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Peloton, a fitness industry phenomenon, stumbles into legal mess

Peloton facing $150 million lawsuit
  • Given music's crucial role in Peloton's popular workouts, not having licenses for much of that music seems unfathomable to many.
  • The lack of licenses has landed the fitness machine maker in the middle of a $150 million lawsuit.
  • "I'm baffled by it," says one music industry attorney.
  • Peloton says it's removing the unlicensed songs, and the company's customers don't seem to be racing to leave it.

Devotees of Peloton's high-tech home fitness machines with tablets that stream music-driven classes have a question for the company: What were you thinking? The rapidly growing startup has blundered into a $150 million lawsuit by using unlicensed songs from top artists including Rihanna, Justin Timberlake, Lady Gaga, Bruno Mars and Ed Sheeran. 

"My reaction was that the site, the classes and everything look so well put together -- how on earth could they have not licensed the music before recording the classes and placing them online?" Peloton member Nicole Dunn told CBS MoneyWatch. Industry pros, too, said they're confounded by allegations that the maker of interactive stationary bikes, treadmills and other gear brazenly infringed on musical artists' rights.

"I am baffled by it," said music attorney Kamal Moo. "Usually, companies know that when you use outside content for anything, you need a license. You would think an executive or legal counsel would have brought it up and said, 'We have already licensed these compositions, but we can't use the other ones.'" 

"Netflix of fitness"

Founded in 2012, New York City-based Peloton has amassed a faithful, and generally upscale, following. Its stationary bikes retail for $1,995 plus a $250 delivery fee. Members also pay a $39 per month subscription fee to access live and on-demand classes. 

Music is a big part of the experience. Peloton's heart-pumping cycling workouts depend on companion playlists that instructors use to motivate riders. Competitive types can even compete in virtual races against their peers -- riders' stats are tracked through the app. The brand bridges two very different industries -- fitness and streaming -- and has even been dubbed the "Netflix of fitness." It's reportedly planning to go public this year in deal that could value Peloton at $4 billion. 

"Music is what moves us," Peloton wrote in an email announcing its new "Track Love" feature that allows members to add songs they hear in class to their own playlists and sync them with Apple Music or Spotify. "Whether you're powering through an interval on the Bike, charging up a hill on the Tread, or navigating your morning commute, music gives you that extra energy to get to where you're going." 

"Indeed, Peloton has publicly acknowledged that its consumers 'embrace music as central to the Peloton experience and consistently rank it as one of the top aspects of the brand,'" the lawsuit states. So why would a hot startup make what appear to be a major misstep? Entertainment lawyers have some theories.

Startup mentality

The music publishers' suit claims Peloton was a "textbook willful infringer" for using thousands of unlicensed songs over multiple years. More specifically, the complaint centers on synchronization, or "sync," licenses that cover a song's lyrics and melody and are negotiated with publishers to allow an entity to use a songwriter's composition in a video. So-called master use licenses cover the song recording and are owned by record labels. Publishers and record labels collect income from licenses and distribute a portion of it to songwriters, whose livelihood depends on license fees.  

Although that system is a well-established way of ensuring artists and music publishers are fairly compensated for their work, it's not uncommon for startup companies to use intellectual property before negotiating a contract, according to Owen Sloane, partner in Eisner's Entertainment, Media & the Arts Department. The theory goes that if the company becomes successful, intellectual property owners will recognize the partnership's value and be willing to negotiate contracts at lower rates. 

But no set fees are associated with sync licenses, and content owners might not ever agree to a business' proposed rate. This could be the case with Peloton and the music publishers that are suing it.

"It's a risk that a lot of these companies take, but in general I think it's a big mistake," Sloane said. "[The music publishers] might also be offended because they didn't get the license from the beginning," he added. If that's the case, "you're facing a pretty tough situation, and they can put you out of business, or at least make a big dent with a lawsuit for punitive and statutory damages," he said.

It's also possible that Peloton acted lawfully and did in fact secure the required licenses, according to Sloane. "There's one paragraph in the complaint that said Peloton might have secured sync licenses from other co-owners of the songs, and under United States copyright law, if you co-own a song with someone, each co-owner can license 100 percent of the song non-exclusively, subject to the obligation to pay the co-owner," he said. "I certainly would be surprised ... that they wouldn't take care of business," Sloane added.

"It's inexplicable"

David Israelite, president of the National Music Publishers' Association, said Peloton knew it needed sync licenses because it did actually obtain them for many songs -- and therefore knowingly acted improperly. 

"It's the most perplexing question as to why this company would know it needs a license, as proven by the fact that they went out and got licenses from some publishers, and be willing to use so many songs for which they did not have a license in their programming," he said. "I have no idea as to why they would behave that way. It's inexplicable."

Branding expert Kate Newlin said the suit could be the result of a cost-benefit analysis gone wrong. "There was probably a fair amount of cost savings involved in only doing it right half the time," she said. "Incompetence is the simplest explanation, but it doesn't hold up if they did it right some of the time."

Peloton would do well to quickly apologize -- and pay up. "It's a music-driven brand, and we are also a music-driven culture. When you try to cheat music that people care about and is giving them the energy to workout, you denigrate it," Newlin said. The company could lose members "if they care about the artists and they don't want to see themselves as cheating," she added.  

Peloton fans not sweating it

Despite the legal imbroglio, Peloton customers don't seem to be racing to ditch the company or pedaling over to rival Soul Cycle. Peloton CEO John Foley responded to the lawsuit by removing exercise classes set to the disputed tunes, while assuring fans that their experience wouldn't be affected in the long term. 

"The unlicensed music issue has not affected business as usual. I believe it was a rookie mistake made by a new business [before it gained popularity] and not done maliciously," said Melissa Adkins. "This will not deter me from being a loyal customer." Peloton cyclist Chris Martin said he holds the brand in high esteem, and has "full confidence that Peloton will do right by the artist." 

The company is adding 20 classes per day to its catalog, which still includes thousands of them. "While it's not ideal, there are still plenty of rides to choose from, no ride data as been deleted and Peloton was proactive about letting users know what was happening. I think Peloton is handling this the best they can," Peloton cyclist Jamie Killin told CBS MoneyWatch.  

Other riders were disappointed that many classes had disappeared, yet the cost of membership remains the same. "This is crap," said Reddit user SquareInsect. "For all the money Peloton is taking in, they could make agreements with the publishers they're missing, and keep these rides. I only ride recorded rides due to my schedule. The catalog of rides is seriously impacted, but I'm expected to pay the same $40/mo.," he said. 

A customer service agent for Peloton said it isn't offering any compensation to members, but the company hopes the new classes will appease peeved riders. "We are very aware of the classes that have had to go bye-bye, but they are creating more and more that you can enjoy."