At the height of the COVID-19 pandemic, the connected fitness app and bike maker Peloton was on top of the world. The company, which helped to usher in a new era of at-home fitness, saw its stock rise past $171 a share, with a market capitalization that broke the $50 billion barrier.
But just two years later, Peloton’s fortunes have seen a dramatic reverse. The company has laid off hundreds of staff, it has replaced its chief executive officer and founder, and is reportedly even considering a sale, with names like Amazon and Nike reputed to be interested in buying it on the cheap. Meanwhile, Peloton’s stock has crashed and is now hovering at around just $10 per share, much less than its IPO price of $29 and well below its all-time high.
Peloton’s fall from grace is a stunning reversal of fortunes for a company that pioneered the idea of connected, at-home fitness, and now people are wondering what the future of that industry holds.
Peloton Takes Off
The company was founded back in 2012 by its former CEO John Foley and four others, who met while working at the media and internet firm IAC. Foley has taken credit for the idea of combining indoor fitness machines with live and on-demand classes, but while the concept was clearly intriguing, he initially struggled to bring investors on board.
In a 2018 interview with Business Insider, Foley revealed that during most of the company’s early years, he spent the bulk of his time chasing after investors in a bid to fund the idea. Peloton was not an easy sell, with Foley claiming that he pitched the concept to more than 400 investors, only to be told “no” every single time.
“The worst part is that we’re not talking about 400 individual pitches,” Foley said. “A lot of people would want me to come back four or five times and have me meet more partners and pitch again. I would say that I’ve been turned down maybe five or six thousand times.”
The concept did at least find a better reception among actual fitness fans. In 2013 Foley came up with the idea of crowdfunding the company’s first fitness bike through Kickstarter, where it was listed for an early bird price of $1,500. More than 200 angel investors committed funds to the project, and Peloton began shipping its first fitness bikes in 2014. At the time, Foley and his other co-founders spent hours traveling up and down the country, showing off how the bike works at pop-up stores and shopping malls across the U.S.
That level of dedication quickly paid off, and Peloton was able to develop a cult following among fitness fanatics, thanks in part to its roster of instructors. When it opened its first physical studio in New York City, hundreds of Peloton fitness bike owners traveled to Manhattan just to be able to take part in a live class with their favorite instructors.
As Peloton began making more headlines, big money investors finally began paying attention. Foley told Business Insider that it was in 2017 when the really smart money began getting involved. One year later, the company announced it had raised a stunning $550 million in venture capital funding at a $4.1 billion valuation. Peloton had truly arrived.
The funding was followed by the launch of a second product, the Peloton Tread. It came with an expensive price tag of more than $4,000 and was followed by the addition of new kinds of fitness classes in the app, such as yoga and high-intensity interval training. It was all part of the company’s plan to keep users engaged and get more people to sign up for its fitness class subscriptions, with no equipment necessary.
In 2019 the company filed for an initial public offering, having sold more than 577,000 bikes and treadmills to date, while accumulating over 500,000 paying subscribers. Even so, the company’s SEC statements showed that Peloton also had spiraling losses due to investments in marketing and licensing fees for the music used in its fitness classes. Perhaps not surprisingly, the company’s IPO on Sept. 26, 2019 was not initially successful, with its share price falling 11% on the first day of trading.
Peloton struggled during its first few months as a publicly traded company, but everything changed with the arrival of the pandemic. The closure of hundreds of thousands of gyms all over the world caused people to embrace the idea of connected fitness en-masse, and suddenly thousands of fitness fanatics discovered Peloton and its live-streamed workout classes. Peloton’s stock took off and the company rapidly hit the big time.
The transformation was epic. In May 2020, Peloton reported that its sales had jumped by an astonishing 66%, while its number of subscribers increased by even more, at 94%. The company then announced its first profitable quarter in September of that year, with sales rising 172% from a year earlier.
So rapid was its rise that Peloton was caught off guard. The unexpected surge in demand for its exercise machines put pressure on its logistics, with delivery times for new orders stretching into weeks and then months, causing frustration among some of its fans. Adding to those problems were issues with some of its fitness bikes. Users reported pedals breaking off while riding, and Peloton struggled to get them shipped back for repairs, often taking weeks or months to do so. Following reports that more than 120 biles had broken, with 16 customers injuring themselves, Peloton announced a recall affecting more than 30,000 defective bikes.
Despite these problems, 2020 proved to be a transformational year for the company. Not only did its user base, revenue and reputation soar, it also launched newer, more advanced versions of its fitness bike and treadmill, and a multiyear advertising deal with Beyoncé. By the end of the year, the company was valued at a staggering $34 billion.
Pioneering Fitness Gamification
Peloton’s success stemmed from the fact that it is much more than just a fitness bike and application. The bikes and treadmills come with a 22-inch tablet device that enables users to livestream fitness classes or select from thousands of pre-recorded ones. It also uses a heart monitor that tracks the user’s pulse, while the power generated by pedaling or running is measured to provide real-time feedback in the shape of watts.
There’s a critical competitive element too. Users compete to improve their position on multiple global leaderboards and show off their fitness prowess. In this way, Peloton pioneered the idea of “social fitness”, using some clever psychological tricks to get users addicted to keeping fit.
Peloton understood only too well that people’s brains are hardwired to value immediate benefits, such as sleeping in, versus longer-term rewards such as keeping fit. It’s a mental model known by psychologists as “hyperbolic discounting”, and it means people must overcome their own psychology in order to motivate themselves to work out.
This is where Peloton really succeeded, transforming fitness into an addition. Behavior change strategist Jennifer Clinehens explained how it did this in a Medium post, highlighting the psychology it employs to keep users interested. The high price of its fitness equipment is a key part of its strategy, she explained. By charging around $2,000 for a bike, plus another $40 a month in subscriptions, it forces customers to make a big investment – which encourages them to jump on the bike more.
At the same time, Peloton’s bikes are small and have a sleek, stylish design. This encourages owners to put the bike in a prominent place in their homes, where it can always be seen. The more people see the bike, the more likely they are to use it.
According to Clinehens, Peloton also takes advantage of a theory known as the “Habit Loop”, which describes the basic psychological structure behind every habit people have. There are three factors that combine to create habits – the trigger, the routine and the reward – and Peloton successfully managed to combine them all.
By building gamification into its workouts, Peloton created fierce competition among its more than two million users, encouraging them to compete and improve their ranking at the top of their class leaderboards. It introduced multiple types of leaderboard and also allowed users to create their own, leading to multiple communities springing up. Rankings are determined primarily by the effort each user puts in, meaning they have to work hard to improve their position. It also provides various other rewards, such as badges and level-ups. Peloton introduced a competitive element that’s taken very seriously by most of its users, as evidenced by hundreds of videos and tips online about how to improve your leaderboard position and “hack” your workout to earn more points.
Peloton succeeded because it became a master of fitness gamification. Users earn points, achievements, and badges based on their scores, which are calculated by calorie output and pedal speed. These incentives, along with the serotonin boost a workout provides, combined to get users addicted to fitness.
Peloton’s pioneering role in fitness gamification didn’t go unnoticed. Competitors abound, with the likes of Flywheel arriving on the scene with its Fly Anywhere bike in 2017. Flywheel borrowed many elements of Peloton’s business model, including a high price tag of $2,200 for the bike, livestreamed classes and rewards for users. Flywheel said the Fly Anywhere bike was an extension of its existing studio experience, and was promptly slapped with a lawsuit in 2018 that accused it of “stealing” Peloton’s proprietary technology.
While Peloton gets much of the credit for kicking off the modern fitness technology industry, newer rivals are looking to evolve the idea further by doing away with the expensive hardware. For instance, The Mirror is a huge, mirror-sized tablet that can be mounted onto a wall, streaming various cardio, pilates, barre, boxing and other fitness classes. A second hardware-free player is Obé, which uses a regular phone or laptop that serves as a portal to dozens of different fitness classes, including dance, yoga, sculpting and more, for the affordable price of just $27 per month.
Peloton’s competitors are poised to take advantage of the company’s dramatic fall from grace, which coincided with the shift to a post-pandemic world. As the COVID-19 pandemic receded and gums and fitness studios reopened, Peloton’s business took a massive hit. In November 2021 the company reported earnings and revenue that missed Wall Street’s expectations amid a sharp slowdown in new customers. Its dismal outlook for the months ahead caused its stock to fall more than 30% in a single day
“It is clear that we underestimated the reopening impact on our company and the overall industry,” Foley said in a conference call with shareholders.
Prior to this, Peloton’s reputation had taken a major hit following a tragic accident involving its treadmill that resulted in a young child suffering fatal injuries. Peloton’s stock fell more than 5% following news of the accident in February 2021, and regulators promptly urged the company to recall the product. Foley rejected this, saying that the warnings over its treadmill were “inaccurate and misleading”, but the negative publicity ultimately forced the company to recall its high-end Tread+ model in May.
As business slowed down, Peloton was later forced to announce a hiring freeze, and then there was even more negative publicity when black employees of the company voiced concerns they were being paid less than the industry standard. Then, a fictional character in the “Sex and the City” reboot was killed off shortly after using his Peloton fitness bike. Moreover, Foley came in for criticism himself for throwing a lavish holiday party while the company’s stock was tanking.
By January 2022, things had come to a head, with Peloton discussing layoffs, pausing production of its latest equipment and canceling its plans to open a new, $400 million factory. Business Insider reported that month that the company’s warehouses were filled with excess bikes that it was struggling to sell.
In February Pelton’s stock had fallen well below its all-time high and reports emerged that companies including Amazon and Nike were considering bids to acquire the company on the cheap. Just days after those reports emerged, Foley announced that the company would shed around 2,800 jobs – almost 20% of its workforce – and that he too would go, stepping down from his role as CEO.
Peloton’s demise was as dramatic as its original rise to stardom. The company was undoubtedly one of the biggest winners of the global COVID-19 pandemic, appealing to thousands of users who were looking for ways to ride out the apocalypse.
However, the post-pandemic reality has shown that Peloton’s success was destined to be short-lived. Peloton was a useful tonic while people were forced to stay at home, giving people a way to keep fit and simultaneously maintain a social life with its ultra-competitive, gamification elements. But the truth is that most people, and fitness fanatics especially, prefer to spend their time outdoors, with other people. They’re tired of being stuck at home and pedaling in place. Now that outdoor exercise is possible again, Peloton’s well-worn fitness bikes are increasingly being left to gather dust as former devotees spend more time in the real world.
That said, Peloton may well have an enduring legacy in the shape of the next generation of fitness applications that borrow its model of combining gamification with exercise to keep users motivated. Despite its fall from grace, few can knock the extremely clever psychology it employed to get people using its machines in the first place.
New applications are emerging that use similar incentives for those who like to exercise outdoors. One of the most promising of these next-generation fitness apps is Walken, which is based on an alternative gamification model that provides an even greater incentive in the shape of financial rewards. The company has created an app that integrates fitness with the concept of “play-to-earn”, introducing users to blockchain and cryptocurrency while simultaneously encouraging them to live a healthier lifestyle.
With no expensive investment required to get started, Walken is actively benefiting from the natural, human instinct to want to spend time outdoors, thanks to its focus on walking as a fitness activity. Unlike Peloton, where the rewards are restricted to leaderboard rankings and badges, Walken takes this further by rewarding users with its native cryptocurrency token WLKN, which is earned by taking steps and playing games.
The Walken app is designed to be highly accessible, using existing smartphones and wearables to enable players to “move-to-earn”. It relies on user’s smartphones to detect when they move, while leveraging data from Apple Healthkit and Android Health to determine how many steps they have taken, so it can calculate the exact rewards they earn.
Walken users can also earn a second crypto token, known as GEM, which can be used to upgrade their in-app character attributes, such as speed, strength and stamina. By upgrading these attributes, they can compete with other players in fitness battles and earn more WLKN tokens, which can be sold for real-life money or used to purchase items in Walken’s marketplace.
Applications like Walken are hedging their bets on the real reason for Peloton’s stunning rise. While Pelton’s fancy and very expensive fitness bikes look great, they’re not what drove the company’s initial success. Peloton made it big because it hit upon a novel way of motivating users to want to keep up with their fitness efforts, rather than just give up after a few days or weeks.
It’s this concept that will live on through a new breed of applications like Walken, with its promise of bringing fitness gamification into the real world. People want to spend time outdoors, not just sitting on a static exercise bike, and this is where the future of fitness applications holds the most potential.