My Updated Revenue Model Post 1st QTR Earnings Release

Many have asked for an updated model after the ER this last week.  This new model has a lot of tweaks to key variables, and I had to spend some time making the model fit within the specific numbers of the release.

Before we get to the specifics I want to highlight what I posted earlier this week.   The specific nitty gritty in the financials really don’t matter all that much for a company that is headed to unicorn status.   Subscriber growth and getting to scale are much more important in the phase we are currently in.  Mitch understands that crossing the chasm requires rapid and disruptive growth that can challenge and overtake the incumbents of the industry.

Many MoviePass investors have now seen this excellent presentation done by Mitch where he outlines how rapidly changing patterns of consumer behavior and the speed at which businesses with a new disruptive idea that reduces friction and increases consumption of a service can quickly grow into multi-billion dollar companies, seemingly overnight.    If you have not watched this yet – and you invest in MoviePass – you owe it to yourself to check it out.

There is a fun part of the video near the last 7 minutes where Mitch takes a shot at AMC, stating they will buy them and change their name.  I love it!

The point here is that if you are investing in MoviePass / HMNY and you think you can peg the share price to very specific models like mine, or anyone else’s model,  forget it!    Mitch and our boy Ted are moving way to fast for that.   Whatever you read today in my model, could change with a major move tomorrow from the company.   A new family plan, an acquisition, getting a big hit from American Animals or Gotti, or some other film.   It all moves to fast to model and tweak in the single-digit percentages.  And that is why if you get all hung up on ER’s and all the bean counting with company’s like MoviePass, you will simply get lost, or run over by the train.

Now – while all that is true, there is a business to run, and there has to be enough money around to fund the big ideas and give investors some real hope that this thing won’t just bleed cash in eternity.    Ted and Mitch have consistently said they could near profitability at the 5 Million Subscribers mark, saying that would happen sometime near the end of this year or early next year.   So with that promise from management, and the need to not party like it was 1999!  Here’s a model that can make some claim toward progress on getting to profit.  And by profit – I do mean gross profit, not net profit.  If you don’t know the difference, you should not be buying individual stocks.

To make this model work I had to take in the following data from the ER into my model.

  • Subscribers 2.7 Million (They were not specific on this, but I believe that is the very latest number and is a May number) 1.1 Million new in the QTR – I could not fit this into the model.  It actually didn’t make sense with the numbers they have been quoting along the way.  So this is something that is just broken in the model – that said, it’s not critical to the outlook and I didn’t have time to figure out why they net addition numbers just did not jive with other sub #’s they have stated.
  • Revenue 49.4 Million – Ad revenue  1.2M – I got close here
  • COGS 137M  –  I got close here
  • Utilization rate – Dropping to 1.5 on average – THIS IS BIG and it was largely missed by many.  (quick rant – HMNY is HORRIBLE at PR – I mean they are terrible, the worst I have seen, even for a startup.  So bad that it makes me question who they have working on this and why they don’t just hire me to help them with it.  In this specific case of ER – they released all the 10Q numbers in the evening and followed up with a poorly written Press Release the next morning. (NO COMPANY EVER DOES THAT!!!!)   Even worse!!!  They did a terrible job highlighting the most important new data they had in the release, and that was the super significant reduction in Utilization rates with the new rules and fraud protection now in place.   For some reason, they included an excellent graph of monthly cohorts in a multimedia format and had no serious efforts at comments or explanations of the graph!   Many investors would not even see the graph as those things typically do not show up in most trading platforms.   I mean really, everything about how they execute their basic PR is just amateurish /rant )

If you don’t understand cohorts, and have not studied this kind of thing, it ain’t no big deal.  The graph simply looks at what a group of users, based on certain months as the cohort, would look like before and after the changes.  You can see here, the drop in Utilization is BIG, and on average it drops down to a 1.5,  That’s very good!  And I expect to see other – smaller – drops in the future.  Both form more anti-fraud measures, and from the user base maturing.

OK!!   so I worked all of those factors into this new model.   And with all of these new numbers baked in, it actually looks quite promising that MoviePass could still get very close to breakeven

Also for the first time, I added a row for SG&A – I took the $20 Million they reported in the QTR and smoothed it upward monthly.   SG&A is a funny thing to play around with, it is largely a variable, and can go up and down based on a lot of management decisions.   It is a small part of the puzzle for HMNY, but it was a little bigger than many of us wanted to see, given the company has claimed it does not need to spend money on advertising.   No matter, it is real money, and it does need to be watched.   And if this were not a product that sold itself, it would need to be watched very carefully.  Many subscriptions businesses spend 100’s of dollars per acquired customer.  MoviePass spends Much less than that.  It is now closer to $55 in SGA per Subscriber.   That is not “Nothing” anymore.  And if it goes up a lot more, that is new problem to start looking at.   It would mean that our WOM marketing is starting to slow.  We don’t want that – so get out there and tell your friends about MoviePass every damn day!

OK here’s the model.

And as usual – all my models are on this page.

 

Final comments and caveats – I don’t get paid to do any of this.  If you hate the model – that is fine – you are welcome to build your own!

I do apprectiate comments and suggestions.  So keep those coming.

I know MoviePass consumers like to get a lot of bang for their buck.  So I hope this gives you some solid friction free advice you can use!

Lastly – I had two nice glasses of wine writing this post, so if it rambled, and got loose at the end, that might help explain it!

MoviePass – Why The Earnings Don’t Really Matter -Yet

 

I spent a good deal of time combing through the earnings numbers last night and then again this morning.   Overall, the loss on GP was bigger than I expected or modeled.   I won’t bother repeating all the numbers here.  Gomes does a fine enough job covering the short view of how the financials sucked.  So if your glass is half empty read his post.    And BTW I am not saying he is wrong on the analysis of the quarter.   What I am saying is that it actually doesn’t matter all that much yet.    HMNY is making the transition to Unicorn status, and that is what matters now.

HMNY stock action is starting to act like a unicorn.  Investors, both retail and institutional are starting to accept that it is going to take a lot of money to build this business to scale.   For unicorns, the name of the game is rapid growth, at almost any cost + the belief that at scale a wonderful business will be born.  MoviePass made solid progress on both of those fronts.  Not as good as I had hoped, but solid progress has been made in the QTR.

On subscriber growth, honestly, I was a little disappointed with the 2.7 Million number.   I really wanted to see 3 Million here as the surprise number.   But, 2.7 Million is not a BAD number, and it does put the company on a solid pace to hit or beat 5 Million subs by the end of the year.   We still have the two most busy moviegoing seasons ahead of us!  We all get impatient I know, but 5 million subs in the period of about 14 months is a crazy good number.   That is unicorn growth.

On the front of creating a wonderful longterm business at scale, I like what I see.   The advertising business is just scaling up now, and it was frankly too early to have a lot of traction early in this QTR on ad revenue.   That said we did see some real revenue here at just of a million bucks, and we have 3 real paying customers, who must have spent a decent chunk of change to get that number over a million.  The completion of MovieFone acquistion happened in the QTR, and don’t forget that this gave MoviePass access to Oath’s huge salesforce.  Also of note, MovieFone announced the decommissioning of their standalone app to be integrated into MoviePass just this week.   So there is a lot of good progress in building up an advertising business to take advantage of MoviePass as it continues to grow and scale up nicely.

The news was less good on Utilization rate, and hence this made the financials look worse.   The explanation for this is the immaturity of the customer base, and the new safeguards and limitations were not yet in place.

The maturity of the user base is key to utilization, if you have had MoviePass for more than 5 months you know exactly what I mean.  At first, you ride that new bike like the shiny awesome new toy it is.  You make love to it like it was your hot new GF or BF.   But like all new things, after a while, it becomes an old thing, and you calm down and ride it less.   We are creatures of habit, we go back to our old habits, it happens, I have reams of data to prove it.   Buy if you want a great read on how strong our habits are read this book.  It will blow your mind!

So, unfortunately, with strong new subscriber growth, we will experience higher utilization rates for some amount of time until the userbase is significantly larger than new net additions each quarter.   If you take the 350,000 net new ads monthly the company is now claiming, once we get past 5 Million subs, that math for more mature vs. immature subs starts getting a lot better.   There are a lot of businesses that work this way.  This is not something to get overly alarmed about.   Have you ever heard of giving away the razor to sell the blades?   That is what is happening here.

Longs should be relieved that all the jacking around of the offering did not cause any type of serious momentum bust.   The iHeart Radio promotion was in my mind a clear dud.  It didn’t do much, and Farnsworth has now publicly thrown the thing under the bus – stating “somebody talked me into it, I will never do it again”.   Chalk that one up to having a bit of a moron leading this thing, and startups doing nutty stuff from time to time.

The great news is that the “one movie once” limit, and the ticket stub submission procedure, did not cause a total subscriber rebellion.   Anytime you can make changes that have a 35% reduction of COGs from your customers, and they still love you, it means your value proposition is very strong.   Add to that, customers say they will willingly pay more, things are looking good on being able to get a revenue model on subs to break even sometime down the road.

Honestly, there has been some pretty stupid shit that has happened with this company and stock over the last QTR, and even with that, the momentum case is better than the short case, particularly at this Market Cap level.   This company needs PR help BADLY!   From the horribly timed 8K, to the late a feeble defense of its stock price from Farnsworth, to the completely insane way they released the QTRLY ER last night and followed up with the PR this morning.   It is just a total shit show on PR.   I mean it is amateur hour at its worst.   In some ways, the company has been successful in spite of itself, and that is because the overall idea is so compelling, and this space was so totally ripe for total disruption.    I continue to believe that Farnsworth is a bozo, but MoviePass needed somebody with brass balls and a bit crazy to make the moves it has.  He is a useful idiot in the MoviePass crusade.   Farnsworth is our very own  Erlich Bachman!   If you don’t know Bachman, you should not even think about investing in HMNY!  It’s not for you!

And so it is, the financials look ugly, the company continues to grow multi 1000’s percentages, the shorts will howl that the company is doomed!  The longs will see the beautiful unicorn.   The stock will start to rise, the shorts will get squeezed, the Wall St. number crunchers and bean counters will pout that everything they learned in MBA school was wrong.   And a unicron will become real!

 

A Proxy Battle and a Clash of Egos is Now Holding Back HMNY & MoviePass Stock

Chris Kelly – Original MoviePass Investor

A clash of titans and silicon valley egos is colliding and it is taking down HMNY stock price and could possibly take down the MoviePass ship altogether if not resolved soon.

As Ben Rabizadeh stated in his article on Seeking Alpha last month.

“there is only one news event which can permanently put a bottom in the stock and turn things around; that is resolution of proxy.”

Ben’s words could not be truer today as we sit at .65 cents a share hoping for a miracle.

I wanted to know, what is going on with the Proxy – what happened to our IPO moment and this huge potential opportunity of MoviePass.   I have been digging and digging on this, I have reached out to multiple company officials at both MoviePass and HMNY neither will comment.

I have been in contact with other investors who claim to have contacts who know what is going on inside the proxy battle.  I want to fully disclose that I cannot disclose the sources I have, nor can I fully vouch for these sources given they feel it necessary to either stay totally anonymous and or they will not reveal their own sources.    That said, I have spent many hours on this, digging through SEC filings, reaching out to past employees of MoviePass, talking to investors long and short about the situation.   Here is what I have found.

Apparently, there continues to be a disagreement between Chirs Kelly and Ted Farnsworth on how to resolve the proxy.  For those not familiar,  Chris Kelly, who was Facebook’s Cheif Privacy Officer, was the lead investor in MoviePass’s Series A round financing.    Chris has had a past of getting special concessions out of Farnsworth and HMNY since the beginning -when the odd relationship was formed with Ted and Mitch to bring MoviePass and HMNY together.   If you go back to the old SEC filings at the beginning of the HMNY acquisition of MoviePass you can see that Kelly was able to carve out special concessions from Farnsworth.  Likely because Kelly did not trust Farnsworth because of his shady past.   The following comes from the original Share Purchase Agreement:

(b)          Subject to the terms and conditions of this Agreement, Helios agrees to purchase at the Closing and MoviePass agrees to sell and issue to Helios at the Closing, such number of shares of MoviePass common stock, $0.0001 par value per share (the “Common Stock ”), equal to fifty one percent (51%) of the then outstanding shares of Common Stock of MoviePass (on a fully-diluted basis, giving effect to the payment or conversion of any notes that convert into MoviePass capital stock that are outstanding immediately prior to the Closing, but excluding any outstanding options to purchase shares of Common Stock and warrants to purchase shares of MoviePass’s capital stock and the shares of Common Stock issuable upon conversion of the Kelly Note (as defined below)) for an aggregate purchase price of up to $27,000,000 (the “ Maximum Purchase Price ”), payable as provided in Subsection 1.1(c) below.  The shares of Common Stock issued to Helios pursuant to this Agreement (excluding, for the avoidance of doubt the Kelly Conversion Shares (as defined below)) shall be referred to in this Agreement as the “ Shares .”  MoviePass further agrees that upon conversion of the Kelly Note by Helios in connection with the Closing, it will issue the shares of Common Stock issuable under the Kelly Note; provided, that in the event that the number of shares of Common Stock to be issued thereunder is less than two percent (2%) of the then outstanding shares of Common Stock of MoviePass (on a fully-diluted basis, giving effect to the payment or conversion of any notes that convert into MoviePass capital stock that are outstanding immediately prior to the Closing, but excluding any outstanding options to purchase shares of Common Stock and warrants to purchase shares of MoviePass’s capital stock and the shares of Common Stock issuable upon conversion of the Kelly Note), MoviePass hereby agrees that the Kelly Note will be convertible into such number of shares of Common Stock to provide Helios with the foregoing two percent (2%) interest under the Kelly Note (the shares of Common Stock to be issued under the Kelly Note, the “ Kelly Conversion Shares ”).

This clause has all kinds of interesting stuff in here.  But one thing is for certain, Kelly had a loan to MoviePass, that was convertible to shares, and it looks like both parties were suspicious of each other and naturally trying to protect their own interests.  What is notable is that Kelly was the only special case noted in the entire agreement with Helios and the only outlier noted  in the SEC filings.  Kelly has some sway with now things go with MoviePass and HMNY.

Mitch Lowe and Ted Farnsworth

Culture Clash of Titans

Kelly and Farnsworth could not be more different.   Kelly is a lawyer, who has made it big and has a stellar reputation.  You don’t get to be the Chief Privacy Officer at a company the like of Facebook without having your reputation totally in hand.   Kelly is now a major VC investor, Pro Sports team owner, and silicon valley royalty.  He runs in all the right circles and knows all the right people.

Farnsworth is a huckster and a hustler from Miami. He has burned shareholders with several wipeouts in the past.  His most notable achievements were the psychic network and his total faceplant with purple energy drink, a company he tried to create to compete with Monster Beverage.  He claims Highlander Companies – a Miami Real Estate venture targeting millennials in his SEC Bio – but an exhaustive search brings up nothing about the company.  Farnsworth is the kind of guy that Kelly would normally eat for breakfast.  Kelly apparently has no respect for Farnsworth at all, and likely regrets that he has to deal with in any capacity.

Mitch Lowe stands in the middle of these two guys.  Mitch’s reputation stands strong being associated with both Netflix and Redbox, but big hits and winners for Mitch.   However, Mitch is a super unique type of entrepreneur, he is a high school drop out, he started off with an oddball business selling movie blacklight movie posters in Europe.  He is not your typical blue-blood silicon valley, Ivy Leaguer, MBA.  Mitch has real street cred, but he does it his own way with grit.

When you bring these kinds of personalities together, I can tell you from experience – these big egos clash – big time.  That is what is now happening behind the scenes at HMNY and MoviePass.

IPO vs. Reverse Merger Who Wins What?

Retail investors shouldn’t really care very much how the Proxy is resolved, we just want it resolved and fast.  The benefits of removing the Proxy status are many.  It provides MoviePass better and cheaper access to more capital, it makes it much easier to sell the story of the company, and it clears up a ton of brand confusion with HMNY that just continues to linger.   It is one of the primary reasons that the stock price is getting killed, and the dilution of shares is happening on the cheap right now.

Kelly wants a MoviePass IPO, it is not exactly clear why he wants this, but it is easy to speculate.  Kelly likely believes that the company is undervalued, and he wants to see a bigger return on his original investment in the company.  It is impossible to know how many shares of MoviePass Kelly currently holds, but he is for sure one of the biggest holders of the company left in the cap table, and he wants to maximize that holding.  Kelly and original MP investors only have the remaining 8.2% of the company left to bargain with.  In many ways Kelly likely regrets giving up as much of the company he has, knowing that they have the potential to go big now.   Further, it is likely that Kelly wants to have a bigger say in the company’s future, he likely does not want Farnsworth in his way or in his company.  Kelly likely wants a seat on the board, and some other board members with him that align with his way of thinking.  An IPO helps Kelly with his ego – which apparently he has a very large one.  He wants MoviePass to be his trophy, not Farnsworth’s.

Kelly allowed Mitch to do a deal with the devil in Farnsworth, to finance the big $9.95 go for scale play.  None of them had any idea at the time that they were going to strike lightning in a bottle the way they did when the offer was first introduced.   The surge of subscribers took on a life of its own and caught the company and its investors totally off guard.   This is why the company suffered so many growing pains so quickly, from blackouts, to customer service problems, PR glitches and all the rest.  They just were not ready to be instant rock stars.

You only have to look at to SEC filings of the Share Purchase Agreement,  to understand that the goals put forth were blown away by a factor of 10  in a matter of one month.  Even Mitch commented in his video interviews they thought they would get about 100,000 subscribers in a year, and they were way over that in a month.   So yes – they were all caught off guard.   Except maybe less so for Mitch – who was always the advocate for lowering the price and driving the business to big scale.

 

Closing; provided however , that 666,667 of the Helios Closing Shares shall be subject to forfeiture by MoviePass if MoviePass fails to achieve either of the following two milestones within the specified time frame: (A) within one year after the Closing, subscribers to MoviePass’ MoviePass product shall have exceeded on at least one (1) day 100,000 subscribers (such number of subscribers to be determined based upon the number of registered accounts on the MoviePass server that have contracted with MoviePass (through a 3 rd party or otherwise)

With that huge hit of momentum, Farnsworth has felt emboldened by the big bet he had made, and he wants to take total control of MoviePass.  Farnsworth’s desire is to try and take out Kelly and the remaining MoviePass stockholders 8.2% stake out on the cheap.   They now have far less say on what Farnsworth can and can’t do with the company.

To do it Farnsworth is taking another big gamble.  Instead of agreeing to whatever Kelly’s demands for an IPO likely with favorable terms for Kelly, Farnsworth is riding on like the cowboy he is.  He has essentially given Kelly the finger.  Last week’s 8K and the continued dilution to raise money to fund the MoviePass subscriber growth is Farnsworth’s way of saying, “Hey Chris – I can do this without you now, you can either give in now or give in later”.  Farnsworth is not afraid to roll the dice here and force this go his way. By selling more shares in HMNY he is, in essence, diluting down Kelly more as well.   Yes, this hurts the stock price, and it even hurts Farnsworth by hitting him in the pocketbook, Farnsworth is the largest shareholder of HMNY, and he has a bonus structure heavily tied to the market cap of the company, which he is now wildly far away from achieving.

It’s a dangerous game being played by two big egos fighting for their right to control the next big unicorn company.  Unfortunately, retail stockholders are caught in the middle.  Ted is pressing on, diluting shares for more funding, and pushing to be the leader of the band.   Kelly has bunkered down and is trying to find a way to get his IPO.  What we don’t know is what other cards Kelly might have to play if any.  For now, Kelly can just refuse to sell his shares to Farnsworth for a reasonable price, holding up the reverse merger and all the goodness that could come from that.  If Kelly has any other cards, we don’t know but I am sure we will soon find out.

When this is resolved, the buy signal will be on.  It will remove a key blocker for big money managers to invest in the company, it will allow Farnsworth to get debt financing at much more reasonable terms.  Getting debt right now is extremely difficult due to the proxy fight, nobody wants that kind of a legal headache.

I will keep digging here, if you know more please share it with me.  As retail investors, we should put the fire to these guys push them to resolve their differences so we can all prosper!

 


For Reference SEC Filing on MPSA

MoviePass Subscription Agreement

 

Background

 

As previously disclosed, on August 15, 2017, Helios and Matheson Analytics Inc. (“Helios”) entered into a Securities Purchase Agreement with MoviePass Inc. (“MoviePass”), which Helios and MoviePass amended on October 6, 2017 (collectively, the “MoviePass Purchase Agreement”). On December 11, 2017, pursuant to the MoviePass Purchase Agreement, Helios purchased shares of MoviePass’ common stock, par value $0.0001 per share (the “MoviePass Common Stock”) totaling 57.8% of the outstanding MoviePass Common Stock (excluding shares underlying MoviePass options and warrants) after giving effect to the transaction (the “Acquisition”).

 

As previously disclosed, on October 11, 2017, Helios and MoviePass entered into an investment option agreement (the “Option Agreement”), pursuant to which MoviePass granted Helios an option to purchase additional shares of MoviePass Common Stock in an amount up to $20 million (the “Option”). From November 2, 2017 through December 15, 2017, Helios exercised the Option in full. Upon full exercise of the Option, Helios owned 62.41% of the outstanding shares of MoviePass Common Stock (excluding shares underlying MoviePass options and warrants).

 

Helios previously announced the closing of the Acquisition in a Current Report on Form 8-K, filed on December 11, 2017, containing the audited financial statements of MoviePass for the years ended December 31, 2016 and 2015, and the unaudited pro forma combined financial statements of Helios and MoviePass (which Helios amended by filing a Current Report on Form 8-K/A on February 9, 2018).

 

As previously disclosed, on March 8, 2018, Helios and MoviePass entered into a Subscription Agreement (the “March Subscription Agreement”), pursuant to which, in lieu of repayment of $55,525,000 in cash advances made by Helios to MoviePass from December 19, 2017 through February 20, 2018, MoviePass agreed to issue to Helios and Helios agreed to accept, based on an agreed $240 million pre-money valuation of MoviePass, an amount of MoviePass Common Stock which, when added to the amount of MoviePass Common Stock owned by Helios immediately prior to entering into the March Subscription Agreement, caused Helios to own 81.2% of the then outstanding shares of MoviePass Common Stock (excluding shares underlying MoviePass options and warrants).

 

New Subscription Agreement with MoviePass

 

From February 27, 2018 through April 13, 2018, Helios provided cash advances to MoviePass to support MoviePass’ working capital and operational requirements, as well as to support the expansion of MoviePass’ business plans and objectives. The total amount advanced by Helios to MoviePass during this period totaled $35,000,000 (the “Advance”).

 

On April 16, 2018, Helios entered into a Subscription Agreement with MoviePass (the “April Subscription Agreement”), pursuant to which, in lieu of MoviePass repaying the Advance, MoviePass agreed to issue to Helios, and Helios agreed to accept, based on an agreed $295.525 million pre-money valuation of MoviePass as of March 31, 2018, an amount of MoviePass Common Stock which, when added to the amount of MoviePass Common Stock owned by Helios immediately prior to entering into the April Subscription Agreement, caused Helios to own 91.8% of the then outstanding shares of MoviePass Common Stock (excluding shares underlying MoviePass options and warrants).

 

Accordingly, as of April 16, 2018, Helios owns 91.8% of the outstanding shares of MoviePass Common Stock (excluding shares underlying MoviePass options and warrants). MoviePass has no class of shares outstanding or designated other than Common Stock.

 

 

 

MoviePass is Crossing the Chasm Into the Tornado – We’re Dancing Man

As long-term investors in HMNYwe feel like we are dancing alone this week.  We have been rejected by the market, we are embarrassed, alone, we feel like maybe it would be less humiliating to just sit down, or leave the concert altogether.  This is the hard life for startups and their investors.   Being an innovator can be very lonely, sticking to an idea when everyone else is running away or rejecting you is one of the hardest things an investor can do.  People, humans, are animals, they run in herds.

Please take a couple minutes to watch and listen to Geoffrey Moore the originator of Crossing the Chasm walk you through this incredible example of “Dancing Man” from  2009 Sasquatch.  It is a fun video and it explains the phenomena of Crossing the Chasm better than a thousand more words here ever could.

I believe that MoviePass is now at the very scary and most critical juncture for a startup company, it is attempting to cross the chasm from Early Adopters to Early Majority.

Crossing the Chasm

 

All the signs of MoviePass attempting to cross the chasm are emerging at the same time.

  • Early Adopters are already in!  They love the service.  An incredible 83% of MP early adopters say they would recommend it to a friend.  The classic WOM* has been achieved.
    • The percentages neatly mirror the adoption lifecycle.  MoviePass is buying approximately 9-10% of Movie Tickets – matching the early adopter segment perfectly.
    • Mitch has stated consistently that the magic numbers needed to achieve profitability are 5 Million Subscribers and around 20% of tickets purchased.  I am sure Mitch knows these numbers land him just on the other side of the chasm, where the early majority adopts the service, and a new category is fully established.
  • Investors are losing their shit!   Investors, venture capital, always get very nervous at this point in the lifecycle, and this is why HMNY is getting killed in the market.  VC’s and Wall Street guys are big on vision early, and the freak out when it takes just a little more money or time to get to that vision.  They get impatient, they literally freak out, they demand their money back, they look to change management (which BTW has already happened at MoviePass), the give up.  I have seen it many times in other investments, crossing that chasm takes vision and balls that most investors seem to lack.
  • The media is freaking out!  This stage is where a lot of good ideas – (but weak companies) with strong early momentum with the early adopters often die.  As such it is understandable that the vultures of the media who love a good car crash and scary death spiral story are seizing the moment to create some clickbait headlines.  All of this should be expected right now.

I believe that MoviePass will cross the big scary chasm and live on as a big successful game-changing company.   I have not lost faith.  Here’s why.

  • Bankruptcy Looks Unlikely – No Debt Lots of levers
  • Product Changes to adapt to Early Majority customers are now baked into the product.   The incredible PR and WOM derived from the too good to be true offer has done the heavy lifting in for Early Adopter phase.  Limiting to a single view of any title and reducing fraud with ticket stubs are now in and reducing costs.
  • Lack of competition.  MoviePass has an incredible lead over any competition, and it’s is now extremely unlikely any more new entrants will come into this space.  Yes, there is that Turkish company, but they look like a Bing vs. a Google.  No brand there, the offer is weak, and can’t catch up.
  • The entrenched establishment now looks shaky and scared.  AMC lashing out at MoviePass and subsequently seeing their stock tank after an earnings beat – infused from MoviePass is all you need to see to know that MoviePass has the establishment wondering what the hell they can do now to stop this thing.   Again this is a classic crossing the chasm point, where the entrenched competitors realize they have to make some kind of move.  I think it is too late for AMC, they will have to acquiesce.
  •  I have a gut feeling Early Majority has already started.   As I have written about many times in the past, at my local theater the employees I talk with estimate that MoviePass is making up around 30% of tickets sold.   These are kids, who don’t have all the data, but they see people coming in every day, and they know the trend.  These kids say they are seeing the demographics change to more “normal” people, not just movie fans.  That my friends is the beginning of crossing to the Early Majority!   This is a hard one to put a finger on, pure data can lie to you when trying to figure out if the cross to Early Majority is underway.  Truly it is a gut feeling tied to data that tells you when that transition is underway.  The kids working at the theater are feeling it!

So what should investors in MoviePass do now?

Well,  first of all, I have learned one big lesson, don’t take my advice for timing, so far my advice on timing has been terrible, and for that, I truly apologize.  Mark Gomes got the timing so much better than me, if you are a trader looking for a quick turn, I would yield to him on timing calls, he has nailed it – so far!     I hate losing money, and I hate it when friends, readers, and others lose money.  So far, I have not lost money because I have not sold a single share, but man do I wish I would have listened to Mark about my entry point for this stock.  Calling tops and bottoms is really hard, and I missed here.

With that govelling out of the way.  My advice to those who are already in the stock, I think you should on and see if MoviePass can indeed Cross the Chasm, if they do, you will be richly rewarded.

If you have not read Geoffry Moore’s Crossing the Chasm, I highly recommend reading it – it is a classic and one I think all serious investors and entrepreneurs should read and understand.

I also highly recommend “Inside the Tornado”, which adapts Moore’s original works to be more relevant to B2C disruptors like MoviePass.

*Word of Mouth 

Chapter & Lesson # 3

 

Chapter 3 

“Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion.”  

Jack Welch 

I decided that when I got my second shot at working at Microsoft I was going to treat that opportunity very differently.  I had a little bit of experience in the real world now.  Even I could now see how PC’s were going to completely transform the workplace.   I was not visionary enough to fully understand how much PC’s were going to change the home, but it was pretty obvious that PC’s were going to be important in many homes very soon.   Of course, Bill Gates had the powerful vision of a PC on every desktop in every home, but that seemed like a distant pipe dream back in 1994.  But when Bill spoke, people listened, and he had a way of making the un-seeable seeable.  For all that has been said and written about Bill Gates, to me at least, he exemplified a bold and strong leadership combined with an amazing vision unlike I had ever seen.  

Gates in my very limited interactions with him, was the real deal, just an absolutely incredible person.  Bill’s vision, intelligence, drive, his massive depth and breadth of so many different areas was just unbelievable to witness. I was amazed and impressed whenever I was fortunate enough to have a meeting with him or hear him speak.  It was just an incredible privilege to be around him.  Whatever you think about Microsoft, its products, its business practices, you can never take away the incredible person that is Bill Gates, and the lasting impact he has had and will continue to have on our planet.   He has made a big dent in the universe. 

So much has been written about Bill Gates that it is hard to come up with anything particularly novel or new to say about the man.  One of the things I always appreciated about Bill was his unique ability to take extremely complex and technically difficult problems and simplify them so that anybody could understand them.    

A meeting with Bill was something that could take weeks to prepare for.  Most of the meetings with Bill were to seek strategic direction, either for a product specifically, or for some kind of directional or strategic advice on the business.  Bill was always amazingly deep on both topics, so much so that you would fear he might ask a question that you had not thought of, and he often would!   When particularly difficult decisions needed to be made, Bill had an incredibly elegant way of weaving his deep technical product knowledge with his insanely good business acumen to come up with what would often be an obvious solution, where he would plainly explain the answer.   

It was amazing to watch Bill lord over meetings with his superior intellect combined with his reputation as the great founder of Microsoft; with his jabbing quick smarts, and his sometimes wicked tongue, he was the only person I have ever seen who could command the respect of Microsoft’s biggest egos and bring them quickly inline.  His leadership was simply unmatched. 

Learning Lesson #3  –  Only work at a company where you truly admire the leadership.   When you truly admire the leadership of the company you work at, the hard times and the difficult things you encounter each day are much easier to deal with.     There were plenty of hard times, bad days, and screwed up things happening at Microsoft during the 20 years I was there.   When you are lucky enough to have great leadership at the top, you end up trusting that good decisions will ultimately be made about the big things that really matter.   This makes it infinitely easier to deal with all the little stupid things that happen in big organizations all day long.   After Bill left the company, it was clear that Steve Ballmer didn’t have anywhere where near the intellect, vision or leadership qualities that Bill did.   You could never be sure if Steve would make a good decision on the big things that mattered, he was way more random, insecure and for my taste a more difficult personality to deal with.    The longer Steve was in power, the more you could watch the company lose its way.   When a company feels lost at the top, the stupid things that happen every day at all companies seem to feel much worse.  You can put up with a TON of bullshit if you feel like you are heading in a great direction overall.