MoviePass Surge Pricing Disrupts Decades of Uniformed Movie Pricing

Have you ever wondered why a movie ticket to a major blockbuster event movie is the exact same price as a niche documentary film?   On any given night across the country, multiplexes are playing major event films like Black Panther, or Incredibles 2, and charging the exact same amount of money for those films as they are charging for little known or little-followed indie films or niche documentaries.   The reason ticket prices are essentially the same for low demand films as they are for high demand films stems from the bizarre cabal like history of Hollywood, where major studios were vertically integrated film businesses that controlled the entire end to end ecosystem of films from production all the way through to the theaters.     These big oligopolies were broken up through a series of federal lawsuits dating back more than 75 years ago.   A landmark piece of legislation called the “Paramount Case” ended the practice of vertically integrated film businesses, and set up the bizarre uniformed pricing system we have today.

Today’s announcement of surge pricing by MoviePass just turned all of this history on its head.  

I am a little short on time today, as I have a debate with super bear Mark Gomes later this afternoon.  That I hope you will all have a chance to watch.  So I am going to keep this a little bit short.

The Paramount case began in 1928 but took  14 years to finally settle the case.   The end result was these three new legal rules governed the industry: (i) no direct or indirect intervention in box-office pricing by producers and distributors; (ii) no licensing negotiations except on theater-by-theater and movie-by-movie bases; and (iii) no vertical integration between the Paramount defendants and exhibitors. The courts intended these rules to open the market to independent producers and distributors, to allow exhibitors to select which movies they would show, and to remove artificial constraints on ticket pricing.   The decision forced the studios to sell off their ownership in theaters around the country, changing forever how the theater business supply chain worked for Hollywood.

Unfortunately for consumers, the rules ended up with a bunch of unintended consequences.   Including making popcorn insanely expensive at theaters.

“This Supreme Court decision still controls movie distribution and exhibition in the U.S., and today, studios split gross profits with theaters. But how they do it is pretty interesting.

During the first few weeks of a movie’s run, the studio receives the bulk of gross ticket sales. While the details vary based on deals between the theaters and the distributors, it’s quite common for the theater to fork over 90%-95% of the revenue from the film on week one, perhaps 80% on week two, etc. By the end of the movie’s run, when the fewest people are going to see a film, the theater is taking in the lion’s share of the gross. When averaging the whole run, the theater might only get 20%-30% of the gross ticket sales, with these numbers varying a bit based on a variety of factors.

As one commentator has noted, this system provides a strong incentive for the studios to make “movies with built-in demand – in the form of a superhero in the lead or a plot drawn from a hit book – and the potential to open with a bang.”

Over time, this has developed such that it’s not uncommon today for theaters to take a loss for a given movie based on ticket sales alone, particularly movies from major studios. There’s really little the theaters can do about this, however, as they have extremely limited leverage in negotiations (particularly for small theater chains). They can’t make the movies themselves, and certainly can’t turn away major blockbusters, lest people stop going to their theater(s). In addition, if a given small theater chain is dealing with a major movie studio, the studio may also say something like, “Well, if you don’t put this movie on 1/4 of your screens for this amount of time and give us X% of the gross, you’ll not be seeing any more Warner Bros. films offered to your theaters.” Major theater chains have a little more leverage in these negotiations, particularly when dealing with smaller studios, but still not that much in general.”

Theaters lack any leverage with the Studios based on how the Paramount decree decision was structured.    If you have the time it is worth reading the entire Stanford study on Uniformed Pricing,  if you don’t want to click and read, here’s the important summary on why fixed pricing persisted.

“The practice seems to persist partially due to misconceptions of exhibitors and partially due to distributors’ enforcement of uniform pricing. While distributors are not allowed to intervene in box-office pricing, occasionally they enforce uniform pricing by refusing to deal with exhibitors that wish to switch to variable pricing. Such refusal to deal may be legally questionable, but it is not in violation of the Paramount decrees and, to the best of our knowledge, has never been challenged by private parties or by the antitrust agencies. Presently, the distributors’ interest in uniform pricing seems stronger than that of exhibitors because they could be more affected by demand uncertainty, moviegoers’ unstable demand, and agency problems. In addition, uniform pricing may serve as a second-best solution to double-marginalization problems. Under present law, the first-best solution is not available because of the legal constraints on vertical arrangements.”

Basically the study concludes that the theater owners ended up with almost no leverage in how they could buy films from studios.   If a theater attempted to rock the boat with studios and do some form of variable or demand-based pricing, they could face being blackballed with the next big event film from that studio came out.    It also concluded that it may be a sort of “gentelman’s” agreement that has held together for many years, as the studios could actually charge more for high demand films, and the theaters could also technically charge more in certain markets where they had monopoly pricing power.   This is the argument of double marginalization.   It is reasoned that by sticking to uniformed pricing, both parties avoid a sort of price war in their respective areas of power.   Other arguments for uniformed pricing have historically been that it is too hard to predict demand.   That argument seems to be now obviously flawed.   It is pretty obvious these days when a major film like Black Panther, or Incredibles 2 hit the theaters that they are going to be very high demand films.

For investors of HMNY and MoviePass, today’s announcement is very important.  This is an act of total disruption to the theater industry.  Change is hard, particularly for those in Hollywood who are used to having things their way for many decades.   Introduction of surge pricing actaully helps theater owners tremendously, and it is something they could not do without risking being punished by the studios.   Studio chiefs and distributors will likely come out swinging at MoviePass even more than they previously have.   They simply do not like having a third party getting in between what has been a cozy and easy to manage relationship with the theaters.

There are a lot more implications here that I will write about soon.   Mark Gomes and I will be discussing many of these topics later today.

Tune in here!  https://www.youtube.com/watch?v=cN_VPOp16Xg

 

 

 

In Defense of Ted Farnsworth

While I have long been a relentless bull for MoviePass and its disruptive business model, I have at the same time been fairly negative, or at times, downright nasty in my opinion of Ted Farnsworth the CEO of HMNY and 91% owner of MoviePass.  My opinion is starting to change.

In this latest news cycle where MoviePass has announced their 3 Million Subscriber benchmark, Ted Farnsworth has done an admirable job of highlighting the multiple points of progress made by MoviePass, and he has done it without putting his foot in his mouth.

I have had my complaints with Farnsworth, and I believe he made an epic PR mistake by not clearly communicating exactly and precisely how he planned on funding the subscriber growth for MoviePass with an ATM offering.   And Farnsworth made matters exponentially worse by allowing that now infamous Variety article to quote him as saying he had a $300 million equity line of credit, when in reality he was speaking about the ATM.   This verbal vomit caused more confusion and distrust from retail investors, at a time when AMC and others were actively trashing the company’s business model.  It was disastrous for the stock price and created a lot of angry early shareholders who became bagholders very quickly.

This entire episode could have been handled so much better and would have saved the company and stockholders millions of dollars and shares of dilution had Ted and Mitch executed a better communication strategy.    To be fair, Mitch and Ted have both openly communicated that they love the fact that nobody believes in their business model, and that it is not attracting many viable competitors.   While I love the strategy of trying to operate a business in a sort of stealth mode of an unviable business model, they took that game too far to the edge.  You don’t want potential partners & consumers to have to question if they are about to do business with a company that could be failing imminently. And, if you are trying to raise money with an ATM offering, it would be much more efficient to sell shares for $3-4 vs .30-.40 cents.     This was not handled well, and it wasted a bunch of money for a lot of people, including Ted and Mitch.

I know people are still angry with Farnsworth, and I know Farnsworth has a history of failures that share some similarities to MoviePass.    It is understandable to me why many people want Farnsworth out of the picture.  I get it.

Let me explain why I think Farnsworth probably deserves a little more slack than many of the angry longterm investors have been giving him, and how I see him starting to improve.

First, let me address the known facts that Farnsworth has had more than his fair share of wipeouts in the past.  Farnsworth’s ugly past success record affords him little in terms of bragging rights or the benefit of the doubt.  That said, he has not been a total failure his entire life either.  One of the most wonderful, yet most difficult things for investors to deal with, in the American entrepreneurial system is we allow and embrace total and abject failer.  The wipeout, for better or worse is part of our system of capitalism.   We have decided as a society that it is better to allow our entrepreneurs, inventors, & dreamers to take huge risks, to bet it all and to win or lose on a grand scale.  We have also decided that failure should not result in a life of indentured servitude.  This is why we have bankruptcy laws that protect both businesses and individuals who take risks and fail from spending a lifetime of paying it back.

Collectively, we have decided it’s better to punish, forgive, learn, and move on in business.  Farnsworth has taken advantage of that core principle of our entrepreneurial system, and while we can despise him for doing so, it is the system we have created in this country, and there is a very long line of entrepreneurs, inventors, investors, and motivational speakers who will tell you that embracing failure, learning from it, and continually improving is the ultimate road to successful outcomes.

Additionally, Farnsworth appears to be the prototypical example of the “male hubris-female humility effect.”  This is a long-standing body of research that basically explains why there are more male entrepreneurs than females.  I know this is a hot topic in the #metoo world, and frankly, I don’t give 2 shits where you stand on all of that stuff.  The research here is sound.  Men tend to exhibit hubris about 3 times the level of women.   We know inherently this is true, men tend to do stupid shit all the time, and when it goes badly, they don’t blame themselves or think about why it was a stupid idea in the first place.  They blame circumstances that were out of their control, or they blame their wife, or they blame the weather, the dog, or anyone but themselves.   The research also says that men tend to pick themselves up over and over again after failure and try again.  Which makes sense, because the failure was not their fault in the first place, duh!   Of course none of this means that men are better than women at identifying opportunities or executing well against a given opportunity, it simply means that they get up to bat more often, and as a result, they get more hits.

Now with Farnsworth, do you think he might be full of hubris?  You bet your ass he is!  This guy has launched more companies and failed more times than you have gone on and off your favorite weight loss program.  When Bloomberg asked him about his total wipeout of his crazy energy drink he said, “it was bad timing. Purple was a premium health beverage and we could not make it through the worst recession to hit the country since the 1930s,”  No matter that many business studies show that recessions are an optimal time to start a business because of lower labor costs, less competition and other advantages.   In Farnsworth’s head, it wasn’t his lack of execution or any other number of things he did to screw Purple Beverage up, it was just the bad economy!  If it had not been for that, it would have been a huge success :-), Yeh, sure – right Ted  🙂 It was the recession that killed Purple.

Now it may sound like I am being a harsh on Farnsworth here… again.  No – not really.  I am simply making the point that it takes a bit of hubris, and some big balls, to keep on coming back failure after failure, to get to a place where you are now sitting on top of one of the most interesting disruptors of the movie media marketplace.  Theodor has balls!

But it is not just that Teddy has balls, and that he has managed to fail his way into one of the most interesting jobs in media that impresses me.  What has impressed me most, is that it appears that Ted is actually learning and improving.  I don’t know if his improvement comes from learning hard lessons from his past failures, or if it is from his apprenticeship he seems to have willingly accepted from Mitch Lowe.   It really doesn’t matter why- what matters is that he seems to be improving.

If you read through the last couple of interviews Ted has done on the latest news cycle – they are very solid. (Screen Rant, Vice)  Ted gives a very confident update of the numbers, while also painting a compelling future vision for where MoviePass is headed.  He avoids nitty-gritty details of the finances and dismisses any theories of impending doom quite elegantly.   These are smart interviews, that offer enough details on the business to be interesting, but they leave out any silly future claims of news coming or details specific enough to incite a big debate or backlash.   It is like he is becoming a grown-up CEO!

Am I 100% convinced that Ted is the right guy to lead MoviePass to the promise land?  Not really, at least not yet.  But I do think Ted is improving, and I feel like he is less of a liability than I had thought in the past.  And after all, without Ted, and his crazy bet it all move on MoviePass, none of us would be able to part of this ride.  And with some level of hubris on my own, I still believe this is a ride of a lifetime!

Helios & Matheson the Name Sucks!

We have come up with a great list of catalysts that could impact HMNY – Moviepass, one significant catalyst that was not on the list was the much-needed change of the company name of and ticker symbol from Helios and Matheson and HMNY to Moviepass and MVPS or some other equivalent ticker that really works for retail investors.

I had a very real conversation with a couple of friends who told me there is no way they would buy a stock called Helios and Matheson, with some weird symbol called HMNY, to them it sounded like a total fraud.  Even after my impassioned explanation for why we were only temporarily stuck with that horrible sounding name, it was enough of a red flag for these two guys to say no way in hell.   And of course after the stock swooned to its new low levels, I take no end of grief for recommending it to them, and they take joy in being “right” about that stupid name.

I have known that the name was a problem, but I did not really realize how big of a problem it was until after I read this article about Crispr Therapeutics AG  with ticker symbol CRSP.

If you have not heard of CRISPR or the science behind it, I highly recommend getting familiar with it.   I learned about CRISPR listening to this Freakonomics podcast, and from my daughter who is a Biochemistry student at the University of Washington.   I know very little about this field, or the investment opportunity here, other than to know it is a revolutionary new technology and is likely going to be the single most important discovery for curing thousands of diseases within the next decade or so.  A short description is they have found a way to effectively edit human DNA to cure disease.  And I am talking about major diseases that impact almost every single person on the planet in one way or another, cancer, blood diseases etc etc.    The point here is that CRISPR is a very big deal, and many people know it is a big deal.

So it was with great interest when I found out that the name and symbol ticker for Crispr Therapeutics AG – (CRSP) was the most highly valued company in this new field with a valuation about 2 times its nearest competitor.  The next competitor is named Editas Medicine symbol (NASDAQ:EDIT).   Not a horrible name, and they do play on the idea of what the technology does, with the EDIT ticker.  But that name feels a lot more like a Sinemia than a MoviePass,  maybe it is even worse than Sinemia, which I still think sounds like something you would pick up eating spoiled meat.  Anyway, the point is that names matter, and they matter a lot for valuation particularly with retail investors.  

From Motley Fool:

What’s in an acronym?

More than a few analysts are convinced that CRISPR stocks by any other name just don’t smell as sweet to retail investors. Results of a Twitter poll conducted by Brad Loncar showed 86% of the independent analyst’s followers think name recognition is the main force driving Crispr Therapeutics’ stock past its peers.

Apparently, this phenomenon comes from something called fluency.   And there is a lot of scholarly literature about this.  One of the most recent studies from Amsterdam – School of Business and Economics suggests.

“A novel strand of research shows that fluency plays an important role in the stock market. Companies with short, easy to pronounce names yield higher first-day returns on IPOs (Alter and Oppenheimer, 2006), and exhibit significantly higher valuations, breadth of ownership, and share turnover (Green and Jame, 2013). Similarly, stocks with tickers that are actual words in the English language exhibit higher liquidity and lower spreads (Anderson and Larkin, 2012). The dynamics that drive these effects, however, are still unclear.”

The study goes on to indicate the more noise around a stock the bigger the impact of fluency seems to be.

I guess this is obvious, but I feel compelled to point it out.  Helios & Matheson is A) not a short name  B) not easy to pronounce C) not actual words used in the English language.

Let’s be honest, the name Helios & Matheson sucks, and it sucks badly.   And the ticker HMNY might even be worse.  One friend I talk to now regularly calls the stock Harmony, he said he doesn’t even know why, it just sort of a word association he does with it now.

And to think all of this is going on right as we are sitting on the FANTASTIC NAME of MoviePass!   ugggh!   and the ticker is so damn obvious MVPS!

While I was at Microsoft I was involved in the naming of a couple big brands, including Bing and Live.  I can’t even begin to tell you how expensive it was to obtain these names, secure the domains, trademark them, and build the brands around them.  I am talking many many millions of dollars.  MoviePass is a home run of a name.  It is descriptive, easy to pronounce, short, easy to type, unique, and can be used as a verb very easily.   “Should we MoviePass it tonight?”   “Let’s MoviePass that one”.    I shudder when I hear, “should we Sinemia it tonight”  NO – I don’t want an STD! for god sakes!

We need to get the proxy resolved and get that name changed ASAP!   When it does, shareholders of the obscurely named Helios & Matheson will surely benefit!

MoviePass for Your Health

Getting Off the Couch and Using that MoviePass Card is Actually Good for Your Health

One of the things that Mitch Lowe, CEO of MoviePass,  has tried to talk about in the company’s last few TV interviews was the idea that MoviePass is helping people come out of what he called the “cocooning phase”.   The Cocooning trend gets a lot of attention from the media as a big trend in consumer behavior.

A combination of better home theaters, more high-quality HD content offerings, lots of tech options including social media, all on top of people’s general anxiety of going out into the public has made cocooning a big trend for that past several years.

The downside of cocooning, and staying home to binge on the 8 latest episodes of “Barry“, (which I love BTW) or whatever your latest addiction might be, is that it is actually bad for your brain.   Netflix binging is know to cause depression, and from all indications, the sour mood of the nation reflects the downward spiral of too much isolation and too much social media.  Experts continue to beat the dead horse on the perils of overdoing it with screens and addiction, but for the most part, people seem to be stuck in a rut that up until MoviePass, seemed unbreakable.

The data on binging shows that Neurochemically it fills our brains and bodies with high levels of adrenaline and cortisol, which if it stays in our system, can increase our stress levels over time.   So while we may think that Netflix binging is a great way to tune out and relax, it actually means that our brains are always “on,” and aren’t relaxing the way they need to be.

Of course, Netflix itself has become addicted to this bad binging habit and tries to encourage it relentlessly.   Deborah DSouza from Investopedia did an excellent piece on this.   Netflix came out with a press release trying to normalize and change the narrative on binging, renaming it “racing”.  A binge racer is a viewer who aims to finish a season within 24 hours of its release, according to the press release from Netflix. The number of binge racers on the platform has increased more than 20 times between 2013 and 2016.

DSouza makes the comical point.  “Knowing that this piece of trivia paints a very bleak picture of people’s lives, the PR release added: “…before you assume that racers are just basement-dwelling couch potatoes, know that for these super fans, the speed of watching is an achievement to be proud of and brag about. TV is their passion and Binge Racing is their sport.

It’s like Mark Zuckerberg recommending we start seeing less of our friends in person.”

In deep contrast to the negativity of binging it alone on Netflix, studies show that going to the movies alone is actually good for you!  It seems that the social interaction of enjoying a film with other people who are laughing, crying, and gasping with you as you watch a film actually builds a positive level of social interaction and bonding.   Further, by going it alone, you overcome fears of doing things alone and grow from the experience.

MoviePass has the unique opportunity to take the benefits of it’s popular and fast-growing movie subscription service and make it a truly social experience that could help improve the mental health of millions of Americans. Atom Films, which bills itself as “a revolutionary social movie ticketing app and website” has been making strong progress in making movie-going more of a social experience.  Atom makes it easy to coordinate a movie going outing with others, agree on a time and movie, and then book the reservation.   This would be an excellent addition to the MoviePass experience, and I remain hopeful the two companies could come together in the future to deliver the combination of an affordable movie subscription with frictionless social features.

In the interim, I think that MoviePass, and Mitch Lowe could double down on the message that MoviePass is a bright light out of the dark cocoon of depression brought on by too many hours of binging.  It’s like your mother used to say to you when you were feeling down.  Get out and do something!

Maybe the cheering mother of the future will say “get out and use that MoviePass!”

 

 

 

Subscriptions Are Big Business & Worth BIG Money

Want some further evidence that subscription businesses are capable of nabbing big Money from major players. This week Microsoft bought a somewhat obscure subscription business for $7.5 Billion in stock called GitHub, which is a developer platform for businesses and individual software developers.

It’s a different market, and Microsoft has strategic reasons to be interested in GitHub, but 7.5 Billion was an astounding price to be paid.

GitHub had a Reported Revenue Run Rate of $200 Million Dollars. It had previously raised $250 Million in VC funding. It reached 3 Million users in 2013. The company was not profitable – it lost somewhere near a $100 Million a year in 2016. It had about 800 employees.

It is a great story for the early investors of GitHub, and it will give the VCs who invested a very nice payday.

Now – let’s compare some of those numbers with HMNY and some interesting similarities.

MoviePass has a revenue run rate of at least $300 Million dollars and is growing rapidly. Moviepass does lose money as well, but on a percentage loss against revenue, it is not wildly off from GitHub.

In terms of paying subscribers both companies appear to be in the 3 Million range. Both companies charge a monthly subscription fee. GitHub charges $9 a month for their basic plan. $21 for businesses.

There are some comparisons that are clearly favorable to GitHub, they have sticky business customers, they have had profitable years in the past.

But I see advantages to MoviePass as well. MoviePass is growing way faster, it has a much bigger addressable consumer market. And Moviepass has far fewer employees than GitHub. Moviepass currently has fewer than 100 employees vs. GitHub’s 800 employees. Those pesky employees are expensive!

There are of course many other differences between the two companies. Importantly GitHub had the respect and admiration of Silicon Valley. Where Moviepass has yet to win over that crowd. GitHub also had the buzz of being a cloud company. And GitHub had won in a market that both Microsoft and Google had failed in previously and desperately wanted to be winners in.

Of course the biggest difference between the two companies is one is currently valued under $30 Million dollars, and the other was just bought for $7.5B!!!

Do I think Moviepass is worth $7.5B$. Nope. But nor would I have ever dreamed anyone would pay that for GitHub either.

Suffice to say – I see BIG Upside for Moviepass!