| Start typing "Can I use Peloton.." and the search engine will present a slew of autofill options: "…without subscription" "…with echelon bike" "…with nordictrack" "…with myx" Make no mistake, scads of people are trying to short-cut Peloton Interactive and hack their way to the company's workouts without shelling out four figures for one of its stationary bikes or treadmills. In the recent quarter, almost 200,000 people signed up for Peloton's digital subscription, which can be had without buying any of its spendy hardware. Sure, some of them were tuning into Peloton coaches for yoga, stretching or even meditation, but a lot were just bungee-cording their iPhones onto other machines from a grab-bag of spin-off spinning brands: Bowflex, Nordictrack, and ProForm, to name a few. The competitive threat seemed to peak last week when Echelon, which has a slew of fitness contraptions on offer, started selling a "Prime Bike" on Amazon for $500. The e-commerce giant quickly put the kibosh on the machine and any perceived partnership, but not before Peloton shares skidded 5 percent. If Peloton's business were one of its workouts, this would be the point where the resistance kicks up and the coaches goad the crowd to get up out of the saddle. But the company is likely unfazed, given its recent rpms and how it is geared. Indeed, the shares regained composure by day's end. For one, Peloton is high-end by design. CEO John Foley has a mantra about executing a "better, best" strategy – implicitly leaving out the "good." The knock-off bikes, it appears, are filling that void just fine. As such, Foley is essentially getting rid of his worst customers before they become customers at all, which keeps the margins high and the churn rates low, which, in turn, keeps the shareholders happy. Beyond the bike, there is the subscription revenue, 1.1 million households paying $40 a month for Peloton classes in 10 different workout disciplines, plus the performance metrics and sweaty social network that goes along with them. With superstar trainers and a thorough music licensing strategy, the content platform has proved remarkably sticky. Churn is hovering at about 0.5% a month and Foley said most of those are unintentional exits from people who didn't realize their credit cards were expiring. At curren rates, it would take almost 17 years for Peloton's crowd to completely turn over. In short, Peloton is as much a media company or a software play as it is a gym or equipment maker. It has built a wicked razor-and-blade business model, though, in this case, the razors cost at least $1,900 and are profitable on their own. The subscriptions, however, with a 57% gross margin, are far more lucrative. When crunched against the low dropout rate, Peloton reckons a lifetime value of about $3,600 per subscriber, a tally that does not include the initial outlay for the hardware. In short, anything that might get someone hooked on a full Peloton membership – be it a pair of Rollerblades or grandpa's old rowing machine – is likely a win for the company long-term. Finally, there is the fly-wheel of the network effects that kick in the more people join the crowd and crow about it to friends. Peloton aims to get its profit margin on subscriptions above 70%, as the cost of content creation is spread more widely over a larger mass of customers. Of course, all of this is incumbent on Peloton content remaining at the front of the pack, so that equation might not pencil as efficiently as it does now. In the meantime, Peloton is basically giving away its digital membership for $13 a month after a 90-day free trial, an option that includes every class one might find on the spendier subscription, including live sessions. It's a starter drug, if you will, a warm-up. "We're so excited about it as an acquisition channel," CFO Jill Woodworth said on a conference call earlier this month. Good customers will keep paying $156 a year to cut corners and cheat. Better customers will dig a little deeper and join the pack. Either way, the peloton continues apace. | 
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