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.