Apple (AAPL 1.07%) recently unveiled Apple Fitness+ as the latest addition to its suite of subscription services. Demand for interactive fitness services is booming, as evidenced by Peloton Interactive's (PTON -3.19%) explosive growth over the last year. With a large installed base of active devices, Apple could gain traction quickly in this market. Should Peloton investors be concerned?
Apple joins a crowded market
Peloton still makes most of its money from selling exercise equipment. Subscription revenue made up 20% of its top line in fiscal 2020 (which ended June 30). This amount includes the $39 per month fee that users pay to access workout programs on their Peloton Bike or Tread. It also includes the $12.99 per month fee members pay to access workout programs through the Peloton digital app.
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Peloton finished the last quarter with 1.09 million connected fitness subscriptions, up 113% year over year. Paid digital subscriptions through the app grew 210% year over year but only totaled 316,800.
The Peloton digital subscription is included with all connected fitness subscriptions made with a Peloton Bike or Tread. The app was initially offered as a supplement for Bike and Tread owners to access classes while away from their equipment. As of June 2020, 67% of connected fitness product users engaged with the Peloton app to supplement their workout routine.
Keep in mind that Peloton digital app subscriptions have grown rapidly despite the availability of Nike's (NKE 1.06%) Training Club app, which is free to use. Lululemon Athletica also offers exercise classes on its website, not to mention the content available on the Mirror platform that Lululemon recently acquired. There's plenty of competition out there, and it hasn't fazed Peloton.
As for Apple's new offering, Fitness+ will cost $9.99 per month, or users can access it through the Apple One Premier plan, which bundles several services together, for $29.95 per month.
The main selling point for Fitness+ is that the service will include special integration features with the Apple Watch. In fact, Apple says Fitness+ was specifically designed for that wearable device. The app will intelligently incorporate metrics from Apple Watch to offer a "first-of-its-kind personalized workout experience."
Apple's advantages
It's a major advantage for Apple that Fitness+ will be integrated into every active device through the new Fitness app on the iPhone, which the company says it will also be available on iPad and Apple TV.
The company already has a massive built-in user base with more than 1.5 billion active devices around the world. If Peloton's digital subscription growth is any indication, Fitness+ could be one of the more popular services when it launches later this year. It helps Apple that Fitness+ is slightly undercutting the subscription price of the Peloton app by a few dollars too.
Apple is tapping into a big opportunity. Peloton reported that more of its members are getting interested in non-cycling workouts, such as stretching, yoga, and strength training classes, among others. For fiscal 2020, Peloton said that 38% of workouts completed on its platform were in non-cycling categories.
Nike is also seeing growth in its Training Club app. In the last quarter, Nike reported that more than 50% of members worldwide started a workout, and this is after explosive growth in new users in the previous quarter. The Nike Running Club app has seen four consecutive months of more than a million downloads using the audio-guided run feature, which allows groups of runners to connect through the app.
Apple will certainly get its piece of the action, but the market for interactive fitness services is becoming large enough that all of these competing services can continue growing.
Apple Fitness+ validates the opportunity for fitness services
Peloton investors don't need to worry too much about Apple, because Peloton is centered around driving sales of connected fitness products, and demand for these products has been off the charts. Last quarter, revenue surged 172% year over year, and Peloton is calling for revenue to double again next year.
Its mission is to capture more share of the 200 million people around the world who already pay for gym memberships. Gym-goers are not easily satisfied with just an app -- they likely want access to studio-grade equipment as well. The app, then, is just one piece of Peloton's business, and the Bike and Tread round out the ecosystem as a complete workout platform in the home and serve as the main growth driver for the company.
