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Peloton's IPO Is Clouded by Its Legal Fights

Peloton's IPO Is Clouded by Its Legal Fights

(Bloomberg) -- Peloton Interactive Inc. is stuck in a legal rut before it can get its IPO really up and running.

The biggest thing in home exercise has 500,000 subscribers prepared to pound the treadmill or pedal on one of the company’s Wi-Fi-enabled stationary bikes, which stream live and recorded classes from its New York-based studio. And that’s a problem. Pushing yourself to the limit in your apartment is fine, but doing so while grooving to James Brown isn’t.

Music publishers are seeking damages of $150 million, saying the company used more than 1,000 songs in its workout videos without a license. If Peloton can no longer play some of the voices the lawsuit mentions -- Justin Timberlake and Drake to name but two –- there’s a risk user growth could slow.

Peloton’s response: a countersuit filed at the end of April that accuses the National Music Publishers Association of antitrust behavior. The company declined to comment further yesterday because it’s in a quiet period before the offering.

And there’s another obstacle. A review board within the U.S. Patent and Trademark Office will take second look at the validity of three Peloton patents after finding that Flywheel Sports Inc. has established a “reasonable likelihood” of winning its argument that the patents cover old ideas.

It all adds to CEO John Foley’s challenge of trying to nurture his unicorn into a public company. On Wednesday, the company took a step closer to its IPO by submitting draft listing documents to the U.S. Securities & Exchange Commission -- four months after people familiar said the listing could value the company at more than $8 billion.

Peloton's IPO Is Clouded by Its Legal Fights

Peloton is trying to get a piece of the investor craving for listings highlighted this year by Lyft Inc. and Uber Technologies Inc. But for every success such as Beyond Meat Inc., there’s the risk of a flop -- witness meal-kit startup Blue Apron Holdings Inc., down over 90 percent from its IPO price. And while Peloton likes to differentiate itself from the fitness hardware sector and call itself a media-tech company, the slumps at GoPro Inc. and Fitbit Inc. are a reminder that what’s hot in training today is tomorrow’s meme.

“There is a market for this amongst fitness-minded people and people with limited to no access to physical locations,’’ said Santosh Rao, head of research and partner at Manhattan Venture Partners. “But the upfront investment in hardware, the monthly fee, albeit reasonable, could be a limiting factor for gaining mass penetration.’’

For now, the copyright issue is more of a speed bump than an existential threat to the company, according to Rao.

Staying Power

Foley remains bullish and expects to be able to convince investors that his business has staying power even in the face of the notoriously fickle exercise industry. Subscriptions currently run from $39 a month with a bike or treadmill, to $19.49 without one.

At a recent New York event called Homecoming, Foley said the company could grow to 100 million subscribers. He plans to convince some of the 23 million Americans who have treadmills in their home, to transform their set-up into a boot camp. Also in Peloton’s favor and unlike some other unicorns, Foley says his company is profitable.

Peloton is hitting two of the biggest trends in fitness -- group training and the use of technology -- according to Brad Roy, editor-in-chief of American College of Sports Medicine’s Health & Fitness Journal.

“Group exercise is popular because it’s fun and because of the social interactions that lead to accountability to others and the ability to challenge yourself against others,” said Roy. “Peloton is doing this with technology, but it comes with the downside of lacking face-to-face social interaction.”

That might help to explain why Peloton likes to market itself as a media technology company, rather than an equipment maker.

Robbie Kellman Baxter, author of The Membership Economy, cited the example of how Apple Inc. is trying to boost revenue from media and software content.

“It’s the subscription revenue that makes them interesting,” she said. “Peloton is well-positioned for this model.”

--With assistance from Julie Verhage.

To contact the reporters on this story: Hailey Waller in New York at hwaller@bloomberg.net;Brandon Kochkodin in New York at bkochkodin@bloomberg.net

To contact the editors responsible for this story: James Ludden at jludden@bloomberg.net, Matthew G. Miller

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