The EconomistSeptember 7th 2019 Business 612
A
s anyone ina CrossFit class or Bik-
ram-yoga studio will tell you, fitness
is full of fads. Few make it to the stock-
market. But on August 27th Peloton, an
American firm founded in 2012, an-
nounced it had filed paperwork for an
initial public offering. Peloton describes
itself as a “technology fitness media
design software retail product apparel
experience logistics” company. Its in-
vestors reckon it could be worth $4bn.
Stripped of the aspirational jargon,
the firm is in the business of selling
high-tech (and high-priced) home exer-
cise bikes. Each bike, which costs $2,245,
comes with a touchscreen, a version of
Google’s Android operating system and
an internet connection. For a monthly
fee, users can tune into streamed exer-
cise sessions, either live or pre-recorded,
complete with leaderboards and statis-
tics. The effect is a mix of a studio spin-
ning class and a YouTube live stream, as
perky instructors give shout-outs to
individual users who are puffing away in
their living rooms hundreds of miles
away. For those who dislike cycling, a
$4,295 treadmill is also available.
Like many of the current crop of tech
“unicorns”—private companies with a
valuation of $1bn or more—Peloton doesnot do anything so unfashionable as
making money. It lost $196m in the 12
months to June, up from $48m the year
before, as it threw money at attracting
new customers. But its efforts seem to be
working: it has 511,000 subscribers, more
than double the number last year. Rev-
enue has doubled too, reaching $915m in
2019 (see chart). It is popular among
trendsetters. David Beckham, an ex-
footballer, is a fan, as is Barack Obama,
an ex-president. That aspirational glow
allows the firm to get away with gross
margins on hardware of 43%, higher
even than Apple’s famously lucrative
gadgets. Despite its high prices (or per-
haps because of them) it also boasts
enviable customer loyalty.
Exercise-bike makers used to be in
the manufacturing business. But Peloton
makes about 20% of revenue from sub-
scriptions, and the share is rising. Mar-
gins here are mediocre but should im-
prove as content-production costs are
spread over more users. The shift il-
lustrates a broader trend: thanks to the
internet, industries that used to be about
products are increasingly about services,
too. This lets firms replace unpredictable
sales with a steady stream of subscrip-
tion revenue. If they can pull it off.Le maillot jaune
High-tech fitnessPeloton is the latest example of how the internet is replacing products with servicesSpinning upSources: Company reports;
KeyBanc Capital MarketsPeloton, revenues,$bnHardware, gross profit margin
Q2 2019 or latest, %Peloton, share of customers cancelling subscriptions
Annualised, %Software-as-a-service company average**Median response from 2017 survey of 162 software-as-a-service companies
†Electronics ‡Exercise equipmentFinancial years ending JuneOnline services, gross profit margin
Q2 2019 or latest, %00.20.40.60.81.02017 18 19Exercise equipment
Subscriptions
Other0 20406080100
Slack Technologies
Zoom Video
Communications
Apple
Peloton
Spotify0204060
Peloton†‡Apple†
Samsung†Nautilus‡Dorel‡2016 17 18 190510152025ber 3rd it apologised to users and pledged
to protect their personal data “in every pos-
sible way”.
China’s freewheeling internet users
hand plenty of precious information over
to the country’s data-grubbing apps. A re-
port published last month by a Chinese
cyber-security think-tank found that 1,000
of the country’s most-downloaded mobile
applications hoover up an average of 20
types of data from each user. These often
include call logs and videos of no obvious
relevance to the apps themselves. And the
notion of digital privacy seems almost
quaint in the face of the vast data-gathering
apparatus of an authoritarian state that re-
gards public consent as optional at best.
So why did zao hit a nerve? One reason
is that it appears to belong to a new crop of
apps that generate “deepfakes”, computa-
tional creations that use artificial intelli-
gence to doctor video footage. One form in-
volves pasting a face onto someone else’s
body—in zao’s tantalising offering, your
kisser can be stitched onto the svelte sil-
houette of an actor or actress in a hit film or
television drama.
Until recently such fakery had required
hundreds of images to conjure a convinc-
ing clip. But deepfake technology has rap-
idly improved. zao’s winning claim is that,
as its slogan promises, it takes “just one
photo for you to star in all the world’s
shows”. But for the best result, zao requires
precise facial mapping, which users can
feed into the app by following prompts to
blink and move their mouths about.
When zao’s grasping terms of service
came to light, many users were alarmed at
the idea of these biometric data being mis-
used. Facial verification is being widely
tested in China: to pay in supermarkets,
glide through the gates at railway stations
and even withdraw cash. On September 1st
Alipay, a big payment app, assured users
that “images created through face-swap-
ping apps, no matter how realistic, cannot
trick our system”. The government, too,
has taken note. On September 4th it sum-
moned Momo, a Chinese dating-app giant
with ties to zao, to explain itself and
launched an inquiry into the company’s
“data-safety issues”.
The state’s reaction continues its
clampdown that began in January on non-
consensual harvesting of personal infor-
mation (by private firms, that is). Citizens
are increasingly anxious about online
fraud. More than four-fifths of respon-
dents to a survey last year by the China
Consumers’ Association said they had suf-
fered from data theft. In an unusual case in
May, a man from Jiangxi province sued
Tencent, the internet giant behind WeChat,
for sharing his personal data across its
many services without his approval. The
court ruled in the plaintiff’s favour—and
ordered Tencent to stop the practice. 7