Peloton – Race to the bottom.

Peloton effectively admits it has no IP.

• If Peloton has to resort to a dubious lawsuit to keep competition at bay, I think it is a tacit admission that it has no barriers to entry increasing my fears that the $6.5bn valuation is still much too high.
• This is especially the case as Echelon has just raised money at a much more reasonable $100m (see here)
• Peloton is suing its rival Echelon accusing it of flooding the market with “cheap, copycat products” and a false advertising campaign designed to undercut Peloton’s business.
• I have had a close look at Echelon’s product range (see here) and while it is very similar to Peloton’s, it differs in that there is a much wider range of bikes available.
• Some of these are at much lower prices and instead of having an integrated screen, there is a screen holder for the user to bring his own device and use the app.
• By contrast, Peloton (see here) has one bike that starts at $2,245 which is roughly comparable to Echelon’s premium bike but Echelon’s is some 27% cheaper at $1,638.
• Other than the idea of remote spinning classes via the internet (which one can’t patent), I can’t see what intellectual property or trademark of Peloton’s that Echelon has infringed.
• Spin bikes have been available for years and sticking a screen with an internet connection on the front of the bike is hardly a patentable idea that is going to hold up to examination.
• Nor is attaching sensors to the bike to monitor its progress which is something professionals and enthusiasts have also been doing for years.
• Hence, when one asks the question with regard to what barriers to entry has Peloton constructed to keep competition at bay, there are no answers that I can think of.
• A further clue to the lack of IP is the fact that Peloton spends just 6% of its turnover on research and development which is a paltry sum compared to a real technology company.
• I think what is really going on here is that Peloton is trying to be the Apple of spin bikes and make a healthy return through the sale of hardware.
• In order to do so, it must lock its users in, and it is not even close to being able to achieve this.
• Because it has no lock-in it is having to resort to stopping its competitors from operating or face a big erosion of its hardware gross margin.
• From the S-1 (see here), one can see that its gross margins on hardware are almost the same (42% – 44%) as they are for services.
• These are very healthy gross margins for a bicycle and so I think that users are being asked to pay a lot for the brand.
• Echelon has seen this and because there are no barriers to entry, it is able to sell a competing product at a much lower price and still have a positive gross margin in order to gain share.
• Peloton’s one hope for a sustainable barrier to entry is its community where it already has 511,00 active subscriptions and an 89% attach rate.
• It needs to focus on this community keep it active and engaged thereby ensuring that Peloton becomes the go-to place for remote exercise.
• In order to do this, it needs to cut the price of its hardware to a lower level and push the size and vibrancy of its community over Echelon’s much smaller 100,000 community.
• This is a huge advantage and I think is the only hope for Peloton to begin making money.
• This is how Peloton can put Echelon out of business as I think its legal action is going to fail badly.
• Hence, I think that things are going to get a lot worse for Peloton before they get better and if it waits for the outcome of this lawsuit (which I think it will lose) before cutting its prices then it will be giving Echelon more time to catch-up.
• The only racing Peloton is going to be doing is a race to the bottom in terms of hardware pricing and further bad performance of its stock price.
• I was negative when it listed (see here).
• I am more negative now.