This Startup Will Keep You From Ever Going to the Gym Again

Peloton Cycle‘s indoor studio in the Chelsea neighborhood of Manhattan resembles New York City’s other fashionably overdesigned cycling studios. The reception area is all clean lines, bright woods, polished metal, neutral colors. There’s an artisanal coffee bar. The place is packed with people of minimal body fat. There’s a gorgeous locker room, Malin+Goetz toiletries, and fluffy towels.

In the cycling studio itself, though, the similarities end. It’s more television production soundstage than athletic space. Spotlights hang from black, ceiling-mounted pipes above the 60 stationary bikes. Cameras are aimed from various points on the studio walls, and there’s one gliding along a semicircular track. The bicycles are, naturally,  bespoke. A monitor on the front of each one displays its rider’s cadence (pedal revolutions per minute) and power output, and the resistance on the bike wheel. It also shows a leaderboard, ranking everyone in the room as he or she tries to keep up with today’s instructors, Christian Vande Velde and George Hincapie, retired American professional cyclists who between them have 28 Tour de France appearances. They’re cycling royalty, and they’re about to kick butt.

Yet the biggest difference between this Peloton class and every other indoor cycling class is that in addition to kicking the 60 butts of those in the room, Vande Velde and Hincapie are about to kick those of more than 360 people who are livestreaming the class on 22-inch, HD, custom-built, Android-based, touchscreen tablets affixed to their home-based Peloton bikes. Later, video of the class will be uploaded to the cloud, where it will join the thousands of other classes that reside there, waiting to be downloaded to the more than 30,000 Peloton home bikes that have already been sold in 22 countries.

The Manhattan location is a microcosm of what CEO and co-founder John Foley believes will earn Peloton Interactive a $10 billion valuation in the next five years. Peloton is actually five businesses. It’s a bike manufacturer; it’s a luxury gym, packed with riders for nearly every class at $30 for a single session; it’s a production studio; it’s a retailer with 14 shops, where you can buy the $1,995 bike, private-label athletic apparel, shoes, and accessories; and, most important, it’s a video producer. Peloton bike buyers pay $39 a month for a minimum of one year to access as many live or taped Peloton classes as they want.

Peloton is also selling celebrity. Besides world-renowned road racers like Vande Velde and Hincapie, stars of the indoor cycling world, plucked from competitors like SoulCycle and Flywheel, teach the classes. Much like celebrity DJs, such cycling instructors as Robin Arzon, Nicole Meline, and Jenn Sherman have social media campaigns and thousands of devoted followers. Many of them are more famous among Peloton riders than Hincapie and Vande Velde. The majority of the instructors make six-figure salaries for teaching 10 to 15 classes a week. Getting access to classes taught by these studio athletes is propelling people to opt for a Peloton bike–and pay the subscription fee–instead of buying some simple, much cheaper stationary bike or other piece of home fitness equipment.

Peloton’s riders aren’t necessarily cyclists; they are cultish. One hundred sixty of them came to New York for a special home-rider event at the studio in February (and 1,800 have RSVP’d for another one in May). “Last week, we had four people posting photos of the Peloton logo tattoos they’d just gotten,” says Foley, a fit 5-foot-9 man with ruddy cheeks, intense green eyes, light brown, closely cropped hair, and a nearly perpetual impish grin. “That’s four in one week.”

Boutique fitness fans like Peloton’s are powering the fastest-growing segment of the health-club industry. Unlike standard gyms, boutique studios–like Pure Barre, YogaWorks, SoulCycle, Flywheel, and Barry’s Bootcamp–specialize in a single activity. From 2013 to 2014, the last year for which data is available, membership in boutique fitness studios grew from 22 percent to 28 percent of the gym-going public, faster than the overall gym membership growth of just 1.5 percent.

That growth should sustain additional boutiques, like Peloton. Foley’s strategic advantage, though, is that he has extended the boutique studio by webcasting its classes. As is the case with an online college course, the number of potential students for each class is unlimited, yet only a single prof is needed to teach it. That’s one reason the company is on track to generate more than $150 million in revenue in 2016, three times its 2015 total. It became profitable in December 2015, just 24 months after its first bike was delivered.

This scalability is what underwrites Foley’s unicorn dreams and has him believing that Peloton will sell a million bikes in the next five years. Even if it sells just a quarter of that number, that would represent almost $500 million in sales and produce $117 million in annual-subscription revenue at current rates. The company’s potential is even more impressive when you consider its origin story. Peloton has defied every aspect of the prevailing startup ethos of doing it fast and lean, buying off the shelf, partnering, and, above all, custom-building as little as possible. Instead, Foley has managed to break every rule and make every startup stumble possible and still create a revenue machine.

The concept for Peloton came to Foley, who’s now 45, in late 2011, when he was president of e-commerce at Barnes & Noble. He and his wife, Jill, both loved studio fitness classes, but their two kids and jobs made getting to the gym increasingly difficult. At work, as he tried to build a com­petitive challenge to Amazon, he realized that, although hardware was important, what really drove people’s actions was the content that could be delivered over that hardware–be it a bike or a Nook. “Going to a SoulCycle class or a Flywheel class, in the locker room after, everyone is talking about how much they like the instructor or the music,” Foley says. “No one ever talks about the hardware.”

He began to wonder, “Could you build a distributed technology platform that will allow you to consume that content”­–those studio cycling classes–“at home?”

The indoor cycling craze was cranking by then. SoulCycle, which launched in 2006, had just opened its eighth studio. (It now has 57 in eight markets.) Flywheel Sports had opened its eighth location. Flywheel, co-founded by Ruth Zukerman in 2010, was the first to incorporate a monitor that offered precise metrics on how much resistance the bike had on its wheel. It also pioneered the gamification of indoor cycling with its TorqBoard–a screen that ranks riders’ performance. (It now has 36 studios in 12 markets.) Smaller, one-off cycling studios were sprouting up around the country.

About this time, Tom Cortese, now COO of Peloton, showed up at Foley’s house, expecting drinks, dinner, and conversation between two friends and former colleagues; they’d worked together at Barry Diller’s IAC, where Foley ran Evite and Pronto.com. At some point, though, Foley spun his laptop around to face Cortese, and there was one word on the screen. “It just said ‘Peloton,'” says Cortese. “And he’s like, ‘We’re going to build this.’ And I said, ‘What are you talking about?'”