Peloton, the connected bike and treadmill company, filed documents for an IPO yesterday. The company makes its money by selling pricey workout equipment, along with monthly subscriptions to live workout sessions that are streamed directly to the bikes and treadmills, or to a mobile device. The company has up over 1.4 million members, and is expected to be valued at around $8 billion when it goes public.
Peloton has spent aggressively on sales and marketing since its first bike went on sale in 2016. Its bikes cost around $2,200 and the treadmills $4,300, but those are one-time sales. Much in the way that Apple is shifting its business model to emphasize recurring revenue, Peloton seeks to lock in customers for the long term with streaming subscriptions.
So far, it appears to be working. Peloton’s prospectus states that it has an average 95% retention rate on subscribers over the past 12 months. And while it’s currently losing a ton of money in the push to sign up new users, if you strip out advertising costs (assuming you don’t have to advertise as heavily to existing, loyal customers who spread the word for you), you’re left with a $900 million hardware-and-subscription business with around $500 million in direct costs in the year to June. Not bad for a company that started out with 297 backers for its bike on Kickstarter in 2014.
But looking beyond the potentially lucrative future of a company that lost $196 million in its latest fiscal year, Peloton’s IPO filing feels like a greatest-hits album of the many troubles associated with unprofitable tech companies that have filed to go public—or are planning to—in recent years.
Reading through the lengthy “Risk factors” section of Peloton’s IPO filing, potential investors are greeted with a picture of the company’s sprawling business. It features many of the common struggles of tech startups, all rolled into one. Here are a few of the trends that Peloton’s prospectus flags to investors:
Music streaming rights
Classes on Peloton generally rely on pop music to keep riders engaged and energized. Without a rich catalog of songs, class instructors won’t have much to choose from to make new classes enjoyable, and old classes could be removed if Peloton no longer has the rights to the songs that played in the background. Much like Spotify, a large part of Peloton’s continued success relies on continued access to music at rates it can afford. This isn’t a frivolous extra: users were angry and rated classes poorly when pop songs were replaced with covers, and the company was previously sued for using music from the likes of Lady Gaga and Drake without permission. It could get sued again:
Although we expend significant resources to seek to comply with the statutory, regulatory, and judicial frameworks, we cannot guarantee that we currently hold, or will always hold, every necessary right to use all of the music that is used on our service, and we cannot assure you that we are not infringing or violating any third-party intellectual property rights, or that we will not do so in the future.
Contracted gig workers
Rather like Uber, Lyft, and Fiverr (and potential IPO filers Postmates and Instacart do), Peloton relies on “independent contractors” to deliver and install its hardware. As it says in its filing:
We also rely on our logistics partners, including last mile warehouse and delivery partners, to complete a substantial percentage of our deliveries to customers, with the rest of the deliveries handled by our own last mile team. Our primary last mile partner relies on a network of independent contractors to perform last mile services for us in many markets. If any of these independent contractors, or the last mile partner as a whole, do not perform their obligations or meet the expectations of us or our Members, our reputation and business could suffer.
Hardware supply chain risks
Every company that sells hardware struggles with the reality of trying to make, ship, and sell products at scale. Snap learned this quite painfully when it drastically overestimated how many people would be interested in its Spectacles video glasses, and had to write down the costs of producing hundreds of thousands of unsold pairs. It’s part of the reason that so few consumer hardware companies, without the size and bargaining power of someone like Apple or Sony, are able to make it to the IPO stage, or even survive at all.
“We have limited control over our suppliers, manufacturers, and logistics partners, which may subject us to significant risks, including the potential inability to produce or obtain quality products and services on a timely basis or in sufficient quantity,” Peloton’s filing states. Other recent hardware IPOs have had varying levels of success, including Roku (which generated the overwhelming majority of its profits from software services rather than hardware in the latest quarter) and Sonos, which is still struggling to turn a profit consistently.
Every startup, once it’s out of a garage or whatever apocryphal founder story it wants to tell, needs to rent office space. Peloton needs to rent specific types of spaces, both for retail operations and filming its live classes. Much like office space rental company WeWork, it needs to find places that fit its specific needs at the right price. As much as it’s a digital company, it relies on physical spaces to produce its content. Much of Peloton’s important leases are in one of the most expensive cities in the world. “All of the fitness and wellness content offered on our platform is produced in one of our four production studios, three of which are located in New York City,” the prospectus says. “Due to our reliance on a limited number of studios in a concentrated location, any incident involving our studios, or affecting New York City at-large, could render our studios inaccessible or unusable and could inhibit our ability to produce and deliver new fitness and wellness content for our Members.”
Trying to build a services business
Every company likes regular recurring revenue—it makes forecasting the company’s future far easier. But, generally, brands need to build up some brand loyalty to do it. Consumer-facing companies like Uber, Lyft, Blue Apron, Postmates, Slack, SmileDirectClub, WeWork, Zoom, Dropbox, and Spotify all rely on subscription products for their revenue. If Peloton can’t keep people interested in its classes—or loses the music or talent for them—it will struggle to keep people coming back and succumb to the dreaded “churn” of customers. As Peloton puts it:
We believe that our brand is important to attracting and retaining Members. Maintaining, protecting, and enhancing our brand depends largely on the success of our marketing efforts, ability to provide consistent, high-quality products, services, features, content, and support, and our ability to successfully secure, maintain, and defend our rights to use the “Peloton” mark, our “P” logo, and other trademarks important to our brand. We believe that the importance of our brand will increase as competition further intensifies and brand promotion activities may require substantial expenditures. Our brand could be harmed if we fail to achieve these objectives or if our public image were to be tarnished by negative publicity.
Video streaming and cloud computing headaches
Some of the biggest tech startups rely heavily on other companies to exist. Almost every company turns to Google, Microsoft, or Amazon for their cloud-computing services, hosting their sites and apps on these giants’ servers. And that can get extremely expensive: Snap, for example signed a $2 billion dollar contract with Google to serve its videos. Spotify also relies on Google; Pinterest relies on Amazon Web Services, as does Lyft; and video-conferencing software Zoom uses its own servers as well as services from Microsoft and Amazon. Peloton doesn’t say who specifically it relies on, but notes that it has “outsourced our cloud infrastructure to third-party providers.” Like all these other companies, if its cloud provider decides to up Peloton’s rates, or decides that it wants to get into the fitness business and cuts off access, that could pose a significant disruption for Peloton’s services. Or, as the company puts it, “our providers have broad discretion to change and interpret the terms of service and other policies with respect to us, and those actions may be unfavorable to our business operations.”
It wouldn’t be a tech startup story without the belief the company’s past, present, and future is almost wholly dependent on the unique abilities of its founders. Peloton’s prospectus tells investors that it is “highly dependent on the services of John Foley, our Chief Executive Officer and co-founder, who is critical to the development of our business, future vision, and strategic direction.” This sounds like a less-drastic version of WeWork‘s ties to its founder Adam Neumann, or how Snap put the potential loss of co-founders Evan Spiegel and Robert Murphy in its filings, or Pinterest put losing founder Benjamin Silbermann in its documents.
Being a “DTC” brand
Much like streaming companies have tried to disrupt the cable box, the internet has allowed for companies to sell their products directly to consumers (DTC), rather than through stores or resellers. There are startups trying to build DTC lifestyle brands with luggage, ugly shoes, toothbrushes, food smoothies, and even erectile dysfunction pills. Peloton’s filing says that maintaining the “value and reputation” of its brand is key to keeping subscriber retention high: “We believe that the importance of our brand will increase as competition further intensifies and brand promotion activities may require substantial expenditures.” It’s not alone: other companies like Casper, Canada Goose, The RealReal, and Poshmark—all of which have gone or are reportedly planning to go public—are pushing similar lifestyle branding.
A general lack of profitability
It wouldn’t be a tech IPO in 2019 if regulatory filings didn’t detail huge losses. While Peloton isn’t on the level of Uber, or even WeWork, it’s still losing a lot of money. Over the past three fiscal years, it’s lost $315 million on $1.25 billion in revenue.
The company notes that it has a “limited operating history” in its filings, and the first risk factor listed in the document is perhaps the most important: “We have incurred operating losses in the past, expect to incur operating losses in the future, and may not achieve or maintain profitability in the future.”