MoviePass Valuation Comparisons to Other Unicorns

After watching this most recent YouTube video of Mitch Lowe being interviewed specifically on details around MoviePass’s ability to survive, I kept thinking to myself how ridiculous it is that the valuation for HMNY is so incredibly low.

As the interviewer points out in the video.  MoviePass is essentially priced like a company that is going out of business.  Mitch does an excellent job defending the value of MoviePass.  If you have not watched the video yet and you invest in MoviePass/ HMNY, I highly recommend viewing it in its entirety.  At one point in the interview, the guys both get real and fully acknowledge there is some real value in what MoviePass has accomplished to date.  It is damn hard to get 3 Million people to hand over their credit card and say “bill me” every month for a service.   There are a LOT of companies that will find this group of consumers very attractive.   So if it comes down to is there value here, in the case of potentially an acquisition, the answer is clearly YES!

Also, it was clear, that if MoviePass wanted to turn profitable in a hurry, they certainly have to the means to do it now.  Mitch revealed 12% of the MP users represent 40% of the cost.  With Peak Pricing now coming, it will be fairly easy for MoviePass to essentially kick heavy users out, or tax them to a point where they are no longer a problem.   As I have said for a long while, MP has all the levers it needs to control its own destiny, and it seems clear that they are intent on doing so.

It has been such an odd situation to watch the value of HMNY/ MoviePass drop so low while other private and public Unicorn companies continue to raise money via VC capital and debt financing,  And do so at incredibly large valuations.   I felt like it would be a worthwhile exercise to look at some well known Unicorn companies and compare some key data points.  These companies share a lot of similarities, they are building disruptive new business models at large scale, they are competing with entrenched incumbents, they are spending capital and incurring losses to build these new businesses.

The numbers here are a little rough, I scoured the web to get as accurate as I could, and because all of these companies are growing very fast, and they are either private or just recently public, it is hard to get precisely accurate data.   I think what I have here is reasonably close for each company, and it works well for comparison to MoviePass.

If you look at the comparisons what will jump out to you is a few things.  First, the market is currently valuing MP at almost nothing, it is assuming MP is going out of business.  As I have said before and will say it again, MoviePass is not going out of business, and they are NOT going BK.  Second, while it may sound scary when we here about the need for potentially over $1B more of capital to get MoviePass totally off the ground, by comparison, MoviePass has built a great revenue stream on relatively little capital thus far, way less than many other Unicorn companies.   And the total expenditure of capital is certainly not out of line with others who have market caps that are very generous.   There is also the constant fear of dilution that overhangs the company.  Will they really need to issue a billion shares or more, swamping the demand side?   It is possible that these fears, even if irrational, and only temporary could continue to depress the stock until the company shows a more clear line of sight to breakeven, or the sentiment for the company and its stock improves.  Those two things could be integrally tied together as well.  Only time will tell.

When looking how far the comparisons to other Unicorn diverge, it doesn’t make much sense, and I fully expect to see some revision to the mean here.   By that, I mean that I fully expect to see MoviePass move up closer to the valuation of other Unicorn companies within some reasonable timeframe.  I believe that this will likely happen toward the end of this calendar year, or sometime into the spring of next year.    I am not predicting any specific price, and this reversion to the mean could take longer.   However, I firmly believe the market is rational in the long term, and these great divergencies won’t continue.

Of course, you could also argue that these Unicron companies themselves are seriously overvalued, (many do believe so) and we could see valuations move more toward MoviePass.   I don’t believe that is going to happen, at least not in any major move.  This is different than the old Dotcom blowout of the 2000’s, these are real companies, and they are creating real value in what they do.   It is the incumbents who need to worry more than any other group.  Old firms like Merrill Lynch will be disrupted by new entries like Robinhood.   Taxis and other transportation companies will be disrupted by companies like Uber and Lyft.   Theater chains like AMC will be disrupted by MoviePass.  etc etc.

Here is the link to some interesting data and comparisons looking at ARR’s, VC Funding Totals, Accumulated Loss Estimates, Market Cap Evaluations and a few more things.   Take a look yourself, and ask yourself, shouldn’t MoviePass be worth more than a single Costco store?

If you don’t want to click to the sheet – here is a embedded one.  Sorry I could not get the formatting to work perfectly.  Again, you get what you pay for!

MoviePass Swag is Out!

Support MoviePass! Wear the gear every time you go to the movies – do your part and spread the word. The gear is actually pretty nice stuff, and if you are a subscriber you get 25% off for the next 48 hours.

Click the image to link to the store. No I don’t get a commission on this! But I probably should! I am trying to pass along the discount hoping it works for readers here.

I got mine- and will wear it proudly all over town! And of course to my local theater.

Here’s my order!

Not a bad price for a pretty cool hoodie!

Updated Model Including Peak Pricing

I updated my model to add in Peak Pricing.   Of course, I don’t have any data on what the actual amount will be for peak pricing, nor do I have the frequency of how often MP customers will use Peak Pricing.

I will update with more accurate estimates as the data comes out.

If you look at the model you will see I added two rows for Peak Pricing.

Row 6 and 7. 

Row 6 is the percentage of the subscriber base estimated that will use Peak Pricing once in the month.   This is a little confusing because 75% does not mean that 75% of the total sub base will actually use Peak.  There will be high users of Peak, and low and zero users of Peak.  So this is meant to be a blended average.   I started with 75% – But really have no way of knowing how aggressive MP will be implementing peak fees, or what the user behavior will be like in terms of avoiding them.  So we shall see.

Row 7 is the average price paid per Peak Price charge.  I started at $2.  This is I think conservative, and it could easily be higher.   I doubt that MP will charge lower than $2 per Peak charge, and likely they will have higher.  Again, since I don’t have data I will stay conservative on this.

You will see in the model, Peak Pricing can bring in a lot of revenue.  My early conservative estimate for July shows $5.25 Million.   But I think it can easily be double that without causing a total revolt of subscribers.

As per usual, the single biggest factor continues to be Utilization rate.  I can show this model a lot of different ways, but it really only works when you get the average rate down to about 18 Movies a year.

Model is here.  

I will continue to update and tweak.

 

disclaimer – it is a model and it is used for discussion purposes and looking at various possibilities.   MP continues to evolve and change quickly.   As changes happen I will try and update.   I welcome feedback but don’t expect that I will change things just because you ask.   So far, my models have been fairly close.  But not dead on.  I expect that to continue.

David just Tossed the Rock at Goliath – AMC is Mortally Wounded

Well folks – I was a little slow on the uptake of this one, but it is now totally clear to me that surge pricing is the ultimate weapon that is going to destroy AMC, and totally liberate Moviepass partner theater’s from decades of uniformed pricing forced on Theater owners from Hollyweird studios and distributors.

MP now has the ability to punish AMC and other hostile theaters any time it sees fit. As a simple example, MP can charge $5 bucks extra anytime someone goes to AMC for a movie like The Incredibles (or any other film), while at the same time charge no extra for partner theaters. MP can now start to heavily influence what theaters customers go to, without having to block any theaters in a heavy handed way. Brilliant!

Moviepass can also make deals with Hollweird studios to remove a surcharge. So if a studio wants a bigger opening night, they can now pay MP for the privilege!

Even better, MP can determine if there will be any surcharge for their own films from MP ventures. More options!

Theaters who partner with Moviepass have a LOT to gain here. If they play along, Moviepass can move traffic to partner theaters at their most profitable points in a film’s lifecycle. Theaters keep way more revenue later in the lifecycle of the film. See the uniformed price post.

ONLY Moviepass can make this move. Theaters can’t do this because they fear studios could bring on the nuclear option. What’s that? That is when a studio refuses to sell a film to a theater chain. Which BTW is totally legal. The theaters have been under this threat for decades with almost zero leverage. Moviepass changes all of this. There is nothing Studios can do to stop Moviepass from doing demand based pricing. This is why distributors have been trashing MP along with that idiot Aron from AMC. The distributors knew all along this could happen, and it kills their insane business practices.

All of this is great for MP subscribers. MP can now fight back against the studios for better pricing on big event films. They can democratize going to the movies just like how Southwest Airlines did for flying. This also helps smaller indie films as they can now better fill seats to movies that may have less demand. Essentially MP is smoothing out the demand curve, and creating much more efficient use of a theater’s capital investment.

More Butts in seats at the theaters saves consumers money and makes partner theaters more money. Surge pricing makes this happen!

AMC gets totally burned on this. They are on an island. The studios are already furious at AMC for their subscription plan, and AMC can’t match what MP is doing. MP has no ties to the studios and can operate freely in the best interest of their people. AMC is like N Korea now, on their own, forced to screw over their own population. Horribly in debt, closed off from the new world, no way to feed their people. It’s a terrible strategy for them. AMC will soon start losing the MP lift, the heavy AMC users will join the new AMC program. Which is great for MP and terrible for AMC. Honestly, I don’t know how AMC could have done this any worse for themselves.

Get your popcorn and sit back and watch. David has thrown the rock, Goliath is about to fall!

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