lot of CEOs and executives, that really only manifested in him being able to raise a couple hundred thousand dollars, despite the fact that he runs in like pretty wealthy circles and still couldn't convince any institutions to come in. So it was like, you know, he had good jobs, but he had a family to support. And he knew a lot of wealthy people, but that actually didn't really accrue to him successfully capitalizing the business for a long time. Look, sometimes activists have good points and their good points to be made against Peloton here. And I think we've been making them. Like, they're also just so whiny and like the incentives are so misaligned. And of course, they want to never be happy because they want to keep buying more to then, you know, sell anyway. Okay, power branding. Yes. I mean, other stuff too, but like, did I pay $2,000, $2,300 for a bike because it was Peloton bike that otherwise I would have paid maximum, I don't know, $1,000 for? Yes. 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 hack up Peloton. But I kind of enjoy doing stuff like that, you know. And to get the same quality of bike, you really, yes, you can do it cheaper with a hack up hell, but not that much cheaper. Like, they, it really is, like, it's a very high quality bike relative to the price. So, but yes, a gree um brand. Definitely to me one that stands out and I think one that attracted Barry is scale economies here. Like, you know, the amount that Peloton can invest even with the music variable cost overhang. But the amount that they can invest in content and in the best instructors, I think, which is where this plays out the most relative to a soul cycle, to a flywheel, to anything else. And then even relative to other connected fitness companies because Peloton has the largest member base, just like with Netflix, they can invest in more great content because they have more resources for more subscribers. And then that's a virtuous flywheel. Totally, totally agree. And it says, I mean, the proofs in the pudding that like Emma Lovewell and others used to be soul cycle instructors. Yep. I think Alex Tucson started with flywheel, I believe. I can see that. Yeah. It just makes total sense that Peloton would say like, we can make this much more interesting for you both in terms of fame, dollars, career advancement because your rides are going to be 5,000 people instead of 40. And duh, you're going to get the best instructors in content. Which does that make to the contracts? I don't know what the contracts look like, but would that make the instructors and all the content that they've produced a cornered resource? If at least my perception is that is the best on demand content I can get for working out. Yep. Certainly the library of content. And you know, it's interesting with all I'm curious, your feeling is on this from a user perspective. It is valuable to me that my favorite instructors, mostly just Alex, he's so awesome. He's constantly adding new content and stuff like the ride to greatness is I will get into them more later later. That's extremely valuable to me if he stopped adding new content, I would seriously consider churning. But the years worth of library, like I do go back and do old library content. And that's quite valuable to me too. And so even if he switched to another platform, then yeah, like, you know, it would take a long time to build up. Like I've got a few 20 minute rides that he did years ago that are really high quality for me. By the way, there is someone who switched to another platform or at least left. I can't their names escaping me. I looked into this couple of years ago and I think Peloton pulled all their content down, which was an interesting move because it's basically saying we don't want to continue to build your brand for free to compete against us, which I found fascinating because I bet that's totally case by case how they would think about whether they should leave it up or not. And that's a big stick for the instructors too. Like if you leave then all of your library of work goes away. Right. Right. I would kill, like, 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 old acquired standby section. So what if they actually had pursued a deal with Soulcycle and I'm going to use Soul Overfly Wheel because I think even though Soul wasn't given them the time of day at the moment, that's the more interesting one. Soulcycle has not had a very good last couple of years. And first there was the Trump fundraiser and then there was the like failed Go public of the Soulcycle, the Equinox fitness conglomerate and then I think, I mean, I'm not a doctor. So this is the, or an epidemiologist, but this is not investment advice and also not health care advice. The number one place to go and get COVID would be a box, an unventilated box of 50 people breathing as hard as they possibly can for 45 minutes in a room, but they've candles in there that helps. I was trying to think like where is the single last place on earth that I want to be during the during the pandemic and it's at a Soulcycle studio, even though I used to do that a lot before I got my peloton and frankly, probably never will again. I can't imagine going back to that behavior for even for non-COVID diseases. It's like just, yeah, if you want to stay healthy, I would only consider it in like you and I when we would get together, we used to be in a Soulcycle. It was really fun to do it with friends. I would maybe consider that again in the future, but definitely not on a day-to-day basis. So what it had, so obviously Soulcycle came out with a peloton competitor after peloton, you know, did very well and it was, it wasn't fully Soulcycle. It was like part Soulcycle, part Equinox parent company. I think that, I have to imagine that thing was a total flop. What would have happened if you had this sort of like JV between peloton and Soulcycle five years in in a strong position, six years in when COVID hit? It's just say, I want to say I don't think the JV would have worked nearly as well as peloton did as a standalone full stack entity. But you know, putting cameras in, building a little Soulcycle studio. There would have been too many, you know, I think back to power, there's an element of counter positioning in the early days of peloton here too. Like, there would have been too many incentives and resources within a Soulcycle or a flywheel to like you would have to really cannibalize a lot of the core in person, you know, operations. Like take your best instructors and make them dedicated to the online offering, right? Like, it, there would have been some weird dynamics there. Every class kind of prints money. So if you're running one of those local studios, you're like, well, right now you could just record that and put it on on this JV with Peloton. But I think that would be lower quality content than what a like full, you know, the peloton rides are so produced in doing this. I was like looking at videos about their control room and the number of cameras that they have set up and I mean, at this point, they're a TV production company with celebrity instructors who happen to be good at riding bikes. But it's a TV studio and it would be very hard to turn any of these Soulcycle, you know, places into TV studios. Yeah. And so if you're like making the decision as Soulcycle, like I'm going to 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 really strong or you know, it's easy here to sit here and say like the pre-core acquisition was dumb. The peloton output park was misguided, you know, probably good in the long run to bring your production in house, but like that big using cash at that moment in time, probably not the right thing. I've talked everyone's ear off about my feelings on the product and pricing decisions. At the same time, I think we got to be intellectually honest here with ourselves and with like the market too. It was easy to believe like it would have been hard to really think about the downside over the past year as everything was up into the right like it's a rare, rare, rare, rare leader and company that I think can stay disciplined through what was probably like one of the biggest boon for any company in of all time. Yep. On the other hand, other companies, I think the difference is a lot of these other companies demand didn't go away. Like Amazon saw a spike, but then it kind of kept rising from there across all their businesses. Whereas peloton saw a spike and then a decline. Yep. That's funny, I was thinking about what would be an interesting comparison here. And I think Eric Yuan against John Foley is sort of an interesting one or let's just say zoom against peloton. Both of these were pandemic era go-go stocks that have totally crashed peloton down over 80% from peak zoom down over 70%. But for zoom, despite the fall, I think it's still growing revenues at close to 100% year over year and is a free cash flow positive machine. Whereas peloton is deeply unprofitable on a full bottom line, still raising billions from the public market with new stock issuances, they seem to convince that this demand spike would last forever with these acquisitions and expensive investments. It's funny, I don't want to blame the management as much as I kind of want to blame, well, maybe it is management, but it's like kind of inability to forecast and know that demand was drying up and being in a business that just requires a lot more moving pieces, a lot more atoms. And that's just really hard. This demand spike created huge complexities for peloton as a business in a way that, you know, for zoom, like I created some complexities for zoom, like I don't want to say, like it was just easy, but like, you know, they're shipping software. Like it's different here. All right, well, before we grade this one and bring it home, this one will be fun to grade, paint the A in the C and maybe the F scenarios for our friend Barry. I think we should talk about our final sponsor, the Softbank Latin America fund, just a wonderful fund run by good friends of ours at this point. So Softbank created this fund with a simple thesis that the region was overflowing with innovative founders and great opportunities, as you know, but was always short on the one essential ingredient of capital. And so as you've heard from shoe and Paulo leaders of the Softbank Latin fund on previous episodes, one of the big lessons that they learned, well, deploying eight billion dollars into 70 plus companies is that technology and Latin is less about disruption the way that we tend to think about it and more about inclusion because the vast majority of the population is underserved in almost every category from banking to transportation to e-commerce. Most businesses also aren't really served by modern software solutions. So there's just so much to build for so many people and so many businesses in Latin America and we wanted to tell you about another one today, another example called O list, a leading Brazil based sales platform. The O list provides technology and market intelligence to increase revenue for merchants founded in 2015. They are a one stop shop for helping merchants get online and capture opportunity in Brazil's fast growing e-commerce market. They offer catalog services, market intelligence, operational tools, buyer support, logistics services and more. And this is just one great example of how Softbank is partnering with great founders with the capital they need and the experience that they have to build and shape the future of Latin America. Now, so if you're thinking about your next move in your career and maybe you want to start or join a company in Latin America, maybe you want to co-invest along with Softbank, there really is no one better to go and bet on the region alongside. So to learn more, click the link in the show notes or go to They're the best, we are such huge fans. As you say, friends at this point, they're great folks, Pello and shoe and the whole team there. Yep. All right. Let's grade this one. I think what we should do is paint the A scenario and maybe a C or an F scenario for what Barry does from here and what those outcomes are. Yeah. Well, maybe let's start with the C scenario because I think that's the sort of more interesting one. F is obvious of this business falls off a cliff and there's no more demand ever. It sells for parts. It all, yeah. Right. I don't think that's likely. But that's, that's, I think a C is it's selling in the next six months. Six to 12 months, I agree. For eight to $10 billion. Yep. Or even $20 billion. Selling within the next year for a nice short term shareholder return, I think that's a C. I think a lot of shareholders would be very happy selling this thing in a year for $20 billion. I totally agree. I think shareholders would be happy. But I think that's like, you know, I think it would be sort of sad if that happened. And I doubt, you know, we don't know Barry at all. We've never talked to him. Barry, open invitation. And this chapter is over, you got to come on the podcast and we got to do like a recap. Or if you want to do a follow up now, would we get, would we get right? Would we get wrong? We're happy to have. Yeah. Totally. We are such huge fanzios. But I don't think he would have taken this just to package it up for a sale in six to 12 months. Like why would he do that? Yeah. I agree. I agree. I'll say I don't think this is an independent enduring company at this point. I think it's going to be more along the lines of a lot of the consumer electronics companies that we've talked about where I think Barry can turn it around. I think you can have sort of tight financial controls where it's run like a good company and some smart, make smarter investments. But I have a hard time knowing how they're going to grow 50% year over year at any time in the future. Like where are they going to go find more demand or where are they going to really meaningfully alter their product lines to go find more demand. I mean, that's the A plus. Like that's the A is if they can figure out how to stay an independent company and become a big, profitable independent company and meaningfully find demand in concentric circles outside their current customer base. That's it. That's the dream. So right. Yes. That's the A plus. That's the dream, 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 several countries. I think about across the world. You know, even even let's assume, I don't know, I don't know the numbers. Let's assume two thirds of that is the US and one third elsewhere. That may be generous, but like let's just use that as a swag. So that's two million US subscribers out of a nation of 330 million people. There probably a lot more than two million people that could be in like a addressable segment for Peloton. You know, and then there is the digital app, right? Like the digital app is a good experience. I started that way. I graduated up, but like it's a really good experience. You know, Apple is investing in a similar strategy to the digital fitness app. And I think for 1299 a month for super high quality class, like this is the Netflix model, right? For the best content out there with the best instructors for 1299 a month. That's accessible to a lot of people. So I think there's probably still headroom on the core, you know, affluent aspirational segments. Maybe you call those two segments. 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 this. And then you layer on the digital product. I do think it could. There is a world where this could become a, you know, maybe not forever, but a longer term standalone company that actually is justifiable of a 49 billion dollar market cap. I like it. Well, I don't think that's the most likely outcome. I think 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 set all that on air. Well, we'll revisit with Barry in a couple of years. We will. How about that deal? We're shaking hands. What? You and I are. Yes. Over. Over video chat here. Carve out. Carve out. So, related carve out. 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 so good. And really the only artifact, long form interview with him dedicated to just him. There's some stuff where he talks about direct listing on the 16 Z podcast and others, but that's just about him and his career. It's worth watching. And there's a great nugget in there. He talks about his strategy exercise that he likes to do that they did in Netflix and it's Spotify. And I'm sure he will bring a peloton of how to how to plan and build your organization to be resilient and robust for the future. And his four to five year strategy exercise. I won't spoil too much of it, but it's very good and worth watching and listening to that. Sweet. Mine is also related. So since the Taylor Swift episode, I've been listening to a lot of switched on pop. And there is a awesome episode called the James Bond spycraft theme, spycraft sound. And the hosts are just awesome of switched on pop. The show is reliably great. It's sort of like acquired for music is another 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 how that gets used through the decades and all the different movie themes. So highly recommend that song. Super fun. That's my car route. I went and listened to that episode after we were texting about it. And it's so good. The whole show is so good. But yeah, it's so good. And one of my favorite parts about it was it reminded me that Chris Cornell's song for Casino Royale is so good. Oh, man. Yeah, it is. Rest in peace, Chris Cornell. But that is one of the best Bond themes of all time. Yes. Listeners, thank you for going on the journey with us. Go check out the LP show. Our latest episode with the NZS capital folks is really good. Like I they're just so smart. And if you're staring at stock tickers getting anxious, this is this. I mean, not investment advice, but like it will help you bring a cool steady hand. It's a nice warm cup of tea. Otherwise trying times. Yes. And if you want to join us for the Zoom call tonight, if you're listening to this on drop day, then join slash LP. And we will we will see you in the Zoom later tonight. We have a job board slash jobs. And your next great career move. And yeah, tell your friends about this. You can find us in video on Spotify right alongside Taylor Swift and many other great artists and podcasts or anywhere where you get your podcasts. And thank you to Vanta, Vouch, the Softbank Latin America fund and listeners. We'll see you next time. We'll see you next time. Who got the truth?