Peloton shows everything doesn't need to be a subscription: Morning Brief

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Not everything has to be a subscription company.

Peloton, the former star of the stay-at-home economy turned archetype of the COVID comedown, still can't turn itself around. In a fit of sweaty déjà vu, the maker of connected exercise equipment is slashing headcount and saying goodbye to its CEO.

Two years ago Peloton did the same thing but ended up in the same place, which is, I suppose, what stationary bikes do. To reduce costs the company will lay off about 400 people and continue to ditch physical showrooms. But Wall Street didn't appreciate Peloton's latest culling. The stock tumbled more than 12% Thursday, dragging shares below $3. Next to razors, boxes of wine, and streaming services, subscription fatigue is settling in. But Peloton's problem isn't its digital product.

“The subscription economy isn't going anywhere,” said Adam Levinter, CEO and founder of the consultancy Scriberbase and author of "The Subscription Boom." "The question is: Where is it changing and what areas are getting squeezed?"

Peloton is a consumer product that is very expensive to experience. Where its $1,500 bike might have been thought of as a consumer investment, a lock-in to guarantee months and years of recurring revenue, it also acts as a luxury-priced barrier, limiting the pool of customers and turning its equipment-free app into an afterthought.

(To underscore the restrictive cost, Levinter said to imagine that Netflix (NFLX) charged a monthly fee to consume its library, but you could only access it through a $1,500 Netflix-branded TV.)

Parts of the subscription economy — which UBS projects will reach $1.5 trillion by 2025 — are thriving. Music services, educational content, software, cloud providers, and paid loyalty programs, like Amazon Prime and Walmart+, are flourishing. But Peloton's revenue has stagnated. Even before the restructuring and the departure of the turnaround CEO, investors were fleeing. Shares have lost roughly half their value this year.

But Peloton's customers remain loyal.

For many subscription-based companies, having to manufacture and deliver a physical product can be a drag. Peloton offers a hybrid model, but the company still largely centers its machines, said Amy Konary, senior vice president and founder of Zuora's Subscribed Institute, a think tank for recurring revenue businesses. Instead, a greater focus on the no-equipment-needed app, decoupling its digital services from its physical products, would steer the company closer to other subscription winners, Konary said.

In thinking of Peloton as a media company, she offered her own comparison to Netflix and other streaming services, but in a flattering light.

Peloton reliably churns out new, high-quality workout videos that can be easily filtered depending on the desired criteria of users (instead of floating through a sea of content). Sub-communities on Peloton also serve as another form of curation, she said, steering users to recommendations and higher engagement.

The camaraderie and spirit of self-betterment on the platform are also powerful intangibles that other companies are hard-pressed to replicate. And the service claims an industry-low churn rate, largely without nagging notifications that other apps rely on. Of course, this is all aided by a $1,500 anchor that runs proprietary software.

Anyone who has read through their credit card statement recently is inclined to agree there are too many subscription companies. Automakers toying with the idea of charging car owners to heat their own seats as part of a subscription plan foreshadows a cruel future of recurring add-ons. Peloton is not, in a financial sense, a good subscription company. But it isn't actually a bad one.

Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on Twitter @hshaban.