When Debt Is The Product

The centerpiece of any living room, an exercise bike.

A lot of news is being made surrounding the upcoming IPO of Peloton, the maker of connected, screen-equipped, home exercise bikes. They’re currently valued at 8 billion dollars, and expected to IPO this year. Yes, you read that right. In 2019 an exercise bike company is being valued at 8 billion dollars. In the late ’90s, the idea that the future of home exercise equipment wouldn’t become anything more than an expensive thing to drape laundry on is surprising. Of course, my first thought when reading about Peloton’s wild success was “I’ve got to see the design of these bikes.” And make no mistake, Peloton’s industrial design and user experience are quite lovely — but it’s nothing immediately groundbreaking.

You know you gotta get that family package! At 0% APR, they’re practically giving it away.

So why the massive IPO? While I’m no economist, I did do some research, and it does look like there are two factors at play here. First, user acquisition and thus user data are on the steep rise for Peloton. The user data is far more abundant than anything gained by any cycling gym/cult, like SoulCycle. Peloton not only knows when you exercise, but for how long you did, and in most cases even your heart rate while riding. With the push toward connected health devices both by users who desire self-tracking -and- health insurance companies looking to monitor their users in exchange for “discounts,” it’s no wonder this data is valuable. The second factor though is slightly more insidious: it’s how Peloton is acquiring users. Each Peloton bike is well over $2,000 and requires a $39/month membership to get the classes streamed to that beautiful screen on the bike. So where is this money coming from? Are that many users forking over $2000+ to join Peloton? No, not upfront at least — the majority of users aren’t buying the bike. They’re financing it.

It appears that the exercise bike, arguably a once stagnant industry, is now being propped up by “purchasing” from the future. Peloton is essentially building a model, not unlike many other “solid” industries — colleges, automobiles, housing — by making a user base of debtors and running their business on other people’s credit. Users, being driven by brand and identity are taking on aspirational debt, that reflects less on the product or experience, and more on who they see themselves as. Much like a fad diet or a new year’s resolution — people are inspired to pull the trigger in a moment of inspiration and self-care — and because the upfront costs are virtually negligible, they agree to a “small,” monthly, remora-like payment, that hitches a ride on their budget.

They always get you with the fees.

This model of debtor funding isn’t new, but it is dangerous if it becomes a large part of the market. When an economic downturn occurs, it’s the excesses and niceties that get cut first — gym subscriptions historically being near the top of that list. If someone’s looking to make ends meet when times are tight, the $100+ a month to Peloton is probably one of the first things to go. Herein lies the classic problem of lending — at the point where someone is ready to call it quits, they have only paid part of their debt. But it’s still far less than the debt they took on, and far less than the money Peloton recorded as an upfront sale. At this point, the user is defaulting on their loan, and the item they were leasing is also worth a lot less than its original value. A sweaty, used Peloton isn’t exactly market-ready for full resale (and it still requires the $39/month content subscription that arguably makes it truly valuable). These effects cascade back up the chain, with a near value-less asset requiring maintenance, and defaulting debtors affecting the broader economy. Does this sound familiar?

Okay, but this is just one company — it’s not some ominous indicator that overvalued consumer product companies, primarily backed by loans, will cause a similar downturn to the sub-prime mortgage crisis when people default on these myriad small loans? Hopefully not, but is this a company model that we as users should get behind? Is this a sustainable business model for designers to work within? At the risk of sounding like Victor Papanek, it does feel like our collective skills and abilities could be better spent on solving more pressing problems than designing debt-backed subscription products. (Full disclosure: I’m just as guilty of creating tchotchkes as the next designer. “Do as I say...” etc.)

Much recent design has satisfied only evanescent wants and desires, while the genuine needs of man have often been neglected by the designer.
— Victor Papanek

As product designers, we should indeed be focusing on solving more significant problems, like personal mobility — providing affordable, public transportation access to those who can’t afford a car — like Uber and Lyft are doing? Wait, aren’t those highly valued companies looking to IPO too? Ah yes, Uber’s IPO valuation is at $84.5B, and Lyft was valued at $24B. Both Uber and Lyft took losses last year of $1.9B and $911M respectively. And both have indicated that they’ll not be making a profit any time soon, which is well within their right. With the ubiquity of ride-sharing, it’s hard to imagine that neither are making a profit, but perhaps like Amazon, they’re investing all their VC money and earnings to seek growth? They both are. In fact, they’re investing by incentivizing new drivers with (wait for it…) “backed” loans to buy new cars that drivers can use for Uber and Lyft. Uber’s even offering $1000 “cash” up front — in the form of an advance that is automatically deducted from the rider’s earnings as they drive. And their car loan payments are tied to this mechanism as well, meaning drivers don’t start making money until their loan is paid first. It certainly makes sense, but this all sounds a bit insidious again, doesn’t it?

Additionally, we are now looking at a vast market of auto loans — on consumer-grade cars that are being driven like fleet vehicles — thus adding more wear and tear and depreciating their value. Who will be looking to buy that 150k+ mile Honda Civic? I mean, why buy the car when they could just Uber everywhere? In a few years Uber will be automated anyway… oh, shoot. Once again, we have massive valuations centered on “user acquisition,” backed by a mass of debtors paying off depreciating physical goods. As it stands, Uber already loses 58 cents per ride — and that’s with its drivers making a shocking $3.37/hour on average (pre-tax). Like the remora-esque monthly payment to Peloton may feel invisible, so does the wear and tear on the new vehicle for the Uber/Lyft driver. But as the car breaks down, and the loan breaks down the debtor defaults, and we have a massive amount of unrecoverable debt. This is to say nothing of the fact that Uber and Lyft require a credit card to use, so they’re hardly “public.” Nor does this get any better when we calculate in the damage these services do to the public transit infrastructure (the true fallback if these services die off).

A developed country isn’t a place where the poor have cars. It’s where the rich use public transportation.
— Gustavo Petro

A WeWork office, with open meeting space and… ping pong.

This is happening elsewhere too. WeWork is doing the same model with investor and loan-subsidized desk “rentals” in prime office buildings with massive mortgages. WeWork is valued at $47B and operates at a loss of $1.95B. WeWork claims to be "in the early stages of disrupting real estate, the largest asset class in the world” which judging by the pattern we’re looking at, will probably happen for better or worse. Even the mobile phone is firmly ensconced in this financial mechanism — with every phone contract acting as the loan that subsidizes the “value” of the phone. Because of the dependency on software to function, the phone depreciates sharply with every yearly update. This has even changed the mindset of buyers to become that of “its time to get my “free” upgrade” rather than my phone, a daily-use pocket computer, should function at a higher standard. Apple and Google have both stated desires to end this with more robust phones, better software, and better recycling programs — but that doesn’t stop the reality that most people’s phones just don’t work well after a year-or-two.

So what is the point of this (slightly grim) rundown of overvalued companies, debt traps, and depreciating hardware? Aside from this post being a slightly indulgent summation of a lot of articles and podcasts (probably NSFW) I’ve been coming across this month, it’s ultimately a call to be more mindful of our roles as consumers and designers. That call is certainly a reminder to me to fight the siren song of consumption for consumption’s sake. To reevaluate what I need, what I own, and what I’m merely subscribed to. I’m on an annual phone contract and have ridden in my fair share of Ubers, but this past month has made me strongly reconsider my options for both. Again, at the risk of sounding like a Luddite, we can all choose to use these services or not — and choose to design for these companies or not. Both seem like tough decisions, albeit first-world ones.

Does anyone else remember that Uber’s first slogan was “Your own private driver”?

Does anyone else remember that Uber’s first slogan was “Your own private driver”?

Credit and debt, the mechanism that makes all of this possible, is a limited path that leads towards a version of “luxury.” Peloton feels like a private trainer; Uber feels like a private car; WeWork feels like owning an office; an annual iPhone feels like the bleeding edge. But none of these subscriptions are actual ownership of assets — they arguably aren’t even luxurious experiences (if it can even be defined in this context) — they’re just debt and short-term positive feelings. It’s not necessarily thrifty to be paying through small monthly financing, it’s usually precarious and anxiety ridden. And it’s far too easy to end up in the place where you can’t pay for any of these “luxuries” and thus lose your credit — or worse, become apart of the millions that are completely un-banked due to debt.

This model of leasing is taking previously available items (affordable transport, communication, etc.) and putting them out of reach of those who don’t have steady income or credit. Yes, buying these items outright is definitely a financial challenge — ownership of a tool, rather than being owned by the debt is still very much a real luxury. Financing is an almost inevitable part of access to more significant “necessity” purchases like a car or home. In large part, financing itself isn’t the problem when used mindfully, but we should be far more cautious of products asking us to finance them from the start. When these products need special financing (directly or indirectly) to make them “affordable” at the moment (like Peloton bikes or Uber/Lfyt rides) then we should be wary that the company is just using the financing to offset the real costs in the long-term, for the sake of growth — worker well-being and market sustainability be damned. In these instances, they are using the aspirational trappings of “luxury” to sell you something that is already nearly free if a user knows where to look, and not take the bait of immediate consumption. The choice lies with the consumers: lease something in the present and be owned by the debt of their objects, or intentionally buy-it-for-life and have the pure satisfaction of ownership, no strings attached.

Annual or Perennial?

If you want to go fast, go alone. If you want to go far, go together.
— African Proverb, in the opening of China Achebe's, “Things Fall Apart”

I recently came across this mini-documentary Stringbean, chronicling the record-breaking, self-supported hike of the Appalachian Trail (AT) by Joe "Stringbean" McConaughy in a stunning 45 days, 12 hours, and 15 minutes. For context, the next closest time was set in the year prior by Karl Metzer, during a supported run taking 45d 22h 38m. The difference between a supported and self-supported run largely hinge on the immediacy of the help you get. Supported runs are an active group effort, with team members stationed on the trail ahead, helping the runner along the way. Self-supported runs are meticulously planned, and completed alone with re-supply stations being contents mailed to oneself. It should be said that even supported, it’s an astonishing feat to pull off an AT run of this speed. But Metzer’s run really draws McConaughy’s achievement into sharper contrast considering his lack of immediate help during the attempt.

Coincidentally, just before viewing Stringbean, I caught the documentary Free Solo (now available on Hulu) chronicling the free solo climb up the 3,000ft tall face of El Capitan by Alex Honnold. Again, here's a human achieving a remarkable feat — both in mental and physical endurance. On the side of El Capitan, if one is tired or injured there’s no place to stop or break like there is on the AT, the danger is truly in another class altogether. Even climbs of El Capitan with equipment are a real challenge, and to do so without any backup at all is enough to give me anxiety as I write this. Both the achievements of “FKT-ing the AT” and “Free Solo-ing El Capitan” are amazing and unbelievably impressive. We all need to see the record breakers and hear their stories for that vicarious motivation and experience — I certainly won’t be attempting those records in my lifetime (side note: I would love to hike the AT before I die, but certainly not speedrun it). All that being said, Free Solo and Stringbean left me with far more thoughts about the kinds of people it takes to achieve these feats, rather than nature or equipment (which is where my mind usually wanders after these kinds of documentaries).

On a long journey, even a straw weighs heavy.
— Spanish Proverb

In both cases, these record breakers are practiced planners, seeking a lighter approach to their craft. For Honnold, weight is obviously critical, to go up at the speed necessary, he needed to stay light — it was just him on the rock face. For McConaughy, every unnecessary ounce is torture and a hindrance to speed as well. At a glance, McConaughy’s setup rings familiar to fans of Ray Jardine’s “Trail Life” guide to thru-hiking “The Ray Way.” Joe is wearing trail running shoes, not boots. He carried an 11-ounce custom prototype backpack with no frame, and at its heaviest, his bag weighed only 28 pounds (not a lot when considering the amount of food he needed to carry and consume every day). A oft quoted line by Yvon Chouinard in his classic book “Let My People Go Surfing,” is “The more you know, the less you need.” That notion is undoubtedly proven out in these two feats — both Honnold and McConaughy have attributed their success to intensive practice and planning — and that allowed them to carry only what was absolutely needed. 

Honnold spent over a year training the routes of El Capitan, returning to his “basecamp” van and girlfriend Sanni, to recharge and plan. McConaughy spent four months planning times, routes, and resupply locations with his fellow ultrarunner fiancee Katie, along with training runs of AT sections beforehand. However, it’s at this point where the two differ, and why I’m writing this post. When viewed together, Honnold’s approach to his task is analytical and calculating, seeking an obsessive goal bordering on sociopathy— McConaughy is determined but joyous, a challenge he aims to conquer with the support of others. At one point in Free Solo, Honnold all but says he has no obligation to be safe for his loved one — that he’s doing his best and to not climb would only leave simmering resentment towards those who’ve asked him not to. You can see that clip below:

It was the moments like this that stuck with me in Free Solo and drew such a sharp contrast to Stringbean. Both were stunning feats of human ability, achieved by practice and planning, but done so in vastly different ways when it comes to the emotional context of their support system. I bring this distinction to the forefront not to diminish or promote one over the other — but just to try and acknowledge the difference and the paths one can take to “success.” It’s hard to not see Free Solo as a glorification of having a singular mindset toward a goal, with the hope that one’s support system tolerates the questionable behavior required to meet the challenge. Our society sometimes needs people with near sociopathic intent to push the boundaries of what’s possible. Culture holds up those people as motivating examples, while taunting us with their less than idyllic moments. Steve Jobs and Mark Zuckerberg come first to mind, both “geniuses” incidentally with dramatic films portraying their more monstrous sides. Yet, at the same time, would society be better off if there were more singular-minded humans, hell-bent on achieving? Or would we not have a better foundation, and better communities, if we held up the examples of those who still achieved greatness by planting roots and building a mutually supportive system?

After circling around these examples, personally, I lean towards believing the latter. We are surrounded by examples of people who achieve greatness in a bold, singular way — and their mentality is lauded. In the corporate space, the growth of Amazon, and it’s ever-widening offerings are rewarded by Wall Street, consumes tremendous ecological resources, and is hated by its overworked “temporary” employees. Socially, there is constant cultural messaging encouraging us to ignore “the haters” and cut out of our lives “those who hold us back” and to “hustle 24/7.” But it’s hard to pinpoint what this “personal brand” mentality leaves us with for the long term. That behavior may net achievement in the short term, but it consumes a lot to gain something so quickly. In other words, it’s not sustainable. Sustainability is frequently top of mind in product design, and for a good reason — we consume too many resources for such little gain. But I am beginning to wonder if we should not also consider sustainability more deeply in the process of achievement, of living itself. At the risk of erring into something akin to “lifestyle design,” I’ll just say that I see these two achievement stories as a difference in values-based living.

Author Austin Kleon relates this difference in lifestyle to the difference in the gardener’s mindset toward “Annuals” and “Perennials.” In his excellent book, “Keep Going,” Kleon encourages readers to see their work as seasons, and that like perennials, they will have times of dormancy building for the bloom. He encourages that we seek motivation from masters of their craft who are the top “8 over 80” rather than “30 under 30.” In a world that is continuously encouraging that we broadcast our immediate results, this idea of slowing down and building roots for a more fruitful life overall, almost feels radical. Some of us will strive for an annual difference, continually expending energy to plant for a big immediate harvest — reaching the peak of El Capitan in a matter of hours. And others will strive for endurance, with deep roots that draw energy from more than just the initial planting, to cover the entire AT in 45 days. Society needs both, but it feels profoundly important to examine which route we each want to pursue as individuals.

So are you an annual or a perennial?