Outside is Free, Indoors is Valuable

This week Peloton, a US business has launched on the NASDAQ and is worth billions and the UCI has announced a new “e-sports world championships” for next year which will be run on Zwift. Outside is free… but cycling indoor is suddenly becoming very valuable.

Peloton sells exercise bikes and online spinning classes. Once people have brought their proprietary hardware they can subscribe for online exercises classes which provides the business with two primary sources of income. Their exercise bikes are pricey, almost $2,000 and according to a recent copy of The Economist magazine, the company enjoys gross margins on hardware of 43%. This puts them up there with some prime luxury brands like Louis Vuitton or Ferrari, rather than Tacx or Wahoo. It’s partly why the company is suddenly worth $8.1 billion. There’s shades of Robert Putnam’s “Bowling Alone” as people skip spinning classes to ride alone at home but how much of Peloton’s customers are substituting the gym for their basement isn’t known. It’s an interesting business model because of the high entry costs, you have to buy that $2,000 exercise bike just to get started when normally most online subscription models rely on hooking in people easily. To exaggerate to make the point, the video streaming platform Netflix doesn’t make people buy a proprietary screen that costs twice as much as a plain TV or monitor in order to sign up.

Which brings us to Zwift which is an open platform, at least for now. Perhaps Zwift management look on at Peloton’s hardware sales with envy but it’s hard to imagine them telling the userbase their Tacx, Wahoo, Elite and other devices are redundant… although perhaps they could launch Zwift hardware with exclusive features so that in time they start to get hardware market share too? But it’s the other direction that makes you wonder. Zwift seems to be very linked to pro cycling – more of which in a moment – but what if as well as virtual laps of the London Olympics and Richmond World championships they had spinning classes as well? This way people could buy a cheap indoor bike or use a normal bike and an indoor trainer and the company could start to eat Peloton’s lunch. Perhaps this isn’t as glamorous as Peloton’s marketing but the effects should be just as real.

Peloton seems very much aimed at non-cycling while Zwift seems focussed on committed cyclists (as well as triathletes and runners). We’ve seen this with the promotional adverts featuring Geraint Thomas, the pre-Giro marketing stunt earlier this year and possibility of a Giro prologue ridden on Zwift’s platform. Today the UCI has announced it will host an “cycling esports” world championships next year. Now this might not be for you but perhaps you’re not into cycle polo or indoor (gymnastic) cycling either. Anyway the interesting points here are that the UCI is trying to get into this while other sports federations are too and it could give cycling’s governing body a lead. Also it’s Zwift, again. There are other platforms but as touched on here before, Zwift is a tech “unicorn” with wealthy backers and it is spending big on marketing. The idea being to ensure online cycling rhymes with Zwift and rival platforms are squeezed out, it’s a business decision but a cultural one too as Zwift’s money shapes our experience of pro cycling as they sponsor the sport, especially if we were to get a Giro prologue or similar. It’s also cultural for the way an online ecosystem is being carved out but dominated by one company only, much like internet searches or online book retailing. If Zwift do a world championships then expect big dollars to be poured into the marketing, headline-grabbing prize pots and so on. The quid pro quo is that the UCI will now be the regulatory body.

All this is valuable business and it’s only just getting started. There will be more hardware to come in the shape of home trainers but what about fans that adjust their speed to your effort, and maybe headbands come back in fashion. Seriously it’s said clothing brands will soon be launching indoor clothing ranges. Think about it and shoes don’t need to be semi-waterproof, jerseys don’t need dorsal pockets, shorts don’t require reflective trims. Perhaps it won’t make a big difference but there’s a consumer niche to fill.

Plenty if not the vast majority of readers here will be cyclists already and enjoy the feel of the open road. But online cycling is partly aimed at a new crowd, see Peloton that’s worth billions precisely by not bothering to compete with a real bicycle and instead has carved out a market that for now is worth billions, whether it remains so invites skepticism. Zwift sits in between and a proportion of its users may never ride outdoors either but it’s directing a portion of its marketing spend into pro cycling and the latest stage is a tie-up with the UCI. This is just the start of things, expect clothing ranges and possibly pro races in the coming years.

66 thoughts on “Outside is Free, Indoors is Valuable”

  1. I hate cycling inside. Would rather get wet.

    Something I shall be doing on Sunday when I go and watch the World’s. In the absence of Mr Rings input I am giving MVDP and Alaphillipe 5 rings each.

    • You may well be right, but you are no Inrng.

      Glad to see his re-emergence. It’s strangely felt like cycling had gone mute.

      The valuation of Peloton seems mad when you think Zwift do theirs for free. I would imagine that if they wanted to knock Peloton out they might start to pair with Watt Bike.

      I think Zwift’s tie in with the UCI and Strava are pretty canny, though Peloton might gain much more traction with ‘gym’ goers, of whom there are plenty spending stupid amounts on membership fees – so perhaps the idea of something which provides the sweaty dance studio feel in the comfort of their own home with no shame of being seen drenched in sweat or being abused for not doing enough by the instructor has a lucrative appeal. I for one won’t be buying was is an overly priced spin bike though. And they probably don’t care.

  2. According to a dealer who sells exclusively high-quality cycling gear, sales of winter clothing have been significantly declining for some time. Looks like the amount of winter training outside is reduced and the money that used to be spent on winter clothing is now spent on indoor trainers, Zwift etc. Al least in germany.

        • No, you don’t – if you choose to live up north!
          Well, actually, you need to clean your bike because the winters aren’t like they used to be, the temperatures are more often above zero. The mixture of snow, sand/gravel (used to make icy surfaces less slippery), salt (used to prevent wet surfaces from transforming into ice) and the usual road grime and oil residue can be annoyingly sticky.
          I particularly hate the penchant for salt. Steel bike are fast becoming solely summer bikes here

          PS A tad more seriously: the Zwift phenomenon has been observed by bike shop owners here as wel. (First it was the big or gigantic in comparison German web shops and those attractively low prices that stole their customers, then along came Zwift. It’s a mystery to me how the small independent bike shops survive – but it seems they do! Maybe it’s the sheer number of new cyclists; not everyone buys a bike that’ll arrive in a cardboard box and those who don’t buy more epensive bikes than before and the bikes get their service and annual maintenance done locally…

      • We have got the best weather all year round to ride outdoors here in Sydney, but interestingly the use of Zwift/indoor training is exploding. I feel like I am one of the few serious road riders that hasn’t jumped on the bandwagon yet.

  3. Proprietary vs open platforms have been a competitive issue for a long time, especially in the tech sector. The dominance of Microsoft in the 90s was attributed to the fact that their OS and software ran on any system. Apple, on the other hand, was criticized for sticking stubbornly to proprietary hardware and software. These days, Apple is the dominant player in the space and the proprietariness of its platform (if I can coin a term) is part of its success. Not only can Apple control the finished product, but it creates an ecosystem of products that contribute to its profits (first iPods, now iPhones, iPads, and watches, etc.).

    To me, the question here is whether Peloton and Zwift are really competing in the same market. My guess is that they are not. Peloton is probably drawing affluent amateur generalist athletes (those who cycle for fitness, but probably have gym memberships, attend yoga studios, and do boutique fitness classes regularly). With its online spin classes, it seems to be competing with SoulCycle and other spin studios. Zwift is probably drawing more hardcore cyclists (who spend a lot of money on bikes and want to ride them even when the weather is bad). Zwift is more of an accessory to riding the trainer for dedicated cyclists who live in climates hostile to outdoor riding for some of the year. With their indoor bike, Wahoo seems to be trying to draw from both groups. I don’t think they’ll bridge the markets, but they may be able to take advantage of each.

    • That impression (Peloton is not for serious cyclists) seems to be wrong according to a Peloton sales person I talked to. Actually a lot of classes on Peloton are instructed by leading road cyclists or triathletes, aimed at training for these events.

      According to him, a certain Sir Wiggo went into the showroom with the same preconception. But he was so suitably impressed that he actually bought 2.

      They also have an iPad app, allowing you to join a class on any training bike or road bike + turbo setup.

      The appeal of Peloton and Zwift are the social aspects of them. Peloton more so because you can talk directly to instructors and others in the class (in a video call feed) whilst in Zwift you can only type to other players.

  4. Welcome back Inrng, hope you find your new home well!

    Isn’t this a damned if you do, damned if you don’t – situation?

    Questionable if the UCI should have anything to do with this at all, but then again, E-sports are really a thing by now.
    That said, who hasn’t lived in a house with a totally unused trainer thingy of some sort, carrying dust in the garage or in the attic?

    Great if it makes people exercise more, but of course, nothing like being out on the open road in any weather. The HSE-thing might also be a thing though, there is no shadowing that roadies get into accidents more serious by own or others faults.

    Mountain biking or CX is the mean there, at least you can’t blame others so much..

    Alaphilippe? Didn’t look so good lately, but then again; Dennis was nowhere to be seen lately.

    MvDP, Matthews, Sagan, Greg, Gilbert 5.

    Belgium has a real luxury problem, Remco is riding RR also, right? Might as well give him also 5.

    Quintana now seems to be reschooled to classics rider also, hope he rides!

    Real bad weather forecast, should be a good race.

  5. Good to have you back Inner Ring. Very interesting article too.
    A couple of thoughts from me –
    I’ve noticed strong product placement associated with Zwift’s television advertising, notably Canyon, S Works and Pinarello. All premium brands in themselves, a decent bike amongst that lot is well north of £4000.
    Whilst Zwift users can run on any bike there’s certainly that association being pushed and, dare I say it, it sits with the bike snobbery that seems inherently part of road cycling at any level.
    In comparison with that, a Peloton machine is relatively affordable and you’re free of any snide looks that may await if you took your $2000 bike out on the road.
    Outside is far from free, on the contrary.

    • Ecky, hasn’t your final sentence reinforced the snobbery

      Good secondhand bikes are a few hundred £, € or $ if you really want to get out on two wheels, surely?

      • Agreed! It’s not the bike (though it may be the car or moto) One of my favorite local race memories was driving the race official around in the 1-2/Pro (or whatever they call it these daze) roadrace amid Pinarello, Cervelo, BMC, SWORKS and pretty much every overpriced high end bike you can imagine, some of them shod with those insanely expensive German carbon wheels.
        The winner showed up with a beat-up Trek with a Big-S Ultegra groupset that looked to have thousands of kilometers on it without much in the way of care.
        I hope everyone who looks down upon someone else’ equipment does so as the rider on it passes them and never looks back.
        Cycling’s a sport about legs, lungs and heart, not about fancy equipment.

        • nothing funnier in my book than a middle aged trundler like me on £4k worth of carbon and deep rims never getting anywhere near the speeds needed to get all those aero benefits he’s paid for…

  6. It’s worth adding that a number of brands are currently releasing wattbike-like bikes to go alongside their trainer ranges – the Tacx neo bike, wahoo kickr bike etc. And with built-in zwift compatability . These could provide some additional competition to Peloton, but certainly illustrate the growing value in indoor riding…

    Also worth noting, perhaps, that Peloton’s share price has bombed upon listing, making it one of the worst IPOs ever!

  7. For me cycling has always been a mode of transport first, fitness and sport the resultant. I’m assuming most readers here are committed road and probably mtb users too. As you migrate indoors cycling recedes to irrelevance and subject to ever more transport policy apartheid. Don’t kid yourselves that CO2 reductions and climate change concerns will work to cycling’s advantage, long in to the futur the car will likely still be king in some format. Why develop AI in autonomous vehicles to avoid killing or maiming cyclists and pedestrians when you can just legislate the problem away from vehicles?

    A bit like bricks and mortar vs online retailers, every so often you’ll need something now but your shop of choice won’t be there anymore. Bikes on roads could be next…

    Catastrophising? Given the state of politics in the UK and US (any others of note?) who’d bet against it?

    The history of capitalism is littered with innumerable examples of unintended consequences, I fear indoor cycling and its gameification will be just another to add to the list.

    Of course it might just be a passing fad.

  8. “…according to a recent copy of The Economist magazine, the company enjoys gross margins on hardware of 43%. This puts them up there with some prime luxury brands like Louis Vuitton or Ferrari, rather than Tacx or Wahoo.”

    Sorry, no. A gross margin of 43 % is a very average one. “Normal” clothing not any luxury brand has usually a gross margin of nearly 50 %. Usually for consumer goods the gross margin lies somewhere between 35 – 50 %. This looks more like reasonable price for the hardware and not some subsidised price to lure people into buying their software/services, which is their business model though. Unlike many game consoles, where the revenue is generated via the games/content those consoles are most of the time a loss and cross financed via the games/content. So that puts them in the range of Tacx or Wahoo, even if their products are sold with a gross margin of a bit more than 30 %. But they probably sell more hardware than Peloton.

    FYI, luxury brands have gross margins of 300 – 1000 %, which is a total different ball park.

    • It depends on what you class as ‘Luxury’…
      Inrng is indeed correct in that LVMH & Ferrari run at gross margins of c.65% & 50% respectively.

    • No need for the attitude, cthulhu.
      Especially when your understanding of gross margins is completely wrong.
      To achieve a gross margin of between 300% to 1000%, the gross profit would need to be between 3 to 10 times the sales price. This is impossible.
      Gross profit is always less than sales price. By definition, gross margin is always less than 100%.
      So less ‘tood please.

  9. One point I feel is routinely missed in the zwift eracing conversation is the potential to tap into international talent, in particular those without a cycling history. Yes, the cost of a trainer and pc will be beyond many in developing nations, but it’s cheaper than moving overseas to try a pro career. We may start to see more diversity in the peloton as scouts spot talent through zwift etc

    • I think there have been a few stories of riders been picked up from zwift – although sometimes the stats may not meet the reality as some users quite clearly weight dope

      • The men selected hasn’t really broken through.
        The 3 women, one from USA was 35+ did 2 years in the team, then the last 2 Erath and Harris is doing quite well in some secondary classifications although not really wins.

  10. The esports thing does not interest me but I say why not. It does not really affect the rest of the sport.
    I cannot do the zwift indoor riding myself (to boring for me) but around here it has really taken off for those with work commitments, family or businesses. The before and after work rides have essentially disappeared and been replaced with zwift. Orginally during winter but increasingly so even in summer (we can ride a year around it just below zero in winter often before work).
    I must say I have seen the Zwift add on you tube and sbs so often it sickens me. I can’t take it any more. The immaculately dressed models. The dude wearing the cap on an indoor trainer and the serious effort face (whilst obviously not actually riding hard). The dude out of the saddle sprinting in a low gear at just over 300 watts. I can’t take it any more AHHHH.

  11. I’m a previous user of zwift, I really enjoyed the racing aspect of it but prefer to use Trainerroad mainly from a simplicity point of view of not needing full computer set up etc and just to complete my structured training.

    The peloton brand marketing is very interesting as my wife has no interest in cycling but her interest was peaked with their adverts.

    My wife queried about getting a peloton bike and I said she could save us a couple of grand and ongoing pricey monthly subscription by hopping on my turbo set up in the garage anytime she wanted but this didn’t appear quite as appealing to her.

    Indoor training is growing a lot, I still ride outside during winter and only stay off the roads when it is sub zero and icy and mainly use turbo to complete structured training. I know a lot of fellow cyclists who just prefer to hop onto the indoor trainer rather than venture outside when we start entering this time of year. Also people in certain places don’t feel safe due to attitude of other road users.

  12. Great to have you back, Mr.INRNG. I trust the relocation went well?
    As you write, the UCI has – with the introduction of a e-WC (not a water closet) – assumed refulatory rights of this.
    I am wondering what the UCI plan to do on this?
    Will we have computer scientists, network specialists as commissaires?
    How will they ensure “even playing field” on the distance?
    Do I get to travel the world checking and sealing all trainers and workout bikes, keeping an updated list of these? etc.
    A lot of unknowns and, of course, the first edition will have flaws and needs dialing in, but I do hope they have considerd at least some of these aspects of the competition. It’ll be fun!
    On the note of cycling indoors, I have been doing so for the past 10 years during the off season and – though it can get boring – it really is way more effectiv and structured than anything I have ever done “in the open”. But I do prefer the open road.

  13. I feel a certain amount of guilt about not having even the slightest interest in Zwift, as I went to high school with the founder. He’s a good guy, and a real cyclist. But- I have always hated video games, as a parent I spend a lot of time making sure my kids aren’t constantly glued to video games, and Zwift just feels way, way too much like a video game. And cheating.

    I live in Minnesota, and probably do about 60% inside, 40% outside in the winter. Outside is way, way more enjoyable, but getting dressed to ride in our winter is no small undertaking, and riding indoors is a lot more time-effective sometimes. I have settled on a combination of Sufferfest for structured intervals (less boring that TR) and FulGaz for unstructured rides. I’d encourage you to check out FulGaz- amazing rides all over the world, filmed by good cyclists. When you ride up Ventoux, it really does feel like you are riding up Ventoux (or as near as you are going to come inside).

    You could not pay me enough money to watch other people ride indoors.

  14. Good to see the photo of the Peloton bike at the top of the post is consistent with all their advertising and has its power cable conveniently airbrushed out.

  15. Welcome back INRNG. Of all the stress-filled events in life, movin house is in the upper bracket.
    As noted above the advert for Peloton omits the cable, it also omits the SWEAT MAT. One could be the subject of criticism in the real world if such a set-up were adopted.

    • Moving’s ok, done quite a few already and maybe enough but took a break to get lots of building works done at the same time. There are plenty of Peloton adverts and spoofs doing the rounds to show the more typical daily use, eg people using them as clothes drying racks, they’re stored in the basement or garage with no mountain or sea view.

  16. Welcome back. Hope the move and the hard work went well.

    As said above, I am of the ones that prefers riding outside. Even if there’s snow… I’d take the mtb. The only things that prevents me to ride is heavy rain. But I must say, this zwift thing can be good option to combine training with work.

  17. I don’t agree with your analysis of Peloton at the top of the article : plenty of articles in the financial and tech press were warning against Peloton pre-IPO as an expensive bubble fad rather than a unicorn
    So it’s hardly surprising the stock price tumbled

    I’ve read that they don’t actually make any margin on their bike – after delivery and installation, it’s essentially at-cost : the model was that then you would be committed to their monthly $39 subscription (‘exercise-as-a-service’ ?), because without it that expensive bike is actually very ‘dumb’

    However, you *don’t* need the bike, you can actually use the ipad/Android Peloton app with a much cheaper bike as many websites tell, eg https://www.mypursestrings.com/peloton-app/ though there are lots more
    – originally use of the app was free, but then Peloton started charging this at $20/month : again profit is in the subscription model rather than the hardware

    But the issue with many financial & tech reviewers pre-IPO was that Peloton has never made a profit (that Forbes article says a loss of £226m YE June-2019, the Marketwatch one says $195m) and was being sold at eye-watering valuation based on extremely dubious accounting predictions and purposely-misleading churn rate numbers.

    And the shares being sold have extremely-limited voting rights, leaving control of the company in the hands of the founders and the existing venture capitalists who have funded it so far.

    But it’s not aimed at cyclists, it’s aimed at people wanting exercise (they don’t call it ‘spinning’/spin-class/spin-bike/etc because that turns-out to be someone else’s trademark – instead it’s ‘interactive online studio cycling) but not wanting/able to go to a physical gym (eg ‘moms’ with kids, shift workers, people who don’t actually live near a gym)

    (for me personally, having seen spin-classes at the gym, sitting on an uncomfortable stationary bike in a sweaty room with a group of others, being deafened by disco music and bellowed-at by a drill-instructor shouting inane encouragement, sounds like sheer hell…)

    It’s expensive, it’s ‘premium’ : if we do have a financial downturn, it’s discretionary spending which could easily be cut.

  18. I consider pelotons consumer bases are the actual gyms them selves not the individual rider. Pelotons bikes are far comfier than you usual spin bike and assess to classes all the time is cheaper than employing an instructor. In the commercial gym equipment market 2k isn’t an extravagant amount for a unit that will be potentially used daily for years

  19. I don’t have a problem with these indoor trainers if they’re used when injured or when there is bad weather. I do have issues with people who only ‘cycle’ using these indoor trainers, and very rarely venture outside..
    They do nothing for bike handling skills……you’re not going to end up like MvdP or Schurter after using them – and they won’t give you road awareness.

  20. Bit of a question. I went to watch the World’s today – it was a grim ride,but a great day.

    Loads of pro team buses were there. How does that work. Team GB had the Ineos bus,yet Ineos don’t have a female team and the team had riders who ride for other teams, who also had busses there.

    So where does, for instance, a Spanish rider who rides for Ineos go. The Movistar bus which was clearly team Espana, or his trade team bus?

  21. Many of the Peloton customers are the well off white collar workers. A lot of San Francisco, New York/Boston style coastal users. Folks that view it as a time-saver, instead of going to spin/gym class, they can pick their time and enjoy a well-produced live interaction that keeps them motivated. The $40/month cost is a drop in the bucket compared to the value of the time they save. These are folks that can then order food from uber eats after their workout or have their grocery delivered to them.

    Most of these folks get smoked in a real ride as their short classes are not the same as riding for 2 hours and then doing a nice climb. That said, many of them haven’t ridden outside on a regular basis since they were kids. As many of you know Peloton also has a treadmill, and you call also get arm workout in using hand weights.

    If anyone thinks that Peloton dropping from $29- $25 is horrible, please look at many other IPOs. In reality, there is a survivorship bias in the SP500, but a massive number of Nasdaq stocks are not long term winners. (The worst IPO ever comment above – please take google on 101). Many of the Wall St analysts, and portfolio managers, Hedge funds folks etc – will be Peloton users (the core market). The reality is that they are currently making their buyers healthier. As such they may continue to evolve. It is fashionable to have a Peloton.

    A friend bought a Peloton 6 months ago – his wife has used it 29/30 month when they are at home. He stopped riding and instead does 30-45 minute Peloton spin classes.

    One of the key differences between Zwift and Peloton, on Zwift (and similar), adjust the trainer to make it harder based on the terrain. On the Peloton you manually adjust it like a spin cycle.

    I don’t live in a coastal area, but I would postulate that the affluent Peloton users, may increase the number of buyers of Bicycles, so they can “try” the real thing on weekends after a year or two. I doubt they stick with the real thing (you folks that live in the coastal areas my know much more on this).

    From what I understand from others; the technical team at Pelton is at least a few years ahead of the much smaller team at Zwift as far as the quality of output.

    Wahoo is doing well from a volume perspective in trainers, they are growth equity funded, instead of venture capital funded so they need to generate cash flow. Garmin (GRMN) bought TACX. As a company, they are growing profits and valued more rationally at $16B.

  22. Welcome back sir! Just in time. Pedaling indoors is fine for whoever wants to do it, whether they pay or not. Just don’t tell me it’s CYCLING and we’ll all be fine, OK? IMHO the only cycling that happens indoors is on a velodrome.
    Meanwhile, in your absence I found that Hambini guy on Youtube…what a hoot!! All kinds of marketing-maven BS cleverly and amusingly debunked. I’m surprised the industry people he’s skewering have (so far) been unable to have him banned or censored.

  23. One of my mates has pelotón, seems ok but a bit culty on the lines of cross fit. But if it gets people exercising then all good! A bit worrying that they think they own the word, reminds of when Specialized thought they owned the word Roubaix! But sadly that’s par for the course for these US companies. In general I’m a big fan of indoor trainers especially in winter as I can’t stand riding in bad weather but this whole Zwift world champs is utterly ridiculous!

  24. One thing unmentioned about the utility of smart trainers is winter sunlight. Yeah, riding in the cold and wet can be a PITA, and the cleanup even more so (esp. if you live in a tiny upstairs apartment with all your bikes on wall hangars), but what destroys my late fall/winter riding is the short days. My wife and I aren’t comfortable riding in the dark, esp. in bad weather. With all the gearing up/cleaning up issues on top, that puts us into a place where we only ride on weekends, if our weekend isn’t packed with other activities, and so our mileage plummets for months. Probably 80% of my riding last winter was my very short commute to work.

    I hated the dumb trainer we had before, but I’ll be buying a smart trainer in the next few weeks and signing up with Zwift or TrainerRoad or something. Looking forward to being able to get in an hour or two at my convenience, with slightly more realistic “road feel” and something to look at that relates to riding. It’ll also be interesting to use a power meter for the first time. I expect that come spring I’ll actually be in good shape, instead of starting over with my conditioning as has been usual. I don’t expect it to be as good as riding outside, but it will still be riding.

  25. Peloton has hit a $150M bump in the road;
    “Peloton is a textbook willful infringer,” says the lawsuit (citing numerous music copyright infringements made in the name of National Music Publishers Association) which was filed in a U.S. district court in New York on Tuesday. “[T]here is no doubt that Peloton’s infringement was and continues to be knowing and reckless. Peloton fully understood what the copyright law required, having entered into sync licenses with certain other copyright holders, while trampling the rights of Plaintiffs by using their musical works for free and without permission.”
    How’s their share price doing now?

Comments are closed.