Two brands that have been the darlings of Wall Street have turned into a disaster for investors: Netflix stock is down about -65 percent over the last 6 months (as of April 20) and Peloton is down almost -80 percent over the same period. Those numbers are not just small corrections. They show that, fundamentally, investors don’t believe in the ability of both brands to grow. This is relevant also for luxury brands because both brands have been the market makers in their respective categories: they focus on premium content and execution.
Just to put some perspective into the magnitude of this value decline: the collapse of the market capitalization of Netflix was more than $50 billion (322.5 billion RMB) since the recent announcement of its losing 200,000 subscribers in the last quarter and forecasting an estimated additional loss of two million subscribers in the next quarter, according to The Hollywood Reporter.
Bill Ackman, the hedge fund legend, activist investor, and Pershing Square Capital Management founder, bought $1.1 billion (7.1 billion RMB) in Netflix stock in January. He has now sold his entire stake in the company with massive losses. In a shareholder letter Ackman wrote, “in light of the enormous operating leverage inherent in the company’s business model, changes in the company’s future subscriber growth can have an outsized impact on our estimate of intrinsic value.”
Hence, the reason for the divestment is a reevaluation of the true value of the company. In a nutshell, investors like Ackman don’t seem to believe that the stock downfall is a short-term blip, but rather a fundamental correction due to a much-reduced brand equity. Elon Musk recently tweeted about Netflix as “unwatchable” due to what he calls a “woke mind virus.”
Peloton has been a similar case. The brand was what many thought to be the future of fitness with meteoric growth at the beginning of the pandemic. Then, suddenly, demand for the devices cratered, and the founder and CEO John Foley was replaced by the former Netflix CFO Barry McCarthy. Replacing Foley was preceded by many controversies, including being seemingly tone-deaf when the design of the Peloton Tread+ caused severe accidents which later caused a recall, and a lavish party while the stock of his company tanked.
Both companies, Netflix and Peloton, now scramble to improve their numbers short term. Peloton recently decreased the price for their hardware significantly (I have called price cuts and promotions many times the “easy growth trap” that can lead to an irreversible destruction of brand equity) and increased the price for the monthly subscriptions by about 10 percent. Netflix wants to add advertising at least to some tiers, a massive departure from their initially disruptive model. The brand also wants to crack down on shared subscriptions which it unofficially tolerated for many years. Hence, both brands risk alienating those early customers that helped them grow initially, never a clever move.
These moves may turn out to be disastrous in the long-term and they don’t acknowledge that the root cause for the underperformance may be in their own product and service offerings and in massively emerging competition.
Netflix was a cord-cutting disruptor when cable TV was dominating all around the world. The brand was a “blue ocean” for many years offering a low-cost alternative to the live programming of traditional media channels and being advertising-free was one of the major attractions. Then came massive competition, from Apple TV+ to Disney+, from HBOMAX to Amazon Prime TV, to name a few. Instead of continuing to innovate, Netflix focused on “more of the same” with higher prices. When a brand faces competition, there needs to be significant differentiation to win. The delta to the challengers became narrower and narrower.
Similarly, Peloton moved from innovator to “happy underperformer.” When Peloton launched and was fully focused on an immersive spin class experience, it had lots of 45–60-minute classes and provided a similar experience to a spinning studio. Customers were on fire and the brand had a cachet almost like Apple or Tesla. The experience was unmatched. However, over time, classes got increasingly shorter with a focus on the 15-30 minute versions. Brand experiences became repetitive. Adding running, strength training, yoga, and meditation to the platform made the offering more diverse, but the quality of many of the classes became rather underwhelming in an attempt to cater to a wide array of members. Today, taking a Peloton class feels increasingly like “I have seen it before.” The excitement of the innovation, of the new, has gone.
By cutting the price of hardware dramatically, Peloton has devalued its brand equity significantly. Once, it was an aspirational purchase, almost like a luxury for oneself; now it feels like an increasingly “cheap” brand that is constantly on sale. Continuous promotion angers existing customers who paid much more for their bikes and attracts mainly price-sensitive customers who may not be very loyal over time. In email newsletters Peloton constantly advertises the new low prices to customers who already have a bike and paid more than double initially. This shows that in terms of marketing and content creation there is little focus on existing customers.
What Peloton should have done is to continue innovating around content, building up brand equity with exciting new machines and apparel that is exciting and innovative, and to focus on the experience of existing customers and on amazing content. It’s not enough just to rely on celebrity instructors and minor updates. Like Netflix, Peloton now has many competitors, from Apple Fitness+ to Equinox+, from Alo Moves to Mirror, and from NordicTrack to Echelon. The distance between the original innovator and the followers has been shrinking dramatically. I always ask myself why Peloton has not adapted to a content creation and social+ platform like the Chinese platform Keep, which is dominating digital sports in China.
I am not convinced that Netflix and Peloton reached a “natural cap” of their buyers and subscribers. The issues are much deeper — and are homemade. Cosmetic fixes will not solve them.
Both brands will only be able to return to a strong growth if they go back to what made them great initially: disrupting, influencing, exciting, and innovating. More of the same is never enough, hiking prices without giving customers more value won’t work, and devaluing the brand by constant promotions can destroy brand equity irreparably. Food for thought not only for Netflix and Peloton, but for any brand that faces increasing competitive pressure. Never settle!
This is an op-ed article that reflects the views of the author and does not necessarily represent the views of Jing Daily.
Named one of the “Global Top Five Luxury Key Opinion Leaders to Watch,” Daniel Langer is the CEO of the luxury, lifestyle and consumer brand strategy firm Équité, and the executive professor of luxury strategy and pricing at Pepperdine University in Malibu, California. He consults many of the leading luxury brands in the world, is the author of several best-selling luxury management books, a global keynote speaker, and holds luxury masterclasses on the future of luxury, disruption, and the luxury metaverse in Europe, the USA, and Asia. Follow @drlanger