Music streaming with a fancy bike
Emailed on April 24th 2020 in The Friday Forward
After last week's feature on music sync rights I went down a music rights rabbit hole and landed on the shocking revelation that Peloton, the maker of those fancy stationary bikes that your neighbor, Stacey, won'tđź‘Ź stop đź‘Źtalking đź‘Źabout đź‘Ź, is actually a horrible business.
And it's not because it's a bike with an iPad strapped to it. It's because Peloton is really a music streaming service (already low margin) with a complicated hardware component, a SaaS model, and a content curation engine.
Peloton pays royalties to music rights holders (record labels, music publishers, artists, etc.) to play music in its live-streamed classes. It basically has to go through the same process for music licensing that streaming services like Spotify and Apple Music do.
But Peloton has it much worse: In addition to obtaining rights to play the music on its machines, it also needs so-called “public performance rights” since the music acts as a backdrop to a live-streamed class, which, in this case, is legally considered to be a live concert.
The numbers: In disclosures related to last year's IPO, Peloton made $181 million in revenue from subscriptions in Q2 2019. Over $104 million of that was spent on subscription costs of revenue, and music royalty fees was the largest variable cost under that.
In their S-1, Peloton noted that its already shaky music licensing situation could become even more compromised:
“We depend upon third-party licenses for the use of music in our content and an adverse change to, loss of, or claim that we do not hold necessary licenses may have an adverse effect on our business, operating results, and financial condition.”
The one major difference between Peloton and a service like Spotify is that Peloton can be selective about their music catalog. So they can manage expenses, to some degree, over time.
But you have to give the people what they want: After cleaning up their music catalog to comply with the proper licenses, a Peloton customer filed a suit against the company on behalf of himself and others, claiming that the removal of the songs and the associated workouts “significantly diminished the user’s experience with the products.”
