Peloton covets recurring revenue

AS ANYONE IN a CrossFit class or Bikram-yoga studio will tell you, fitness is full of fads. Few make it to the stockmarket. But on August 27th Peloton, an American firm founded in 2012, announced it had filed paperwork for an initial public offering. Peloton describes itself as a “technology fitness media design software retail product apparel experience logistics” company. Its investors reckon it could be worth $4bn.

Stripped of the aspirational jargon, the firm is in the business of selling high-tech (and high-priced) home exercise bikes. Each bike, which costs $2,245, comes with a touchscreen, a version of Google’s Android operating system and an internet connection. For a monthly fee, users can tune into streamed exercise sessions, either live or pre-recorded, complete with leaderboards and statistics. The effect is a mix of a studio spinning class and a YouTube live stream, as perky instructors give shout-outs to individual users who are puffing away in their living rooms hundreds of miles away. For those who dislike cycling, a $4,295 treadmill is also available.

Like many of the current crop of tech “unicorns”—private companies with a valuation of $1bn or more—Peloton does not do anything so unfashionable as making money. It lost $196m in the 12 months to June, up from $48m the year before, as it threw money at attracting new customers. But its efforts seem to be working: it has 511,000 subscribers, more than double the number last year. Revenue has doubled too, reaching $915m in 2019 (see chart). It is popular among trendsetters. David Beckham, an ex-footballer, is a fan, as is Barack Obama, an ex-president. That aspirational glow allows the firm to get away with gross margins on hardware of 43%, higher even than Apple’s famously lucrative gadgets. Despite its high prices (or perhaps because of them) it also boasts enviable customer loyalty.

Exercise-bike makers used to be in the manufacturing business. But Peloton makes about 20% of revenue from subscriptions, and the share is rising. Margins here are mediocre but should improve as content-production costs are spread over more users. The shift illustrates a broader trend: thanks to the internet, industries that used to be about products are increasingly about services, too. This lets firms replace unpredictable sales with a steady stream of subscription revenue. If they can pull it off.

This post was originally posted at https://www.economist.com/business/2019/09/07/peloton-covets-recurring-revenue.

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