Peloton's (PTON 4.29%) new CEO, Barry McCarthy, spent some time at Netflix (NFLX -0.63%) as the CFO of the streaming pioneer from 1999 to 2010. Peloton shareholders are hoping that the monster success of his prior company, whose shares have skyrocketed over 2,200% over the past decade, can be translated to his new gig.
McCarthy could implement two worthwhile strategic moves to make the at-home fitness leader more like Netflix. They could boost the chances for Peloton to turn things around and once again become a thriving business.
Aggressively pursuing international growth
While Peloton's products and services are currently offered in international markets, including Canada, the U.K., Germany, and Australia, the bulk of sales (93% in fiscal 2021) were derived in North America, mostly in the U.S. Netflix, on the other hand, got 44% of its revenue in 2021 from the U.S. and Canada, showcasing its global standing. To be fair, the streaming juggernaut is later in its growth story than Peloton is right now. But it shows that there is still massive untapped potential for the fitness business to penetrate foreign markets.
The general public's focus on health and wellness, like video entertainment, is something that transcends borders. Everyone needs to take care of their health. This is a fact that Peloton should keep in mind when thinking about its global ambitions.
According to data from the International Health, Racquet & Sportsclub Association, approximately two-thirds of the world's gym memberships were outside of the U.S. in 2020. Brick-and-mortar gyms are Peloton's direct competitors, but this data point demonstrates that over time, Peloton's geographic subscriber mix should lean more toward international.
With its burgeoning middle class, Asia, particularly China, immediately comes to mind as a possible market for Peloton to one day penetrate. Netflix cracked the code on how to create compelling content in one country that becomes popular worldwide, and Peloton has that opportunity, too. For example, in India, a nation Peloton is not in today, dancing and yoga are popular forms of exercise. The company can develop top-notch exercise classes that subscribers in other parts of the world start using.
Tapping foreign markets is certainly not easy, especially with Peloton hitting a rough patch domestically in recent quarters. But it presents a large potential pool of new users and greater sales.
Owning all the content
Netflix still licenses many of its TV shows and movies, but by creating original content for almost a decade now, the company has developed competency in this key area. What's more, once Netflix invests in a new show or movie, it owns the rights to that intellectual property completely. It doesn't have to constantly negotiate new contracts or bid for streaming rights. It all belongs to the company.
When it comes to its instructors and the classes they run, Peloton does own the entire workout catalog that it offers to subscribers. But a huge part of the company's experience comes from music. People choose specific classes not just because they seek a certain kind of workout but also because they want to listen to their favorite music genre.
This presents an issue. Every time a song gets streamed in one of its classes, Peloton has to pay a royalty to the artist. During the most recent fiscal quarter (ended Dec. 31), the company's subscription gross margin was a strong 67.9%. While Peloton points out that most of its content creation costs are fixed, music royalties are not, which puts an upper limit to how high the margin can go.
Image source: Peloton.
The Trichordist, a blog that shines a light on musical artists in the digital age, reported that Peloton pays musicians $0.03 every time a song is streamed during one of its workout classes. This is significantly more than what Apple Music and Spotify pay artists. For Peloton to scale even better, I think creating its own music label could be a viable option.
With all of the issues facing the business today, this might be low on the list of priorities. But I believe that it would position Peloton well when demand rebounds and the business has a higher number of subscribers who perform more workouts per month.
There is already a partnership in place with superstar Beyonce, but just imagine if other major artists started creating energizing, fast-paced music that was exclusive to Peloton. The company could own the music outright and wouldn't have to pay royalties anymore. That would keep customers excited about hearing new music they can't get on other platforms.
It will be very interesting to see what Barry McCarthy can do to turn things around at Peloton. Making the at-home fitness innovator more similar to the streaming giant might not be such a bad idea.
