To unlock greater strategic and shareholder value, Peloton should split into two separate companies: one focused on content and apparel (“New Peloton”) and another focused on hardware and logistics (“OEM Peloton”).
Vertical integration served Peloton when connected fitness was an untested market. With end-to-end control over its business, Peloton guaranteed a superior at-home experience and proved market viability. But as Peloton approaches its 10th year, vertical integration has begun to muddle the company’s investment thesis and reduce its competitiveness vis-à-vis new entrants.
The solution to these problems? Two pure play businesses, which I outline below.
“New Peloton”
The content and apparel company, "New Peloton” would effectively become a pure-play media company. Peloton’s digital application would more closely resemble traditional SVOD services. The application would become channel (i.e., OEM) agnostic and would compete solely on its ability to acquire and retain digital subscribers.
Strategic Focus
As a pure play, New Peloton could finally treat content as a profitable end in itself. Content and talent investments could more closely align with digital acquisition and retention goals. Other levers, such as pricing and marketing spend, could re-orient around digital subscription value rather than lower-funnel hardware sales, as is the case today:
During the past year, we've dedicated more resources to building a powerful digital to connected fitness upgrade path, and we are currently driving the highest monthly upgrade rates we have ever achieved. […] As our digital membership base grows, we expect our improving upgrade rates to become an increasingly large driver of our connected fitness sales. — Peloton, Q3 2021 Earnings
Focusing on subscription value would enable Peloton—with its best-in-class content, strong community engagement, and outsized cultural influence—to better compete against better-funded rivals such as Apple Fitness+, whose OEM-agnostic model serves as a competitive advantage vis-à-vis connected hardware companies.
And defensively, New Peloton could better parry against encroachments by community-oriented apparel companies such as Gymshark and Alo Yoga, which have begun to aggressively move into content production (e.g., @gymsharktrain, @alomoves). With content production capabilities, these apparel companies increasingly look like asset-lite media companies (i.e., New Peloton). Absent a compelling value proposition, subscription-based offerings could find themselves increasingly pressured by these emerging—and free—alternatives.
Shareholder Opportunity
New Peloton would also have a simpler investment narrative.
The company would have cleaner industry comparables and would immediately become more digestible to potential acquirers. For example, New Peloton likely becomes a more attractive takeover candidate for companies such as Nike and Endeavor. Both potential acquirers—and others in the performance apparel and entertainment categories—could benefit from Peloton's "Old Hollywood" model:
Nike: Nike has extensive experience sourcing, recruiting, and managing talent relationships. Sponsored athletes introduce (or re-introduce) the Nike brand to millions of fans via broadcast television and other media. Were Nike to acquire New Peloton, the company would effectively inherit the next generation of sponsorable, “on-air” talent. Swap out Peloton-branded apparel for Nike apparel and the company could immediately benefit from its new, wholly-owned marketing channel.
Endeavor: Endeavor, a diversified entertainment company, could easily integrate New Peloton across its portfolio. Endeavor’s talent agencies (WME, IMG) could benefit from new relationships with Peloton instructors and could facilitate collaborations with other managed talent (e.g., music artists). Further, Endeavor could leverage its media production (IMG Media) and direct-to-consumer (UFC, PBR) expertise to quickly scale content production and accelerate new market rollouts. (Disclosure: I previously worked at Endeavor.)
Today, these acquirers likely value Peloton’s media assets but almost certainly ascribe zero—or even negative—value to the company’s manufacturing and logistics infrastructure. The result? Less upside for current Peloton shareholders.
“OEM Peloton”
And what about the new hardware and logistics company, OEM Peloton?
This spin-off should be relatively straightforward, as Peloton purchased Precor—a standalone OEM—only a year ago. Peloton could take a page from the AT&T/WarnerMedia playbook and quickly divest Precor along with Peloton’s manufacturing and logistic assets.
This new standalone company could either IPO (e.g., Icon/iFit) or sell to an existing OEM (e.g., Life Fitness). Other potential buyers? Emerging OEMs such as Tempo or hardware and logistics-savvy operators such as Amazon, whose fitness investments have begun to ramp up.
Wrap
By splitting Peloton into two pure-play companies, all stakeholders win. Company insiders can develop and execute more focused strategies. Consumers benefit from better products and services. And shareholders benefit from clearer investment theses and (potentially) takeover premia.
So, here’s to New Peloton and OEM Peloton in 2022!