My Quick Take on MoviePass Films

Because it is summer time, and I am a retired guy who likes to enjoy the beautiful weather in the Pacific Northwest, I am going to be making less frequent updates to the blog, and I will be keeping them a little shorter.  If something super significant happens, I will write a bit more about it.   You get what you pay for here.  And unfortunately, so far, that has held true for the entry point on MoviePass stock.

I will repeat again.  I am a buy and hold type of investor.  I don’t think you should buy any stock if you can’t stick with it for at least 3 years, and I prefer 5 years or more.   So as to the daily and weekly swings to HMNY and MoviePass, I don’t like them any more than anybody else.    And they are not meaningless for HMNY given they are selling shares to finance the scale out of the company.   Anyway, I remain long, until the story changes to the point where I don’t want to be invested in a company anymore.

OK – On to the MoviePass EFO – MoviePass Films news.   I will start here, obviously, I was hoping for Atom Films to be the acquisition.   I personally see a more immediate benefit to that marriage, and I was disappointed that was not the news.   I was wrong – again – on my prediction here.   I have found that it is fairly difficult to predict what HMNY and MoviePass are going to do next.   That keeps them interesting, but also I think makes things a little frustrating for investors.

Overall, I think that this arrangement is a solid move for both MoviePass and for EFO.   MoviePass knows that it wants to get into the exclusive content game sooner than later, this allows them to enter into that market, without expending much at all in the way of capital.   For EFO this deal makes sense because it helps them to put butts into seats for their movies, even if the movie is not reviewed well, it gives it a chance to find an audience via MoviePass audience and marketing.

Gotti will be the first really good test case for this phenomena.   Gotti, so far, has not been super well reviewed.  It got a couple real negative reviews at Cannes, and it was pretty risky to do the reveal there anyway, as Cannes is a snob fest, and the reviewers there tend to try to one-up each other on intellectual snobbery, so revealing a mob movie, that does not go down the high brow liberal reviewer path, is likely to have you end up with a long dissertation type review on how the movie missed the opportunity to make a bigger social statement.  Or some such thing.  The point here, the movie did not get a great set of reviews.   And to be honest, the movie has taken a long and winding road to release, indicating that even the studios and distributors have had at least some reservations about how well it might do at the box office.     So a deal was struck with MoviePass to be a partner in the distribution of the film, and, MoviePass, as part of the deal guaranteed promotion to their subscriber base.   This is how MoviePass got the deal with Orchard and American Animals as well, they ponied up their subscriber base as part of the deal.

This is why I have been saying for months now – that scaling up the audience and the subscriber base is the most important asset that MoviePass can build.  When you have a large audience, AND you have their personal information and moviegoing habits, AND you have their credit card number, AND you know what theaters they go to, AND what films they like, it is INCREDIBLY valuable!   As investors, we are now starting to get some of that value in the form of exclusive content.   Essentially EFO has made a deal to with MoviePass to extract some of that value.  The deal basically goes like this.

Future movie script:

MP: Hey – we have all these subscribers that love movies, and they subscribe to MP so they are not afraid to take a chance on a movie, even if it might be a bad one based on a review.  In fact, we have some subscribers who love bad movies, just because it is sort of fun.  And there is literally almost no friction to getting them to go see your movie.   We want to make money off of getting people to go to more films, and we would like a piece of the action as we make it happen.

EFO:  Well – we try really hard to make great movies, but sometimes they turn our just OK.   Sometimes we get burned by the critics, and those guys are like sheep, a couple bad reviews, and all reviews seem to go to shit – and there goes that film down the drain.  But we know a lot of people like our movies, they like our guys like Stalone, Wahlberg, and Travolta, even if the movie has a less than stellar review, we think there is a big audience for it.   But we need a bigger audience to get into more theaters and to stay in for longer windows.

MP & EFO – Hey – what if we teamed up the MP audience with EFO’s movie-making machine and made magic together?!    YES!

How will we do it?

EFO – well we have this big library of content, and we can’t just give that away into a new company.

MP – that’s fine, but down the road, we see value in that library and would like to have access to it so we can monetize it against our audience in different ways.  How about you give us an option on that?

EFO – Sure we can do that.

MP – How about we band together for all the new films you guys are going to make, and we share that 60/40.

EFO – I am insulted, we make the movies, we are Hollywood big shots!  We want more!

MP – OK fine – how about we take 51% and you take 49%.  We both will thow in some cash, and we will throw in some stock to sweeten the pot for you hollywood big shots.  We want you to be incented to stick with us for the long haul anyway.

DEAL!


So now we have MoviePass films.   Content is still KING!

Think about every company that started off in the content delivery business and figured out that it made sense strategically and financially to enter into the content creation business.

HBO – NetFlix – Amazon – Showtime – Microsoft – even Apple has entered the exclusive content business in one way or another.   They do this in order to continue to grow their huge audiences and subscriber bases and to offer unique content that is exclusive to their brands.  In some ways, it is a necessary evil of being a major player in the media business.    Content creation is expensive and can be risky, but without it, you are much less relevant to your subscriber base.


Now – read the Press Read  carefully:  I will insert a few comments in it here:

LOS ANGELES–(BUSINESS WIRE)–Helios and Matheson Analytics Inc. (Nasdaq: HMNY) (“Helios”) announced today that Emmett Furla Oasis Films (“EFO Films”) has granted Helios the exclusive option <<<Read -we have the exclusive right to their old stuff and new stuff, it’s an option to work with Hollywood Big Shots – we don’t have to take it >>> to acquire the entire film library and current production slate of EFO Films. The EFO Films library includes acclaimed titles such as Lone Survivor and Broken City and features A-List actors such as Mark Wahlberg, 50 Cent, Sylvester Stallone, Bruce Willis, Arnold Schwarzenegger, John Travolta, Denzel Washington, Nicolas Cage, Robert De Niro, Al Pacino, Kate Bosworth, Leelee Sobieski, Anna Kendrick and Ellen Burstyn. The EFO Films library also includes the upcoming titles Boss Level starring Naomi Watts, Mel Gibson and Anabelle Wallis, 2Guns, Escape Plan 2 and Escape Plan 3 starring Sylvester Stallone and Dave Bautista, The Irishman starring Robert De Niro, Al Pacino and Jesse Plemons, and The Iconic Video Game ASTEROIDS by ATARI, including others in production, with the goal of 12 to 15 films over the next year.

“To have such a well-known, quality production company join forces with the Helios/MoviePass group of companies is truly remarkable”<<Read –  we are psyched that we are big enough and have enough momentum that Hollywood big shots are willing to partner with us to do deals, not everybody gets to do this!! >>>

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Helios also announced today that it has formed MoviePass Films LLC (“MoviePass Films”) with Emmett Furla Oasis Films (“EFO Films”). Helios owns 51% and EFO Films owns 49% of MoviePass Films. MoviePass Films will focus on studio-driven content and new film production for theatrical release and other distribution channels. Hollywood veterans Randall Emmett and George Furla will serve as Co-CEO’s of MoviePass Films; MoviePass Films’ Chairman of the Board will be Ted Farnsworth. Mitch Lowe will hold a Board seat as well, and Farnsworth and Lowe will work together day-to-day to execute the strategy between MoviePass and MoviePass Films. Terms of the deal were not disclosed, however both parties agreed on a payment in the form cash and stock.<<< Read – we are setting up a new company together so we can make movies and promote them to MP sub base – we are BOTH putting in money and stock to get the thing up and running>>

Helios plans to capitalize on the unique capabilities of its subsidiary, MoviePass Inc. (“MoviePass”), to market future MoviePass Films productions to millions of MoviePass subscribers and moviegoers everywhere. MoviePass Films will pay MoviePass for any marketing services provided to market MoviePass Films productions. MoviePass Films will own and control all revenue streams from theatrical release, domestic and foreign distribution rights, streaming, retail, DVD sales, transactional sales, etc.  <<<Read – MoviePass Films – the new company, will still have to pay MoviePass to market the new movies – we can’t just give it to them for free.   But I bet they get a sweetheart deal!   MoviePass Films gets all the revenue from the Movies, but then 51% of that is owned by MoviePass, so MoviePass has controlling interest in the new company, and gets their money when it rolls in from the new movies they make”

“To have such a well-known, quality production company join forces with the Helios/MoviePass group of companies is truly remarkable,” << Read- again even we are surprised we can get Hollywood Big Shots to partner with us so early in the game, we are stoked!!>>>>said Mitch Lowe, MoviePass’ CEO. “Since we began disrupting the movie industry with our unprecedented low-cost movie theater subscription service, MoviePass™, we have envisioned owning and developing our own studio content and using the power of our several million subscribers to bolster the success of the box office for our films. I believe MoviePass Films will accelerate those efforts and demonstrate the power of MoviePass to drive movie theater attendance and downstream sales, for the benefit of moviegoers, movie theaters, studios and the film entertainment ecosystem as a whole,” concluded Mr. Lowe. <<<Read – we were always going to do this, now we can get started right away – watch as we become an entertainment juggernaut!>>>

Helios believes its acquisition of the current production slate of EFO Films and the leadership of MoviePass Films by veteran producers Randall Emmett and George Furla will accelerate Helios’ plan to produce its own movies for theatrical release, create new revenue opportunities for MoviePass’ marketing services, fill theater seats throughout the United States for MoviePass Films productions to the benefit of exhibitors, and enable MoviePass Films to participate in box office and downstream revenues from its proprietary content.  <<Read – we are saying it again – this was always the plan, and now we are going to show you how we can make money up and down the entire value chain, this is why we needed to spend money to build scale, and this is how we are going to kick some ass making money while we get people back into the movie theaters.   We are not stupid like AMC, we actually believe it is better to have more people going to the movies, and find more ways to make money on that.  It’s a different strategy than just making people pay more money for tickets and rip them off for popcorn.  But we like our chances>>>

“To do a deal with Helios and MoviePass is epic for us,” said Randall Emmett of EFO Films. The MoviePass™ subscription service has totally disrupted the movie industry, for the better. When we worked with MoviePass Ventures on the movie Gotti, starring John Travolta, which premiered at Cannes and is set for release this coming June 15 – I immediately saw how revolutionary the MoviePass™ service is. I have never seen any player in our industry move so quickly and gain such a large following in such a short period of time. What impresses me the most is that MoviePass can guarantee box office attendance, which is a game changer. I don’t believe anybody else can do that,” concluded Mr. Emmett.  <<<Read – I am a Hollywood big shot, and I think MoviePass is a game changer because they have a direct connection with the consumer, and they can get people out to see movies with no fear.  Mitch is a smart guy, and he figured out this Movie Insurance idea, and now people are going to movies like crazy people!   Where have these guys been all my life!   It is a new dawn for movie makers!>>>

“Ever since we co-acquired our first film with MoviePass Ventures, American Animals, which is set for release June 1, we’ve been looking for an opportunity to acquire and produce studio content on a larger scale and prove the power of the MoviePass™ service in the process. We believe we’ve found that opportunity with Emmett Furla Oasis Films. Along with MoviePass Films, MoviePass Ventures, our studio driven production company and our independent film investment division, will play an integral role in our business strategy,” said Ted Farnsworth, Chairman and CEO of Helios. “We believe the track record of Randall Emmett and George Furla over the last twenty years speaks for itself. For MoviePass to have the opportunity to jump in the middle of new high-caliber productions that are already underway, becoming a part of that, is more exciting for Helios and MoviePass than I ever could have imagined,” concluded Mr. Farnsworth.  <<<Read – When we used our audience size to get a piece of the action on American Animals, we figured out that we have a big idea here, we could make our own damn movies and sell them.  But then we also knew that we didn’t know how to make movies, so maybe we could find a Hollywood big shot that saw our big idea and would partner with us.  EFO said yes!  and we got married!>>>

So that might friends is how to read this deal.   For the rumor mongering fear generating short sellers they will howl that this is too expensive, that they are giving up a ton of money to this new venture or that a big additional dilution is certain because of this new deal.   That is all horse pucky.   I am certain that this cost HMNY very little to set up this structure.  Both sides protected themselves adequately.   This thing is obviously written with a prenuptial agreement.   Hollywood knows divorce all too well.

So I think it is a great start and could end up serving MoviePass very well.  Like all things, it has some risk that it won’t work.   You can’t push too many bad movies, because people realize their most valuable resource is time, and even for free, a bad movie is still a bad movie.   Also, there are a lot of egos in all of this, and these guys tend to be real bastards when things don’t go as planned.  So any kind of drama could unfold in the future.

I think the deal works well if MoviePass doesn’t overdo it pushing films that people don’t want to see.  That can be achieved be staying closes to the customer, using data to suggest films that MoviePass knows you might like.  This is where the data, and soon the integration of reviews into the MP app becomes critical.    If MoviePass can elegantly promote specific movies to specific subscribers and get a piece of the action through the entire value chain, while delivering on their strategic vision of bringing people back to the theaters, this will turn out to be a very positive deal.

Maybe ultimately we will say – HMMM how did that do that?

 

 

AMC’s Adam Aron Interview -Plays Down Chinese Ownership and Sticks to Previous Claims of Onerous Deal Terms From MoviePass

In a short weekend Interview (conducted via Text messages) I had with Adam Aron, the CEO of AMC Theaters, Aron downplayed the firms Chinese ownership position and referenced previous statements and comments on his stance with regard to doing a deal with MoviePass.

There is a growing group of MoviePass customers and investors who have become frustrated with the lack of progress between MoviePass and AMC. AMC’s CEO has been an outspoken critic of the MoviePass business model, and has consistently claimed he is not willing to share any revenue with MoviePass.

A small but growing group of people, lead by a Senior level US Military member, (who is choosing to stay anonymous) have been calling on AMC to offer MoviePass the same discount it offers other US based companies, such as Fandango and Costco. Costco receives approximately 25% off tickets when buying in bulk from AMC. Aron has claimed that Fandango pays full ticket price same as MoviePass. Mitch Lowe, CEO of MoviePass has consistently said he seeks only the same discount offered to Costco, and believes that given the millions of dollars of tickets MoviePass Purchases, they should be offered the same deal. Lowe has also claimed that he does not want concessions revenues as part of a deal.

Chinese companies including AMC’s majority owners Wanda, have been increasingly investing to compete with US based film companies. Some have claimed that AMC, because it is owned by Chinese investors, may not be willing to do a deal with MoviePass, specifically because they do not want to be disintermediated by the US based company. Some have even speculated that Chinese based investment operations potentially backed by AMC, are naked short selling HMNY stock in an attempt to drive HMNY & Moviepass out of business. Essentially driving down HMNY stock to a point where raising funds to fund Moviepass growth becomes more difficult.

Aron downplayed AMC’s Chinese connection. He said, “You are getting some inaccurate information. AMC is an American company, incorporated in Delaware, headquartered In Leawood Kansas, and run entirely by its American management team based in Kansas. It is publicly owned, with shares traded on the New York Stock Exchange. It is true that 59% of those shares are owned by the Chinese company Dalian Wanda but 41% are owned primarily by American institutions and individuals.”

I asked Aron if anything had changed in terms of getting a deal done with MoviePass. And I relayed to him, that it had been reported to me that Aron had claimed that Moviepass was asking for onerous terms that would take 20 times AMC’s profits.

Aron said that he “did not have any further comment about Moviepass”.

Aron followed up with referencing the below article from deadline saying. “However, you may find this article just a few months ago in Deadline enlightening as to MoviePass’ desires:”

He then sent the following quote from the Deadline story:

“MoviePass has reportedly asked AMC for a slice of admissions and concessions given the foot traffic it sends to AMC, which is around $2 million a week per MoviePass insiders. MoviePass is seeking a $3 cut on AMC tickets that it covers, plus 20% of concessions.”

MoviePass Vs. AMC: Ticket Service No Longer Covers Chain’s Busiest Theaters; Exhibitor Rips “False Statements”

I pressed again asking if AMC continued to believe that Moviepass was an unsustainable business, and if he had any change of heart about a potential deal with Moviepass. He replied again that he had no comment further on MoviePass.

I reached out to Mitch Lowe for any comment, and he did not return my messages to him.

So for now, it does not appear that any ice has thawed between AMC and MoviePass. This is of course risky for both companies at this point.

MoviePass customers and Investors will be angry if HMNY and MoviePass goes out of business. Increasing people are calling for boycott of AMC on chat boards where MoviePass fans and investors gather.

The Chinese connection to AMC, while downplayed by Aron, has some MoviePass fans upset. For AMC, this could become something like the NFL national anthem kneeling controversy. Where a perceived lack of patriotism put a hurt on viewership. If more and more consumers and investors make a connection to AMC being a Chinese owned company, that is aggressively trying to drive an innovative US company out of business, potentially taking away a service people love, that has a chance to do some real damage to AMC’s brand, and could have a lot of MoviePass customers running to alternative theaters.

Why Does MoviePass Get No Valuation Respect? Racism, Ageism and No Investor Love

Many of my readers have reached out to me and asked why I think MoviePass does not get the same kind of valuation other Unicorns receive, or anywhere near what other subscription businesses are currently being valued at in the marketplace.

I, of course, wonder the same thing, and I thought I would put forward a few different valuation scenarios and comparisons to other subscription businesses.   Additionally, I have a couple thoughts on why I think the company had a difficult time raising VC funds that would have allowed MoviePass to hit Unicorn status with private funding.   But first, let’s look at some subscriptions businesses on the market today and see if we can make any sense of the crazy low valuations MoviePass is suffering today.

MoviePass is often referred to as NetFlix for theaters.   Some argue against this, saying that the models are not very similar, or that the market size is not comparable.   That said, I think they are worth comparing, both businesses are subscription based, both charge a similar amount per month, and both provide a value proposition of unlimited, or extremely generous, amount of content that can be viewed every month.   It is at the very least, worthwhile to consider the valuation of NetFlix in comparison to MoviePass.  Even with their notable differences.

NetFlix has a Market Capitalization of $150 Billion Dollars,  The company did 3.7 Billion in Revenue last QTR ending in March.  NetFlix is growing revenue so I will estimate that they do around $17 Billion for 2018.    This means that NetFlix is trading at about 9.4 times next year’s Revenue.   Compare that to MoviePass.   HMNY had a confusing earnings statement last QTR that showed some crazy revenue numbers based on adjusting their warrants.   So I won’t use their reported numbers for this comparison.   Instead, I will do a simple estimate based off of my revenue models.   For the year I estimate the company will do about $450 Million in Revenue.  If MoviePass were to enjoy 9.4 times 2018 Revenue that NetFlix does, the market cap would be just over $4.2 Billion Dollars.  Not the ridiculous $34 Million Market Cap of MoviePass today.

Another interesting way to look at Netflix is Market Cap per Subscriber.   Netflix currently claims 125 Million Subscribers, meaning that each subscriber is currently valued at approximately $1200!  That’s right, every subscriber NetFlix has a Market Cap value of $1200 bucks!   Now imagine of MoviePass could receive a valuation of $1200 per subscriber on their 2.7 Million Subscribers.  That would result in a Market Cap for HMNY of $3.24 Billion.  Again – not close to the $34 Million Market Cap we see today.

I know what many are thinking here, but NetFlix is profitable, and they have been for a long time, and their COG’s are not crazy like MoviePass.  Well, actually that also turns out to not be the case.  NetFlix is actually spending like crazy, just like MoviePass, to build their subscriber base up.   In the past few years, NetFlix has piled on a massive load of debt, now approaching $8 Billion dollars to create and buy exclusive content for their subscribers.

NetFlix Debt

So before you say to my – or yourself, sure they have debt, but they have earnings!   OK, fine I will grant you that, they show earnings with some slick accounting, but unfortunately, they are actually burning a heck of a lot more cash than MoviePass is.   Look at the cash burn from operations over the last 3 years, and that is likely to increase into 2018.  They are burning $2 Billion + in cash, but investors seem to be more than happy with that?    I wonder why?

NetFlix Cash From Operations

And where are they getting all that cash to burn you might ask?   They are financing it!   And yes, at some point, shareholders of NetFlix will have to actually PAY for that financing.

NetFlix Cash from Financing

Hey – I have no problem with NetFlix receiving a rich valuation for their subscriber base, or a very healthy Market Cap to forward revenue valuation.  They are a terrific company and have done amazing things.  But doesn’t it seem a little strange that MoviePass can’t get anywhere close to a NetFlix type of valuation?  And when I say it is not close, I am talking more than an order of magnitude off.  That does not seem like a fair valuation at all.

Now let’s look at Spotify a bit.  How do they stack up on some of the numbers?  SPOT announced it has hit 75 Million subscribers just this month, they have a Market Cap of $27 Billion, they are on pace to do around $5 Billion in revenue for 2018, and they are also losing boatloads of money -which I will get to here in a bit.

The simple math of Market Cap to forward 2018 revenue estimate puts SPOT at about 5.4 times 2018 Revenue.   That multiple applied to HMNY’s 2018 revenue would give a $2.43 Billion dollar Market Cap.

SPOT’s Market Cap per sub value ends up being $320.00 per subscriber.   Not as great as NetFlix for sure (But we all know Music is an even worse business than movies) . Be that as it is, if HMNY were to fetch $320 per sub, that would yield a $972 Million dollar Market Cap for HMNY.   Now let’s also remember that SPOT has very serious competition with Apple Music and Google, and others.  They have little if any meaningful differentiation in the product, and they lose lots of money.   So it’s not surprising their valuation would be less than NetFlix multiples, but it is surprising they too would be an order of magnitude valuation higher than MoviePass.

How much does SPOT lose?   A lot!  Total Net Income for 2017 was negative $1.25 Billion.  Yep that is not a mistake – they are losing over a Billion dollars, it makes MoviePass’s $20 Million a month (and going lower) look quaint by comparison.

SPOT Net Income Loss

And how has SPOT managed to keep funding these losses?   They raised money with their IPO and they have floated about $1 Billion dollars of debt.   Sound familiar?   Yep just like NetFlix, they are spending big money on content – in this case music, to drive up subscribers, while losing money and floating debt to get to big scale.   The market seems to be liking it and rewarding they move with a nice premium like valuation.

I could go on with other examples of subscription businesses that either lose money, or only break even and have way higher valuations than HMNY is receiving.   But what is clear, is something is way way off on MoviePass valuation, and there has to be a reason beyond just the cash burn problem.   Why are these other businesses allowed and encouraged to plow through cash to build a big subscription business, and MoviePass is not afforded the same luxury?

I have a few different theories on this – I think combined – these are the reasons that MoviePass, is not getting a pass with Wall St.  and never got a pass with Silicon Valley VC’s.

My theory is one that I think nobody has brought up, but it is important in the history of MoviePass and now the present valuation situation the company is in, some may take great offense to this, but I believe it to be true.

Silicon Valley VC’s are racist, it is well known and well documented with reams of data, SV VC’s discriminate against people of color and are sexist, and they are ageist.   And what many don’t remember about MoviePass is that it was founded by two African American entrepreneurs, Stacy Spikes, and Hamet Watt.   To understand why this is important you have to understand how VC’s work.  If you have ever seen the early episodes of the HBO series Silicon Valley, it gives a pretty good and comedic lesson in how things operate in the Valley VC world.   VC’s are run almost exclusively by very rich white males, who all go to the same parties, they are all massively competitive with each other, and they pretty much run in herds and participate in group think as they execute their funding decisions.   If one VC thinks a company is hot shit, you can go to the next VC and ask for more money with better terms.  Momentum is the name of the game, and nobody wants to be left out.   Unfortunately, if you don’t get momentum you start to get totally blackballed in the valley.  If a VC says NO, and the next one says NO, it gets harder and harder to find anybody to say yes.   If you are a woman or an African American looking for funding in the Valley, it is way more difficult to get the funding you desire – no matter how good your business plan may look.  That is just a fact.

If you go all the way back to 2014 Spikes and Watts were still running the company, but Mitch Lowe had come in to “consult” and help out the struggling startup.  By 2016 Lowe was made CEO,  Spikes and Watts were kicked to the sideline and Mitch was moving toward pushing the new scale-up plan.  The problem was Mitch also could not find the funding – estimated at $100 million to get to the 5 Million subscriber number that would make MoviePass profitable.    Now the next dirty secret of the Valley is age discrimination, it is massive, and also well known and well documented.   Mitch Lowe is 65 years old, literally, that is a dinosaur in the valley.   Mark Zuckerberg is old to the valley, Serg and Larry of Google, they are fossils now.   Finding a VC to bet $100 million on a 65-Year-Old CEO, who was going to take the reigns of a pivoting startup that had previously been run by two African Americans and scale it to a Billion dollar business, it sounds absurd to the SV VC crowd. (I mean it sounds absurd to almost anyone)   To make matters more difficult for MoviePass, they had already pitched most of the Valley previously, VC’s are stubborn, cocky, and they don’t like to admit to being wrong.   The idea that they would suddenly change their minds on MoviePass when Mitch Lowe took over, it was just not very likely to happen.    Yes, I truly believe that racism and ageism played a big role in MoviePass not becoming a privately held unicorn.

That history of racism and ageism is still impacting the story of MoviePass and it’s valuation today.   Mitch has told the story multiple times how he tried pitching every VC firm he could, and nobody would fund the MoviePass scale-up plans.  Ultimately, that search for money found Ted Farnsworth, the obscure Penny Stock pitchman, with multiple previous 99% wipeouts.   Farnsworth bought into Lowe’s vision, and he quickly put his fund unusual fundraising skills to work, essentially betting his company, Helios & Matheson on Mitch Lowe’s big idea.  It is worth noting that Farnsworth’s ownership of Helios & Matheson stemmed from a very unusual situation where Farnsworth had founded Zone’s and somehow pulled off a merger with HMNY and Zones, where Farnsworth ended up being the CEO.   Everything about Farnsworth is quixotic and bizarre, the guy is an enigma putting it politely.

So now here we sit, with a Senior Citizen in Lowe, who is the CEO of MoviePass, and huckster in Farnsworth, who commands the respect of a turd in the punch bowl from both the Valley money people and commands little more respect from big money Wall St. money crowd.  Mix all that together, with a company that was a little too early to IPO, and in fact, really has not officially IPO’d because of a nasty proxy battle, and you can start to put together a good case why HMNY stock is not gaining the respect that the actual business deserves.

You can imagine some of the conversations at the big MM firms:

  • Why didn’t any VC’s bet on this thing?  I talked to my pal at XYZ VC in the Valley, they said they passed on this thing multiple times, they don’t believe in it, why should we?
  • Who’s the CEO? Farnsworth, ha! that’s hilarious – please get out of my office!
  • You want me to invest in a company that every single VC firm in the valley passed on, and is losing gobs of money, and has a CEO who wiped out multiple companies in the past?   That’s a good one, tell me another 🙂

So you see. MoviePass and HMNY  is a victim of its racist and ageist past, it is a great idea, a disrupter that is bringing people back to theaters in droves, a service consumers love, and a potentially great business, trapped in societal problem older and deeper than the theater itself.   Should MoviePass die, it would be another tragic case of discrimination raising its ugly head in the worlds of Silicon Valley and Wall Street, and hurting people who love the service on Main Street.   That my friends would be a very sad outcome, not just for the investors in MoviePass, but for the country and for the institutions who should know and serve us better.

 

HMNY – Delusion Dilution & a Little Bit of Disgust

I figured it was time to update my blog and say something about MoviePass.   I have to be honest, I have struggled to come up with anything new to say.  Even as the stock continues to get hammered, the overall story for MoviePass and the potential of the business seems to have not changed very much.  I stand behind the models I have published.   Others have proposed their own models including Mark Gomes and Julian Lin who did a sort of scattered model on Seeking Alpha, he used a crazy high Utilization rate and made no correction or even a mention any of the changes made by MoviePass to reduce utilization.   Gomes updated his model to reduce utilization, and his estimated cash burn rate has come down.   He is still pessimistic about the company.   I have not received any new information or any new reason to believe my models are off, and I have not heard a single argument for why my model does not work.

The primary argument people give me is that I am too optimistic and that Ted and Mitch are liars who can’t be trusted.   Both of which could end up being true, but for now at least, I am going to continue believing that they are running the company in good faith.  As to me being too optimistic, so far that has proven to be true, my entry point for this stock was bad, and continues to look worse on the daily.  I am an unhappy shareholder at this point.  I have averaged down, but do not plan to average down further, and won’t be buying any more of the stock until things stabilize – assuming that ever happens.

There are a lot of theories, some of which are more like conspiracy theories for why the stock has been hammered as hard as it has been.   I am not going to go into all of those here because most of them are just that, theories, and the fact is we don’t have any new official news from the company to work from.

For my part – I think I owe it to readers of my blog, and friends of mine whom I have recommended this stock to an update on my opinion as to what has happened here.  And that is how I titled this post.

Delusion: The definition of which is “an idiosyncratic belief or impression that is firmly maintained despite being contradicted by what is generally accepted as reality or rational argument, typically a symptom of mental disorder.”  I actually believe there is delusion on the bear side of the argument.   Others will obviously counter that I am the one being delusional.  No matter, maybe both sides are a little delusional here.   As I mentioned about, I stick to my model, and I have no substantive reason to abandon it.   On the bear side, the fear is palpable, hyperbolic shorts are pushing a BK scenario that makes no sense whatsoever, panicky weak hands are hanging on any chance of daily news, new articles predicting doom and total destruction are now regular multiple times daily.   If you believed the short to zero argument, you would have to believe that Ted and Mitch have no more cards to play and will walk away into the night with nothing from their efforts.  You also would have to believe there is zero value in 2.7 Million paying subscribers, zero value in the MoviePass brand, and zero value in MoviePass ventures.   That to me that seems to be at least a little bit delusional.  But ask yourself, is all of that worth nothing?  And does the company really have zero options left?

Dilution: The definition being: “a reduction in the value of a shareholding due to the issue of additional shares in a company without an increase in assets.”  Now this one gets a little bit tricky.   The last part of the definition is important to focus on.  “without an increase in assets“.    I believe that the ATM dilution is not happening without corresponding increased assets.   The assets, of course, are the new subscribers being acquired with the money raised from the selling of new stock into the marketplace.   The company has announced that it is on pace to have net additions monthly of 350,000 customers.   Unfortunately, this is not happening on the cheap, and this is why the dilution feels so painful.   And to some, it actually feels like there is no increase in assets at all.  Because if you don’t believe in the business model to begin with, you would of course argue that any new customers added are a liability not an asset.  And of course if you believe that there was no positive LTV of a MoviePass customer, you would just keep hammering away at the message that more customers will just drive the company down faster to zero, and hence you would short the stock hard, and try and continue to drive the price down further.   If on the other hand, you believe that the model does come close to breakeven when the company hits 5 Million Subscribers, you would then value the new subscribers as a valuable asset, in which case the dilution of your shares would be more acceptable to you, because you would accept that the company needed more money to grow the asset base.  This is the old argument of would you rather have 10% of $100 or 6% of $200.  The dilution fear is legitimate in cases where the money is not being spent well, or is just plain being stolen from shareholders.   If you believe that, you should not be in this stock.   Now, I am not saying that dilution is not a concern for the company, it is a concern because it is concerning to see so many new shares hitting the market.   Last checked total outstanding shares had gone up to 82.7M.   That is a lot more shares than when most of us started out with this company.   Now at today’s closing bell, the stock was trading at a measly  $.55 – Making the Market Cap 44.2 Million dollars.   There is still no significant debt for the company, and they do have a bit of cash in the bank.   Somewhere around $20 Million in cash.   So you are getting the company for about $25 Million bucks.

Yes! they are burning the cash up supporting new subscriptions – I am not ignoring that fact.  But if you pretend you are MoviePass god for the day and you could buy and run the entire company right now, you would be getting the cash, the subs, the brand and the MP Ventures movies already bought at a screaming good deal.

And, as MoviePass god,  if you wanted to, you could say – hell with it, I don’t want to lose another dime on subscribers, and you could change the plans to be even more restrictive and jack up the prices to a point where you kept all the cash and had a nice stream of revenue for quite some time.   Some, including Gomes, are suggesting that is now the best path forward.   I disagree with that path, but “reasonable” people are making that argument.

Dilution sucks, it makes it harder to get a huge huge gain out of a stock holding, primarily because the more shares out there, the harder you press up against the laws of big numbers.   If you believed that MoviePass was going to be a $1 Billion dollar company.  Now with $82.7 Million Shares out there, the stock only has to hit $11.49.   There are a lot of people who have shares above that price, and they are not happy to know that this is now the unicorn price for the stock.  I don’t blame them for feeling that way, and that is the problem with the entry point many of us had on this stock.   Gomes called it well, and I have given him a ton of credit for calling how the public market would react to funding growth via a public ATM offering.   Retail investors simply put, have not been able to deal with this very well at all.  Many have been scared out of a stock they once believed in.   Naked shorts have been ruthless in putting pressure on the stock making it go down further.   In turn, that has meant that the company has been forced to issue even more shares to generate the cash needed to keep the subscriber growth going and to support the business model until scale is ultimately reached.     So this has been a major bummer for the stockholders thus far.

I wanted to stay away from conspiracy theories – but just to whet your appetite – it is not hard to think of companies who might short this stock to make life hard for them.  There is a particular movie chain who desperately wants to see MoviePass dead, and there is at least motive for them to find ways to naked short sell the stock.  The company is owned by Chinese investors, and its initials are AMC.  If you are a shareholder, or MoviePass lover, next time you sit in an AMC theater, you might just think about how they are trying to kill your good times!

And so – yes dilution is real, yes it sucks for many of us, but there is a reason for it, and if it does ultimately increase valuable assets, as a stockholder, you will be fine.   It may take a year or more for the market to fully appreciate those assets, but when they do, you as a shareholder will by justly rewarded.

Little Bit of Disgust:  the definition of disgust being “a feeling of revulsion or profound disapproval aroused by something unpleasant or offensive”.    My feeling of profound disapproval at this point is targeted at Ted, and Chris Kelly, who continue to allow their egos to get in the way of settling what is now a long drawn out proxy battle for the company.    After I wrote the piece about this proxy battle I have now had multiple anonymous confirmations that my post was 100% accurate.  That indeed Ted and Kelly are fighting it out for control of MoviePass, and that they do indeed hate each other, and both are looking to take control of the company.   This has been incredibly bad for the company and for stockholders.  The big institutional money will not invest large sums in a company who is in a proxy battle.   It is nearly impossible to get any reasonable debt when in a proxy battle.   Further, it becomes a big day to day distraction on the business, while in its most crucial stage and needs focused management attention and execution.   I am disgusted by this, it is ego-driven, and does not help the company, the employees, or the shareholders.   It needs resolution, and these jackasses need to make amends NOW!

I am also further disgusted with Ted’s totally JV PR moves.  The latest being a tease of an acquisition announcement at Cannes that never materialized.   As most readers know, I worked at Microsoft for a long time.  I can tell you that it is basic 101 that you NEVER talk about a deal publicly before it is done.  NEVER – EVER – NEVER.   It is just so stupid that I can’t believe the CEO of the company made that mistake.   If you did that at Microsoft, you would be fired, seriously, your career would be over.  Of course, we can’t just fire Ted – but over time… maybe 🙂

Ted has shown that he is just crazy enough to get the financing to make this thing happen, but also too damn crazy to run this company to a sustainable multi-billion dollar Unicorn.   Maybe he can learn enough on the job to get over the hump.  But my sincere hope is that he does the right thing when the Proxy is resolved, and hands the company over to Mitch to run it, and takes a seat as Chairman of the Board.  Let Mitch do the heavy lifting.  He’s done it before.  Ted has done almost nothing – other than run companies into the ground, before.

So with all that, I remain long, upset with management, dissapointed with my entry point into the stock, hopeful that in a year or so, we will be seeing better days and higher stock prices.

 

 

Why Atom Tickets is the Perfect Acquisition Candidate for MoviePass – And Why I think it might just happen!

While we are all sitting around on pins and needles wondering what HMNY CEO Ted Farnsworth meant with his teaser quote in Variety when speaking of a”major acquisition, Farnsworth said,  “It’s going to be substantial,” said Farnsworth. “People are going to go, ‘Hmm how did they pull it off?’”

I am becoming increasingly optimistic that the acquisition is going to be Atom Films.  Which I think is a perfect fit for MoviePass, and for Atom films.   It is a synergistic combination, that will take both companies to a totally new level.

Why I would love this merger:

  • MoviePass has built an incredible brand with massive momentum.  Consumers love it and it is spreading with WOM in a fast viral way.  MoviePass is getting people back into theaters.
  • Atom Tickets has built terrific infrastructure and a very innovative social movie ticketing app and website and is now accepted at more than 19,000 screens across the US.  Including AMC, Regal and Showcase Cinemas.  Atom has created a “cool” frictionless way to go to the movies and has integrated concessions purchasing into the app, where consumers can pre-order concessions and have them ready and waiting at the theater.
  • MoviePass needs more ways to make money and needs a way to secure discounts on tickets purchased at the major theaters.   Atom Tickets can provide both of those things.
  • Atom Tickets needs more consumers, they have the Theaters signed up, but they have an audience problem.  Building that audience is expensive and hard.  MoviePass has audience, and they have incredible momentum building more audience.  Atom really can’t afford to go it on their own in this incredibly expensive space, they need a horse to ride to get their solution into more consumers hands.
  • MoviePass knows that they have a big Halo effect on getting people to the movies, but they have no way to monetize that – Atom Tickets could make that happen.
  • Atom Tickets has already started doing merchandising deals with Studios. For example, they ran a  “Legends Never Die” promotion, where Atom Tickets U.S. app users purchased advance tickets to see the Tupac Shakur biopic and could upgrade their order with a $25 limited edition merchandise bundle that included an official All Eyez On Me T-shirt, bandana.  MoviePass could bring a much bigger and more enthusiastic audience to these types of promotions.

Here is why I think it may just be possible.

  • Atom tickets CEO and Co-Founder  Amesh Paleja left the company to take the CTO Job at Starz –  and Atom has not named his replacement.    Believe me when I tell you, if things were taking off like a rocket ship at Atom, Amesh would not be leaving to take another job.  When a founding CEO leaves a company after a series C round, it means that the waters are rough for the company, and they are trying to find a way out of the storm.
  •    Some have speculated that it would be too hard to pull off this acquisition given the serious amount of financing Atom Tickets has pulled in and from big names including Fidelity Investments, Lionsgate, Disney and 21st Century Fox .   They have raked in a total of $125 Million, with the last round being $60 Million.   In their last round they said the money was to be used for Marketing campaigns and to continue to build out features of the service.   This is where it gets interesting, yes there is a lot of money dumped into Atom so far- and the $60 million was just back in early March.  Now I don’t know about you, but I have not seen much at all in the way of Marketing from Atom, in fact I have seen way more marketing from Fandango than Atom.   Here’s the issue.  Atom has a neat idea, and some cool technology.  The theaters are cool with them, because they see no real threat, and maybe a little upside to the way they do things now.  The problem for Atom is, they are just not that interesting to consumers.   Not compared to MoviePass, and they have to compete for consumers with the theaters themselves and with all the other ticket options.  As a standalone play, Atom is just not that compelling.   They can’t generate the WOM that MoviePass does, and while they have a fair chunk of change, it’s not enough to get them anyplace big.  Certainly not to an IPO.
  • So I think Atom is willing to deal, and I think the backers of Atom would be thrilled to find a way to get into bed with MoviePass, even if they have to take an initial small valuation haircut to do it.  Being acquired by MoviePass takes away a headache for the VC’s here, and it also works to the advantage of the studios – as ultimately they want what MoviePass and Atom want, to get more people to the movies.

Finally,  I have one last reason why I think this may be happening, and it has a lot more to do with what I don’t know, than what I do know, so to speak.  Read – this is NOT inside information!    I happened to have a contact at one of these companies where we could chat about these kinds of ideas and these things.  That contact has gone totally dark on me.  It may be that this person now knows that I write this blog and doesn’t want to talk anymore for any reason anyway.  Or any other number of reasons that this person doesn’t want to talk.  But I have a hunch this person is protecting me and  (she/he) to make 100% sure that no insider trading accusations could possibly be made.

It is just a hunch – and I could be wrong.   But I sure hope this is the news and acquisition Ted is teasing.    Time will tell!