The Rise and Fall of Peloton | Welcome to the Ride | 1

0:11December 2020, an apartment in New York City. A woman in her 30s types the password for her investment account. She taps her foot on the floor, trying to dissipate the nervous energy flowing through her. The woman takes a sip of her coffee as she waits for her account to load. Just before the site comes into focus, she closes her eyes. There hasn't been a lot to be excited about in the past nine months since COVID became widespread. The one exception has been her work. The woman works as a designer for Peloton, which makes a stationary bike and treadmill. The equipment connects to the Internet, allowing users to stream live fitness classes from home.

0:52And right now, Peloton is riding high. As gyms closed across the country after the government-issued lockdowns, Peloton was uniquely positioned to take advantage of the pandemic. People were looking for ways they could work out in isolation. And Peloton gave them that. And its interactive virtual classes also provide community and online interaction. Ever since COVID hit, the company's growth has exploded. So it's become a ritual for the woman to check Peloton's stock price and her brokerage account every morning. A brief moment of joy in dark times. The woman opens her eyes. She yells out to her husband who's working from their bedroom Honey!

1:41What? Come in here, I need to show you something What is it? Look She pivots the screen toward him and his eyes go wide We have five million dollars? Yes, Peloton's trading at one hundred and sixty-seven dollars a share The woman leaps from her chair and the two of them jump up and down hugging each other We can buy a house with extra bedrooms. No more working from the kitchen table. We'll have space for kids. I'm going to go on Zillow right now. She steps away from his embrace to check the real estate website. Her husband watches her, but his smile fades and his brow crinkles. I love this. I really do.

2:25But we're sure this isn't just a blip. I know it feels like this pandemic is going to last forever, but it will end. Gyms are going to reopen. This could all go away. The woman shakes her head. Our CEO says that gyms are a thing of the past. People's habits have changed. He thinks this is just the beginning. He said Peloton's going to reach$1 ,000 a share. $1 ,000? Yeah. And he's making moves to make it happen. We just bought this company called Precor, so now they can make bikes in the U.S. instead of China. That's going to be huge. We'll be able to get bikes to consumers so much faster. That's good.

3:08Yeah, and I trust our CEO. This is going to last. Well, all right then. Let's buy a house. The man peers over his wife's shoulder as she starts entering a zip code into Zillow. When his wife started working for Peloton, he was skeptical that it would be the game changer that the CEO, John Foley, promised it would be. He's happy to be proven wrong if it means getting out of this shoebox apartment. But what happens when all of those promises of endless growth go up in smoke?

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5:58from Wondery I'm David Brown and this is Business Wars

6:24When John Foley and four colleagues started Peloton in 2012, investors weren't sure what to make of it. It was pitched as an equipment company making exercise bikes and a media company producing live stream virtual classes. Foley and his co-founders were pushing a whole new type of at-home exercise, a category they called Connected Fitness. Over the next eight years, Peloton grew a small but intensely devoted customer base, selling over a half a million bikes. But then the pandemic hit, forcing people to stay home. With gyms closed for months on end and with no vaccines in sight, Peloton's popularity exploded.

7:12The company couldn't get their equipment into consumers' hands fast enough. There were wait lists for bikes and treadmills. Company leaders thought the fitness industry had changed in their favor. Forever. But Peloton's transition to a post-COVID world will be as uphill as one of their rides. And whether they can survive as consumer preferences and fitness trends shift, that's an open question. Our new two-part series will explore the rise and fall of Peloton and how it forever changed the business of home fitness. This is Episode 1, Welcome to the Ride.

7:56It's 2011 in Los Angeles, California, nine years before anyone ever heard the words COVID-19. Lawyer Hiso Kushi sits in traffic on the 405 freeway. The display screen in his car lights up with an incoming call. It's his best friend, John Foley. Foley, what's up? John Foley and Cushy both met as executives at CitySearch, a website where people could list and review local businesses, similar to Yelp. CitySearch was acquired by media mogul Barry Diller's company IAC in 1999. Cushy is still with IAC, working as in-house counsel to its various tech companies, and now Foley runs e-commerce for the bookstore chain Barnes & Noble.

8:42Even though Cushy lives in Los Angeles and Foley lives in New York, they've remained close. Cushy, listen, I want to run something by you. I have an idea for a new company and I would love it if you came on board. We're going to need a good lawyer and there's no one I'd rather have by my side. Sweet. Hit me with it. Alright, so you know how Jill and I are really into fitness? Yeah, I still remember you haranguing me into taking that indoor cycling class. And you liked it, come on. I will neither confirm nor deny that. Okay, well anyway, would you believe me when I said we haven't been to a class in almost six months?

9:21Jill hasn't made it to the yoga studio in even longer. Whoa. Yeah, with two kids, we just don't have time. Weekends, we're taking them to gymnastics, the playground, birthday parties. Weekday mornings are just getting them to school and us to work. There's just no time to make it to a class. Yeah, I get that. Kids keep you busy. And at-home workouts, you know, I don't know. They're not the same. I miss the community and the competition of the class, all of us peddling away together. So Jill and I were talking, you know, about how we can combine the camaraderie of a cycling class with the convenience of an at-home workout.

9:58And I think we came up with a pretty genius idea. Yeah? Well, what if we made an exercise bike with a screen that could connect to the internet and we could livestream fitness classes? You know, the instructor would be like in a remote studio, but through some kind of leaderboard they could see the stats of everyone streaming their class. They could push them to pedal faster or compliment them on how they're doing. That sort of thing. Riders could interact with each other. It'd be a completely remote fitness class. Cushy doesn't say anything as he thinks about what Foley is proposing. He's, uh, you there?

10:34Did I lose you? Yeah, uh, I'm here. So what do you think? Genius, right? I mean, at the end of the day, you're still talking about riding a stationary bike alone in your basement staring at a screen. I can already do that, but I don't want to. No, no, no, no, no. This will really feel like you're in a class. Yeah, well, I'm sorry, man. I just don't see it. Plus, I gotta tell you, I don't know anything about making exercise equipment. I just don't think I'm your guy. Well, all right. I appreciate the honest feedback. Yeah, come on. No hard feelings, right? No, no, no. Of course not. We're friends first.

11:14Always. Cushy hangs up the phone and continues to inch forward in the bumper-to-bumper traffic. He's disappointed. He thinks Foley is a brilliant businessman, but he just doesn't understand this idea. But Cushy keeps thinking about Foley's pitch. And two days later, he has a realization. He'd been focusing on the wrong part of Foley's idea. What could set this company apart is not the bike itself, but the classes. That's what Foley needs to lead with. He's starting an interactive fitness media company. The bike, that's just the delivery system. Hey, let's step back for just a minute, because this brings up a classic lesson in business framing.

12:03So let's say you're a business owner. You're in the driver's seat. Ask yourself, is your company selling a product, or is it building a platform? See, Peloton's insight was that the bike wasn't the business. The business was creating content and community. Look at Amazon. Amazon didn't win in e-commerce by selling books. It won by creating the infrastructure for selling, for selling everything. If you're pitching investors or customers the story you tell about what business you're in, it can be the difference between confusion and conviction. Back to Cushy. He has no experience launching hardware, but he worked at Barry Diller's IAC.

12:48He knows how to build a media company. Cushy calls Foley back and says he's on board. Foley also recruits three other colleagues to form his new interactive fitness company. Two of them he knows from his time at IAC, and the other is a friend of a friend. In January 2012, the five of them officially found Peloton in New York City. The name is based on the term for the pack of riders who clump together to reduce drag in a road bicycle race. As CEO, Foley hits the road to pitch the idea to investors. His goals are ambitious. He insists this is not the latest fitness trend. This will completely transform how people exercise.

13:34He compares his vision to what happened to the video game industry. When Atari released its first home game console in 1975, people had to go to an arcade if they wanted to play a video game. Now, arcades are few and far between, and at-home consoles are the norm. In Foley's view, Peloton is the game console, and Jim's are the arcades. If people can get the same high-intensity communal workout at home, why would they ever go to a gym? Despite Foley's lofty vision for the company, investors aren't sold. From their perspective, Foley is essentially trying to launch two companies at once. He's trying to start a hardware company that makes internet-connected bikes, and he's trying to start a media company that produces interactive fitness content.

14:24To start just one of those companies would be challenging enough. To launch both simultaneously seems borderline impossible. And what's more, no one knows what the market for connected fitness looks like. One by one, the major investors turn him down. But Foley refuses to give up. He keeps going, ultimately pitching over 400 investors. In the meantime, he pieces together enough small sums from angel investors to keep the company afloat. You know, getting turned down hundreds of times, that's not just a test of stamina. Think of it another way. Think of it as a filter. Every no sharpens the pitch and clarifies the vision.

15:10Do you remember our series on Starbucks? Back in the day, most investors rejected Starbucks, too, before it became a global caffeine empire. A lot of people who start a business have trouble taking no for an answer, though. It's easy to take business rejection personally. Who wouldn't? But maybe you can draw some strength and resilience from this thought. Don't take no as a verdict. but is part of the process. In fact, if you're not being told no very often, could be you're not aiming high enough. While Foley's on the road, the rest of his team is in New York building the company. They work on creating a prototype bike.

15:50They want it to be the perfect bike, quiet and sleek with a high-quality touchscreen. They start writing the software that will allow them to stream the classes. But they need instructors to lead their virtual classes. And they can't just be any instructors. They need stars. They need people who will shine through a screen and keep customers logging into classes. They start searching for potential instructors. An email comes through from a woman named Jen Sherman. She's 43 and from New Jersey. Four years ago, she took a spin class at a local studio and became obsessed. She got certified and has been teaching spin classes around New Jersey.

16:31Her classes routinely sell out. But she's ready for the next challenge. So, when she finds an article about what Peloton is trying to accomplish, she's intrigued. This could be a way to reach even more people, and instructing virtually would certainly be a new adventure. Her email is bold, telling Peloton they need to hire her. And brash. She references her booty and liberally drops curse words. But turns out, that's a good thing. It shows she has personality. And if that can shine through via email, then the founders think it just might shine through on screen, too. The founders bring Sherman in for an audition in spring 2013, telling her to prepare a mini-class lasting about four to five songs.

17:21They lead her to a corner of the office that's been cordoned off with a black curtain. Behind it is an old rusty bike. They tell Sherman to lead her class from that bike and indicate to a camera lens poking through a hole that's been cut out of the curtain. She should talk into that camera. The founders will be on the other side of the curtain, following her class via TV screens. It's all so low rent, Sherman realizes just how much of a startup this company actually is. But she believes in their vision. So, despite the rusty bike and the wires dangling from the ceiling, she gives it her all. And when her songs are over, she unclips from the bike and steps out from behind the curtain.

18:06The founders are grinning. They tell her she was amazing. She's hired. Helaton has its first instructor. And if this company performs as they think it will, they're going to make her famous. By mid-2013, they have their bike prototype. They have their first instructors. But despite all of Foley's efforts raising money, they still don't have enough funds to manufacture the bikes. Foley and his co-founders were rejected by all the major investment firms. So they decide to take their idea directly to the people. We love fitness, we love technology, and we think we're on the verge of something really big.

18:49But we're a startup and we want to make this dream a reality. We need the support of the Kickstarter community. In June 2013, they launch a Kickstarter campaign to crowdsource the funds they need to start manufacturing their bikes. Under Kickstarter rules, they have a month to raise$250 ,000, which will allow them to build the minimum number of bikes their manufacturer requires. And if they fail to raise that much, they'll get none of the money. In 30 days, they'll find out if the storied investors of Silicon Valley are right, that there isn't a market for connected fitness. Or, they'll find out if their idea has legs.

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22:43The End And then there's Peloton, with its small pop-up store. It's sparsely decorated with some cheap furniture and six Peloton bikes, the only six Peloton bikes that currently exist. They're black with red trim and a large screen above the handlebars. Their Kickstarter campaign was successful. They were able to raise a little over$300 ,000, exceeding their$250 ,000 goal. But it's been over a year since they hit their Kickstarter goal, and the excitement has faded. They were able to entice consumers to give money based on the idea of Peloton, but to make it as a company, they need to actually sell bikes at the price point they've listed.

23:29And this pop-up shop is their first venture into sales. If no one buys one, well, then it was nothing more than a nice idea. them. Foley and his co-founders stand around in the shop. They're nervous. They've given so much to this company, and it's all come down to this. Foley realizes he needs to give some kind of inspirational speech to the team. Hey, everyone, listen up. I know today's a big day, but let's not put too much stock in it, all right? We're offering a premium product. Peloton is selling its bike for $2 ,245. That's slightly more than high-end stationary bikes made by established companies like NordicTrack and Schwinn.

24:16It's a big purchase, and we're an unknown brand. We can't expect people to drop that kind of money the first time they walk into our store. Our job today is to entice people, put the idea of connected fitness into their heads. One of Foley's co-founders, Tom Cortese jumps in. I mean, I'd like to sell one bike today. Yeah, me too. Me too. I'm just saying that if we don't, it doesn't mean we failed. Cortese runs his hand over the bike. He was one of the leads in overseeing its design. Yeah, I know I'm biased, but I really think this is beautiful. I really hope people see what we're doing here. They will.

24:55I know it. Foley's watch beeps. Okay, mall doors have opened. The team watches as the first wave of customers streams past the store on their way to the more established brands to hunt down bargains. For the first time, Foley feels nervous. What if no one even comes into the store to look at their bikes, let alone buy one? Maybe he got this all wrong after all, and he's wasted the past two years of his life. But eventually, customers do come in. Many of them. And Peloton sells four of their bikes. That night, they celebrate like they sold a million. Peloton officially has customers. The company is on its way.

25:45And from there, things start to move very quickly. The company sells close to 40 ,000 bikes in its first two years. But selling the physical bike is only half the battle. They also need to sell people on their subscription service. Priced at$39 per month, their digital services give users access to all of Peloton's streaming content. This includes live classes, where the instructor will see the user's stats, like speed, resistance, and calories burned. And also what they call on-demand classes, recordings the user can follow along with at any time, albeit without any interaction from the instructor.

26:27These classes are what differentiates Peloton from all the other stationary bikes out there. And it's through its subscription service that Peloton intends to actually turn a profit. They're selling the bikes at cost so they can make money off their media. To keep users subscribing, Peloton puts significant resources into making its live-streamed rides as engaging as possible. Beyond looking for the most charismatic instructors, people like Jen Sherman, who ooze personality, they hire producers to tape classes with multiple camera angles. They also license a million popular songs for their instructors to use.

27:09The result is a library of all their classes, so users can choose by instructor, duration of the workout, or genre of music played. In 2014, Peloton sets up a studio in New York where a small number of riders are able to take classes in person. The real-life attendees help create the feeling of being in a class for the riders participating from home. Peloton executives encourage their instructors to let their personality shine through. They don't script their classes and give them a lot of leeway to say what they want during their classes. Some instructors are sassy. Others focus on motivation.