Peloton’s New C.E.O. on the Tough Road Ahead

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The list of Peloton’s challenges over the past year, self-inflicted and otherwise, is astonishingly long. A child died and dozens of others were injured in accidents involving its treadmills, forcing a recall of its products. It spent money as though its enormous pandemic-fueled growth would carry on forever — and fell hard when demand faltered.

Now the company is staring down slowing sales, about $1.5 billionof inventory and a spending hangover that left it with a $439 million loss last quarter. Its share price, which quadrupled in 2020, has plummeted nearly 80 percent over the last 12 months, at times dipping below its I.P.O. price.

Barry McCarthy, the 68-year-old former chief financial officer of Spotify and Netflix, took over as chief executive this month after Peloton’s charismatic founder, John Foley, announced his resignation as C.E.O. An early employee at Netflix, Mr. McCarthy worked closely with one of its founders, Reed Hastings, to develop the subscription service’s revolutionary streaming business and to take the company public in 2002. When he became Spotify’s chief financial officer in 2015, he pioneered the audio company’s advertising strategy, including its push into podcasts.

At Peloton, Mr. McCarthy’s immediate task is to right the ship — the company’s chief financial officer said it wanted to save at least $800 million annually, on the same day Peloton announced it would lay off 20 percent of its corporate work force. But he also needs to fend off constant sale speculation, curtail frequent leaks and determine a postpandemic strategy.

And he’ll have to do so while navigating a complex relationship with Mr. Foley, who, as executive chairman, is not going far. Mr. Foley and other insiders still control a majority of Peloton’s shares, giving them veto power.

In his first extensive interview since taking the job, Mr. McCarthy spoke to DealBook at Peloton’s offices in New York City. Sandy-haired and fit, he bears some accessories befitting a chief executive of a once hot fitness company: a Garmin watch, a Ministry of Supply shirt. But in his first C.E.O. job, Mr. McCarthy also brings a notable C.F.O. sensibility, speaking both deliberately and directly on his plans for Peloton, his relationship with Mr. Foley and what mistakes the business has made so far. The interview has been edited and condensed for clarity.

How did you get the job?

It was a shotgun marriage. I was retired and just managing private investments and playing a lot of golf. But I’ve been wanting to get back in the game. I saw the stories, the shutdown in production and the tanking of the business and all that stuff. And so I started to do a little reading. I was a passionate Peloton user, but I really didn’t know much about the business. I reached out to TCV [one of Peloton’s earliest investors] and said: ‘Hey, Coach, put me in. I can fix this.’ [Mr. Foley has said that he and the Peloton board ran a succession search over several months, and that the process moved fast once they “got in contact” with McCarthy.]

Why did you think you could fix it?

I know subscriptions. I know consumer-facing businesses. I know growth. I know founders. I certainly know business models. And I know from my experience that product market fit is the hardest thing on the planet to find. And once you find it, it’s almost impossible to screw it up no matter how hard you try. And arguably, we’ve tried pretty hard here, but the customer love is just off the charts. The monthly churn is less than 1 percent.

What did you see in the story?

The two narratives on the company: One is “Implosion peaks during Covid: downward spiral, incompetent management team, company should get sold.” Another narrative is “No, actually Covid was the marketing campaign the company could never have afforded.”

Peloton has built this large recurring revenue base with subscribers that is growing at 20-plus percent a year. The cost structure got out of whack with revenues, and they spent money on things that they shouldn’t have. But if you resize the cost structure, and you begin to reinvest in growth with product-line extensions and new markets and some other things, then there’s a lot to work with here.

Lots of analysts have said that everyone who wants a Peloton already bought one. How big is the TAM, or the total addressable market?

You can’t possibly know what the TAM is. You’re in the middle of inventing the TAM.

What do you want Peloton to be? Is it about the hardware, the software?

The magic doesn’t happen in the sheet metal. It needs to be good enough, but it’s not sufficient. If it’s just NordicTrack, you’re not winning. The magic happens on the screen. That’s where the user experience is, right? It’s the music. It’s the instructors. It’s all the social aspects that we have only just begun to develop — and that’s where we’re going to spend our money.

Today, it’s a closed platform — but it could be an open platform and part of the creator economy. What other apps would you put on it? Could it be running an app store?

You’re going to have to invest while slashing costs.

Can you become a profitable company by only cutting costs and have long-term success? I think the answer to that is clearly no.

You’re going to see us play for scale, for sure. And that should mean that we change the pricing model in order to take advantage of elasticity, which I think should significantly accelerate the growth in subs.

How are you planning to change the pricing model to strike the right balance between revenue from subscriptions and products?

Selling subscriptions with a really low entry price. Playing around with the relationship between the monthly recurring revenue and the upfront cost to find some sweet spot in the consumer value proposition that gets people to buy into the user experience and affords you a really good margin.

So instead of selling a bike outright at more than $2,000 and then selling a subscription, you’re thinking of selling the whole thing as a subscription, say $150 or $200 a month — like a high-end gym membership?

It’s probably, instead of $39, it’s maybe $70 or $80. And then the upfront cost is dramatically lower.

How much do you worry about fixing the corporate culture?

Well, they did the cost cutting before I arrived, in fairness to them. Do I worry about being charismatic enough to lead a culture — the kind of company that has been built around a very charismatic leader? No. There are two sides to that coin, and, given where the company is, I think I’ve been well received.

What have you learned from the other founders you’ve worked with?

They see things the rest of us don’t see, which is why they get to be founders.

What went wrong here?

They got caught up in the vision thing at the expense of getting real and dealing with the world as it is. I mean, really, who thought that Covid was going to be the forever thing?

Can you compare your relationship with John Foley to your relationship with Reed Hastings at Netflix and Daniel Ek at Spotify?

They ran those businesses, and I worked for them. That’s a fundamental difference. And both of them were having success. And the business never, you know, ran off the rails.

I would not have come unless John agreed to remain engaged on the product side. Nobody is hiring me to be their product guru. They started out in the equivalent of a one-room garage, and they got crowdsource funding, for goodness’ sake. And now they’re the dominant player in connected fitness. That didn’t happen by accident. Somebody actually did that. And I want to suck every ounce of that talent out of him that I can for as long as I can.

How hard will it be leading the company when John and other insiders still have a controlling stake and veto right? You still work for him.

The question is: What best serves his economic interest? At the end of the day, he’s very much an economic animal. And so, if we’re winning in the marketplace with my leadership, I think this is a nonissue. He’s a happy camper. He’s doing what he likes doing. Which is not everything else that I’m doing — and he gets to be the product visionary, right?

And if the company isn’t doing well, I’m getting replaced anyway. So it’s pretty cut and dry. And if I don’t do well — and there’s a change — maybe at that point the business gets sold.

What would you do if someone gave you a deal offer you couldn’t refuse?

My guess is we were most at risk before I came. It was your best shot at acquiring at a bargain-basement price. If we’re able to re-accelerate the growth and articulate a vision that investors find compelling, then it would be a much bigger price.

Do you think you’re going to have to raise more capital?

The answer is maybe. But we need a little more context to have insight into that answer. Regardless of what the strategy is, you need a capital structure to support it. So now if it becomes this enormously capital-intensive business, because you’re giving away a $2,000 bike and then recouping it over time, you can absolutely raise capital around it.

It would be some combination of debt, equity — mostly debt like we used at Netflix, because the bigger the subscriber base gets, the more predictable the revenue stream gets. And the more predictable the revenue stream gets, the more leverage you can put on it.

Are you going to hire anyone to help with the supply chain?

Definitely. For the next couple of weeks, we’re going to get a bloody nose because of the move to third-party distribution. We had 10,000 people scheduled to receive bikes from Peloton, and we moved them over to third parties. Ten thousand people are getting rescheduled. Plus, some of those 10,000 are going to get rescheduled again. So we need to up our comms game. And then, make sure that we’ve got people with the appropriate level of experience and expertise.

Would you consider joint ventures?

Yeah, I would. Which ones? I don’t know. Should we do something with Amazon? Should we do something with YouTube? Is it Nike? Should we do a co-branded thing with Adidas and with retail? There’s a big opportunity in apparel — we do $250 million revenue in apparel. John’s wife is no longer running apparel for us, by the way: not an employee of the company anymore, which is something he fixed before I joined.

How often do you and John talk?

Well, I haven’t been keeping track. So far, I’ve talked to him three times today.

Do you feel like you have carte blanche to do whatever you want?

The entire staff reports to me. And John is ex officio reporting to me. John and I don’t always agree. Like he announces to the team at our all hands — which didn’t get cut short by the way — that we’re a family. And I say you’ll never hear me say we’re a family. We’re a sports team, and we’re trying to win the Super Bowl. And so we’re going to put the best players on the field we can. And if you go down the field, and we throw you the ball, and you drop it a bunch, we’re going to cut you. Because everybody else who’s trying hard to win the game deserves to have the best players on the field. And if you’re a good player, you’re going to love being on this team. I love John’s strengths, but I’m running the company.

What do you think? Let us know:[email protected].

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