Peloton Has to Get Off the Bike
A star
of the pandemic, the company now has to realize that selling hardware is like
swimming with bike chains around its neck. Like many companies, it waited too
long to transform. Don't make that same mistake.
BY HOWARD
TULLMAN, GENERAL MANAGING PARTNER, G2T3V AND CHICAGO HIGH TECH
INVESTORS@TULLMAN
Peloton’s new CEO
Barry McCarthy, who’s trying to turn a great big bulky barge around with pep
talks and a puny paddle, is in a whole lot of hurt right now. He’s short on
cash and trying to borrow a bundle from big banks with their own problems and
he’s stuck with a ton of excess inventory and a treadmill that’s still seen as
a threat to toddlers. Even worse, the world is returning to health clubs and to
office buildings newly stuffed with workout spaces and other amenities offered
by desperate landlords trying to pull tenants back to their properties. (Even
if they buy some Pelotons, people will share them, not own them.) But honestly,
those concerns aren’t even his biggest problem. He’s on the cusp of becoming
just another dinosaur in a digital world. Just like the folks hawking physical point of sale credit card readers.
Barry needs to bite
the biggest bullet bearing down on him and bag the manufacturing part of his
business before it drags the whole enterprise down with it. The rule per Rahm Emanuel is very simple: “if you have
to eat a shit sandwich, don’t nibble.” These days, no one here really wants to be in the hardware business.
Because hardware is hard. Hardware is a dirty and already over-regulated
segment, as well as fiercely competitive with few barriers to fast followers
and cheap knockoffs. And the next generation or two of consumers could really
care less about owning “stuff.” We’re moving rapidly to a digital future where
everything is about utility and easy access rather than possession and
ownership. Kids already see Pelotons as their parents’ clothing racks. If
they’re riding at all, it’s for the shared online experience of taking classes
with their friends. As soon as those social connections are again available in
real life, no kid I know is gonna be sitting all by themselves on a sweaty bike
in their basement.
But for the moment, if
there’s a short-term, silver lining for Peloton, it’s the high-value, clearly
affluent subscriber base of around three million adults (estimated at its pandemic
height). These are active customers albeit at varying price points and
accessing Peloton services through various channels that don’t necessarily
require owning a bike - much less one made by the company. McCarthy talks about
growing the subscriber base to 100 million, which sounds laughable for a
company without the cash reserves to attract and acquire new customers in an
increasingly noisy, costly, and competitive market.
As his market cap
continues to shrink, the best bet for the business and the smart money says
that he should dump the durables and get as virtual as possible as soon as
possible and then sell his subscribers in bulk to a better-financed and bigger
buyer such as Apple, whose watches are likely already strapped on most of the
Peloton subscribers’ wrists. Every day McCarthy waits to sell his wasting asset
means less money for his shareholders on the inevitable day that the business
is bought. Smart businesses get sold when the time is right; broken businesses
get bought when their moment has passed.
The even broader
message for many other companies who are slow to pull the trigger because
they’re not taking a tough enough look at where their core business is ultimately
headed, or because the current profits are just too good to give up, is that
it’s never smart to be so greedy that you stay too long at the fair. Or take
too long to react to serious changes, shifts in consumer behavior or
preferences, and new competitive offerings in your marketplace. You never want
to try to take the very last dollar off the table or to precisely time the
market.
That said, timing is everything.
And if you aren’t willing to make the hard choices, kill even a golden goose
occasionally, and cannibalize yourself when necessary (before someone else does
it to you), you’re going to be left behind. You need to know when to go - even
if it’s not abundantly clear at the moment you decide - because 100% certain is
almost always too late. You need to change before you have to or have no
choice. A year from now, you’ll wish you made the necessary changes today.
Change is always
expensive. It’s just a matter of when, what, and how much you pay: you can pay
early to make the required changes or pay later-- and typically a lot more--
for not having made them. Making even costly changes at the right time is
infinitely preferable to being forced to make them at a time that’s
inconvenient, abrupt, and even embarrassing. Netflix waited way too long to ‘fess up to
the millions of its users who weren’t paying for subscriptions and continues to
pay every day.
The fat cat national
automobile insurers soaked their low-mileage, limited-use consumers for decades
by charging them the same standardized premium rates as they charged heavy,
daily users and regular commuters. They continued this practice through much of
the pandemic even as their insureds woke up to the obvious fact that they
weren’t doing any driving or getting into accidents with their cars sitting
unused in their garages.
Companies like Mile
Auto, which charges its customers on a per-mile used basis, stepped
up and seized the opportunity to offer a better, fairer and less costly alternative.
Now the big guys are not only playing catch-up, but they’re also crushing their
own existing books of business as each current insured they convert from a full
pay prior policy to their new pay-by-the-mile services costs them serious
premium dollars.
Waiting for the exact
right time to move rarely works today. It may bolster short term results, but
in the long run, the more likely result is lost opportunities, customers, and
market share. Someone’s always waiting just around the corner to eat your
lunch. If you’re smart, you’ll be the first in line for a bite.