At-home Fitness Bonanza (bubble?)

Statement

The “interactive” at-home fitness market is a bubble.

Facts

• Business Model → SaaS + Box
• Total money raised → Greater than $1.4B
• Peloton generated revenue of $400MM in 2017 (up 135% YoY and is projecting $700MM in 2019)
• Peloton’s most recent private valuation was $4.15B

Competitive landscape

• Bikes → Peloton, Flywheel
• Tread → Peloton
• Strength → Tonal, Mirror
• Other categories → Boxing, Rowing
• Legacy companies → In addition to the aforementioned “startups” there are a number of other companies, currently in and/or entering the space (Nordic Tract, Echelon, Technogym, Lifefitness and others)

Peloton Bike

Game-changing cardio comes home — A private indoor cycling studio in your home.

You get:

• A spin bike
• A TV
• Access to live and on-demand streaming classes
• Access to community

You pay: $2,245 for the machine (or financed as low as $58/month) and then $39/month for the membership/software

Peloton Tread

Live total body fitness has a new home: yours.

You get:

• A treadmill
• A TV
• Access to live and on-demand streaming classes
• Access to community

You pay: $4,295 for the machine (or financed as low as $130/month) and then $39/month for the membership/software

Tonal

Meet Your New Personal Trainer — Tonal combines revolutionary equipment, expert-led videos, and personalized guidance into full body workouts you can do on demand from the convenience of home.

You get:

• A big TV with arms
• Access to on-demand streaming workouts, programs and classes

You pay: $3,740 for the machine (or financed as low as $199/month) and then $49/month for the membership/software

Mirror

The future of fitness is at your place — the nearly invisible home gym

You get:

• A mirror
• A big TV
• Access to on-demand streaming workouts
• *** Access to live 1–1 personal training (coming soon)

You pay: $1,745 for the machine (or financed as low as $164/month) and then $39/month for the membership/software

Pricing Matrix:

My thoughts:

There’s a bunch of confusion

• Peloton claims they have a 95% annual retention rate, but what does that really mean?

~80% of Peloton’s subscribers finance the hardware, and as such have their monthly membership subscription lumped into their monthly payment, meaning they can’t actually churn… If only 20% could actually churn and 5% are, that would mean their actualized churn is closer to 25%, reasonably deducing that the LTV of a Peloton member is ~48 months or ~$1,800, given that they claim they don’t make money on the hardware and don’t have significant economies of scale there either. Also consider that their early adopters are largely rich people who just churn less than normal consumers, what will happen when churn becomes more correlated with usage and value?

Tren Griffin wrote in this post that he believes that Peloton’s CAC is roughly $500, I don’t know how he could reasonably come to this number, despite his clarification of “by looking at ARPU relative to comparable business, noticing the frequency of their sales pitches on expensive advertising like TV and the way they distribute goods”. In the event that he’s close to accurate — I don’t think he is — that’s a pretty good unit economic.

• 88% of Peloton members are also members at a health club and/or studio. People assume that the use of at-home fitness products is directly competitive to brick and mortar facilities, that’s not the case.

To be “the Netflix” of fitness, you have to change the incumbent landscape, not just be something that’s additive.

• How should we look at Peloton’s undeniably high and growing revenue?

I know that we’ll likely be able to dig into almost all of the things I’m pointing out, very soon, when they release their S1… but this is fun, no? Peloton sells hardware and SaaS, so a significant portion of their revenue is coming from the 0% margin sale of hardware (I understand the SaaS + Box model and the inherent value, just talking facts) yet they claim to be a software company and have largely earned SaaS valuations to date. Just how much of those staggering revenue numbers come from the hardware and how should the market discount that? As far as I know — other successful, similar, business models have always made at least some margin on the hardware and/or had a path to increased margins through economies of scale… not Peloton as far as I know.

If they really are a software company, as they claim to be… why sell the box? Why haven’t they had more success through their pure software play? Why are they opening so many stores?

Is it possible that Peloton is really just a hardware company, pretending to be a software company… using skewed churn metrics as a proxy for usage instead of actually speaking to whether or not their members use their product(s)?

I think they’ll IPO before anyone finds out for sure…

Assumptive advantages of interactive at-home fitness products

• Convenience — people are more likely to workout at home.

In theory, it makes sense that some would assume people are more likely to workout at home, that “at-home” products provide more convenience; but what is the actual goal? The actual goal is doing more, not convenience. Sure, proximity to the requisite equipment is closer, but does that actually increase the likelihood of working out? Think about the variables one faces when trying to workout at home vs. outside of the home… Do you necessarily get more work done when you work from home? With that proximity, you get a whole bunch of other variables that can actually make it harder, decreasing your ability — kids yelling, the fridge staring you in the face, the big comfy couch within plain view.

• Customization — at home fitness systems are better enabled to provide a more customized experience.

I simply don’t believe this to be true. When looking at a SaaS + Box business, very distinctly you have two models connected at the hip… if there is more customization being enabled, it’s clearly coming from the software… so why do we need the hardware? In the case of Mirror and Tonal — the hardware provides utility, but what about Peloton?

• Community/Leaderboard/Gamification — people are competitive and as such are motivated by the relationship they have with other riders/runners within the community.

Right now only delivered through Peloton’s model, but something that has been spoken to by the other companies mentioned in this article. The leaderboard is cool and a lot of people really like that competitive aspect — but A LOT of people don’t.

Historically, the most successful consumer fitness businesses have taken a dichotomous approach to “competition”, which obviously doesn’t mean that’s the right approach, as historically the consumer fitness industry has stood by and counted their money as preventable chronic conditions have risen to become ~80% of our entire healthcare spend (projected to cost us >$47 Trillion over the next decade) — But that’s for a different post.

Rumble has benefited greatly from their competitive nature and Orange Theory has as well, to some extent… While Rumble is a complete outlier, and will likely only impact a subset of major urban markets that tend to house more competitive folks; Orange Theory has seen higher than average attrition and a lot of people think it can be attributed to the competitive nature of the workouts and people’s inability to put up with losing. See… when you compete, there are winners and losers, there’s no way around that. You can do what Crossfit did and scale the hell out of the competition to make more people feel like winners, but there are still losers, there is still failure that you can’t hide from. Which brings to question how that will actually effect retention over time or perhaps already is and we just don’t know it yet. Somewhat recently, Dick Costolo wound down his fitness startup, Chorus, citing AVE (abstinence violation effect) as one of the biggest causes for failure.

AVE is a psychological phenom loosely described as “when people hide from their support group when they fail to meet the group’s expectations, instead of turning to the group for help.”

Maybe Dick just needed an acronym to blame his failed company on, but I think there’s something there.

How big is the market (for real though)?

Smaller than most people think, though the attractive financing packages expand it somewhat, it’s still not nearly as large as some of the estimates I’ve seen.

Do people actually use these things?

I don’t think so, at least not significantly more than any other “at-home” product. If they did, I feel like Peloton would be screaming it from the rooftops. Not to mention the fundamental misalignment with consumer behavior patterns.

Are they the content companies they claim to be?

No. There is nothing special about the content they create — they have no data that others can’t access and the same access to talent (instructors) as everyone else. They’ve raised $1B so they’ve had a competitive advantage, to say the least, as of late, but they have no inherent differentiator in this department aside from their capital resources and distribution (maybe)… two things which would likely be enough if there wasn’t already tons of other fitness equipment all over the world, already.

How badly do people want the “group fitness/class” experience?

Not as badly as most people think. Soul Cycle created a phenomenon that was closely followed by Barry’s and has since been compounded by companies like Rumble and Y7. But all of the aforementioned companies, while cool and trendy and largely successful at what they do, simply can’t scale. The same 6 to 10 markets have been spoiled with an influx of boutique fitness components that have gotten a ton of press and now it’s largely assumed that the rest of the world wants the same thing and furthermore, needs the same thing; an inaccurate assumption that has fueled this entire category — A race to productize the incumbent/analog Soul Cycle to enable more scale… and here we are.

My Thesis

Too early to tell on Mirror and Tonal — as of now, however, I think that Peloton got to >$5B and Silicon Valley “Uber for Xed” themselves into believing that there needs to be a “Peloton for Strength.”

As far as Peloton is concerned — I think Health and Wellness is cool right now and for the same reason that athleisure is a thing, so is this category. People want their friends to think they’re cool and healthy and they’ll gladly pay $2,500 to put a giant piece of equipment in their living room that does just that. Have you ever seen where Peloton’s are in people’s homes? They’re either weirdly in a common area or in a spare bedroom covered in clothes (where most at-home fitness equipment belongs)… but you never see a Peloton in a place where you’d actually really want to use it; somewhere quiet and clean and spacious — weird.

Sure there are some other dynamics at play… like the fact that there was a massive downturn in the “at-home fitness” market, post economic crisis, when banks stopped financing low monthly payments and it’s just now settling back to where it was previously.

What scares the shit out of me is a few things:

(1) I literally can’t find anyone saying a bad thing about Peloton. There’s a pretty big “fanboy” effect at play, in that the majority of folks who own Peloton’s are the same folks who are writing about the company, investing in the company and those who are supposed to be gauging the companies viability. If something seems too good to be true, it usually is.

(2) “The Netflix of Fitness” thing is just a joke — even those who are the fanboys can’t possibly believe that Peloton is expanding the market and we need to expand the market because the lack of “fitness” is crippling our society and if we’re not careful it’ll cripple our entire economic system.

So… I think that this entire category is the Soylent of Fitness — Not the Netflix of Fitness.

There will soon be a massive paradigm shift in consumer fitness, it’s arguably the largest remaining legacy industry that is yet to be completely evolved by technology. Within the next 5 years there will be a company that ushers in that evolution, expanding the market, saving lives and really helping people find happiness through health and wellness; but that company isn’t Peloton or Tonal or Mirror.

Thanks for reading, and if you’re wondering why I care so much… it’s because that market expanding company that’s going to change the world — I’m building it. It’s called Ladder.

Brett Maloley / CEO @joinladder / b@joinladder.com

Research

• The global home fitness equipment market including treadmills, weightlifting machines, and stationary bicycles is expected to grow at a CAGR of 5.08% during the period 2017–2021. — Technavio
• 7% (of those questioned) currently subscribe to a streaming fitness product, 54% of whom are potentially interested in buying an at-home fitness system. 27% of those who work out at least once a month said they currently have a gym membership, but only 11% said they prefer the live environment of fitness classes, to other fitness delivery systems. — Alpha
• Cycling have decreased in popularity, in the UK, by 93,000 participants, between November 2016 to November 2017. Yet the number engaging in circuit training or high-intensity interval training at least twice a week has increased by 518,000 participants, with 47% of those participating in such activities aged between 16–34. Figures show 20% do their interval training sessions at home and 75% in a health club. — Sport England
• There are currently 150k fitness apps available to the consumer, yet only 2% continue to be used after 30 days and just 1% after 90. — Fiit
• 34% of fitness consumers who don’t buy an at-home system say it is due to lack of space.
• 24% of fitness consumers who don’t buy an at-home system say it is due to cost.