Lowe has always said his main focus has been helping Independent filmmakers. Shunting the big studio big budget films makes sense, but is it sustainable? Maybe …it depends on how it is implemented and how well independent studios play along. If they offer some kind of revenue sharing to Moviepass it could make sense for a smaller more sustaining MP.
A move such as this would make the entire $9.99 experiment look very unfortunate- as if they wanted to start on the low end and slowly work their way up toward premium films and formats – it would have made way way way more sense to build her subscription base up that way in the first place. Now instead of looking like a force of nature coming up from below, Moviepass looks like a wounded duck looking for a good reason to exist.
That said, I would keep my MP subscription gladly if the selection of independent films was rich and I could also get the occasional blockbuster later in the film’s theatrical release.
Maybe they can hash out a way to survive. I am not talking about a stock worth buying here. But who knows, maybe they survive to fight another day?
Certainly Farnsworth lied about money being of no concern for MP. As it now appears money is THE ONLY concern at MP. Farnsworth has said multiple times that they had a backer who was willing to go “all the way” with MP as long as the kept growing. That has also apparently turned out to be a total fabrication.
Of course it’s now impossible to believe anything MP management has said in the past. Including their line that the service would BE at 5M subs. We may never know if 5M subs was the magic number now that the subscription seems to be getting totally reworked.
The demand for an “independent film” pass is surely going to be different than the old MP value proposition of any movie once a day. I also think heavy users may be more attracted to that type of offering. Real movie buffs, not casual moviegoers who MP needs.
Impossible to recommend HMNY stock here I do hope they survive to fight another day, but there’s just no plan that anyone can understand now.
After Ted Farnsworth-CEO of HMNY lied about his intentions with the 250:1 Reverse Split, and has promised massive more dilution from billions of new shares created. This stock is too risky to buy. I repeat- do not be fooled into thinking this stock is cheap because of the share price.
Ted Farnsworth cannot be trusted. He has lied to stockholders now on multiple occasions. Including lying about having a $300 Million Credit line, and lying about his plan to utilize the Reverse Split of 250:1. Leaving common shareholders largely wiped out.
This stock does not follow any of the normal rules or metrics of investing. You cannot evaluate this stock on Market Capitalization as you will never know how many shares may become available, and you absolutely cannot trust management to indicate what the plan may be.
Even at this incredibly low market valuation it is likely that you could lose all your money. Even if Moviepass itself survives and later thrives, you could lose all your money in this stock.
Buying this stock is not buying Moviepass!
It is possible that this stock was nothing more than a total scam, a shell company to raise money for Moviepass, with no intention to have ever delivered a return to investors.
Bankruptcy of HMNY is possible, while Moviepass itself could survive.
This is a proxy investment which makes the risk higher that management could spin out their Moviepass ownership out of HMNY, and thereby leave stockholders with nothing, even while Moviepass could survive.
if you have read my prior posts, I believe the 2 critical mistakes I made on my bullish stance were:
Belief that Mitch Lowe would be an honest backstop to Ted Farnsworth. I no longer believe that. Lowe now looks complicit in this debacle.
I underestimated the extreme risk of investing via proxy. I now fully understand why many money managers completely prohibit taking proxy investments.
If you decide to buy this as gambling money – know what you are comfortable losing. As you could lose it all.
I hope I am wrong about all of the above, I have held my small position in hope that I am wrong,
Because my blog receives a lot of visitors who are considering investing in HMNY – I felt it important to further highlight the risk of investing in the stock.
I will not be posting about HMNY or Moviepass again unless there is a major positive new development.
Finally- I know many will say I am short on HMNY, and or I have been all along. That is absolutely not the case. I have never shorted a stock, I have consistently stated that I NEVER short. I mention this because I know how fixated Bulls can be. (I was there once). Take precaution here. OK that’s it final warning.
Well, it appears that Ted Farnsworth lied to stockholders yet again. One day after the special stockholders meeting where HMNY approved bagillion new shares and the approved Reverse Split “up to” 250:1 — the company announced that it was going to move forward with the highest Reverse Split possible and do the 250:1. I am honestly shocked by the announcement. Ted is a special kind of CEO.
Just yesterday, Farnsworth told the audience at the special stockholders meeting that they did not have immediate plans to use the reverse split, and that is was “good insurance”. That turned out to be yet another lie from Farnsworth. I can no longer defend Farnsworth in any way. I think he should be tossed out of the CEO position immediately. I think he is both incompetent and massively dishonest.
I am going to hold on to my shares, but I cannot recommend buying shares immediately post this R/S. The risk of short sellers driving this down another 50% here is very real here, it could happen in a matter of days. I also don’t recommend panic selling the shares you have left. Once the dust settles, the fundamentals can and at some point will come back into play. The R/S does allow larger money managers to buy into this stock, where before as a penny stock it was totally off limits. But unfortunately, not much of that will start to happen until the proxy fight is resolved because many MM’s have strict provisions against buying proxy stocks. So if anybody is hoping or betting on big MM to come in and save the day here, I think that is unlikely to happen until the proxy is totally resolved. Best guess for that is Mid August timeframe.
I have seen a lot of crazy stuff in stocks, this one for sure is the craziest stock I have ever seen. There are a lot of early investors in this stock that will never see their money back. Those that have averaged down to $1 or less have a chance of someday getting back to even, although that seems very remote now.
I don’t see sentiment for this stock improving without extremely positive new news. The news would have to be a major partnership announcement with investment, or a believable major move toward Breakeven – (I no longer think you can trust management in their EOY claims – I am not saying it won’t happen, but I would not bet money on it). Resolved Proxy and Ticker Change will help, but I don’t think it will be enough anymore.
Ted alluded in an industry talk today that they have another major disruption coming that will further turn Hollywood upside down. I don’t believe him. While it is possible that Mitch and Ted have cracked up a new idea, more often than not, when Ted hints at something big coming, it ends up being a lie, or being way less impactful than investors hoped. Ted has repeatedly made false or misleading claims to the press and investors, and he just simply can’t be trusted at all when he makes hints. Everything he says has to be discounted. I honestly believe Ted is a combination of incompetent and dishonesty. It is like playing poker with a rookie, sometimes they make brilliant bluffs because they are simply not wise enough to know any better. This is how it is with Ted, he may be bluffing, or he may be too stupid to know better, unfortunately, it is impossible to know which.
I continue to believe there is real value locked up in this company, and I think that the right leader could come in unlock that value and put the company on a sensible path, the total market capitalization value of this company could go up solidly from where it is today. But there is so much going against the company with Ted and his lies, that I can’t recommend buying it. Nor do I think it wise to sell what you already hold.
Much has been said about MoviePass, its business model, and its impact on theaters and Hollywood. Entrenched competitors like AMC have said that MoviePass is simply unsustainable. We all know the company is investing a lot of money to grow their subscriber base which now stands at over 3 Million. In SEC filings the company estimates it will lose $45 Million Dollars in June of 2018 and “at least” $45 Millon Dollars in July – attributed to increasing subscriber numbers and the hot summer box office season.
Wall Street has been spooked by these numbers, and HMNY has been shorted down to all-time lows again this week, now trading at around $.10 a share.
At the moment, MoviePass and its holding company HMNY are finding it hard to find any constituent group who really loves them.
Hollywood and Theater owners are either indifferent or outright negative on MoviePass and its business model, primarily because they fear MoviePass is inserting themselves in between them and “their” customers. Theaters and Hollywood have found a way to work together, even if it has meant higher prices and less interesting movie choices for consumers, they are at least comfortable with the status quo, and they don’t fancy a new company coming in and changing the game on them.
Customers, on the other hand, have grown suspicious of MoviePass as they have adjusted their plans to reduce fraudulent usage and initiate Peak Pricing to encourage subscribers to view movies other than the big blockbusters on opening weekends. Customers, of course, liked the old deal they had better, and they are not running to the defense of MoviePass.
Investors have viewed all of this with a very skeptical eye. As they say, the only certainty on Wall Street is that they HATE uncertainty. And as MoviePass has burned through cash, declared that it may not be sustainable, and monkeyed around with its core offering, it is keeping the big Wall Street money at bay, and keeping the stock in the toilet.
As I was reading the latest rounds of negative press on the company I ran by this video from the Verge, done by their Entertainment Editor Bryan Ishop.
In the video, Ishop reasons that MoviePass is actually bad for consumers because MoviePass puts downward pressure on pricing that theater owners can’t defend against. Ishop goes on to argue that theaters can’t differentiate by showing different films, and the only way they can differentiate is by offering more premium experiences, things like Laser display, better sound, 3D, IMAX, reclining seats etc. He believes that MoviePass will hurt theaters ability to keep investing in innovation of the theater experience should they not have more direct control over their pricing. In the video, he interviews an executive from a local theater owner in Portland Oregon who says he does not want to give MoviePass a cut of their revenue and feels like MoviePass has inserted themselves as an unwanted middleman.
All of this got me to thinking more and more about if MoviePass is really a disruptive innovator in the classical Clayton Christensen definition, or if it is really just a low-end discounter trying wedge its way into the uninvited territory of theaters and Hollywood. Spoiler! As it turns out, I think both are true.
For those who are not familiar with Clay Christensen, he is really the father of the concept of disruptive innovation, and he wrote the book “The Innovator’s Dilemma” that describes fully the concept of disruptive innovation. It is important to know who this person is, as his impact on American business has been massive, and his models have proven to be universally accepted by business leaders around the world.
Why am I talking about Bryan Ishop and Clay Christensen in the same post here? Because Bryan actually does an incredible job of demonstrating exactly why MoviePass is a disruptive innovator. Bryan is the textbook definition of the “most demanding customer” that Christensen says incumbents will almost always maximize toward. And it is logical because those customers tend to be the most profitable customers.
When Christensen is asked what exactly is a disruptive innovation, he starts by saying what it IS NOT. He says “a disruptive innovation is not a breakthrough that makes good products a lot better” he goes on to say a disruptive innovation “is a product that transforms a product that was historically expensive and complicated that only a few people had access to it” … “makes it affordable so a much larger part of the population has access to it”.
You can watch the entire video here – if you invest in HMNY – I highly highly recommend you watch this video. Clay Christensen was one of Reed Hastings most valued advisors at Netflix, and as most investors in HMNY know, Mitch Lowe the CEO of MoviePass has twice before used disruptive innovation to build Redbox and Netflix in the past.
MoviePass, I believe is taking a disruptive innovators approach, where they are essentially coming into the market on the low end, and by doing so, they are making movies a lot more affordable and available to a lot more people. The low end of movie theater exhibition, in this case, is 2D only, no IMAX, seat reservations only with partner theaters, and some restrictions on premium showings. With MoviePass Peak Pricing, the low end also means that you have to wait to see a new release until after the first or second weekend or pay extra to see it on opening weekend.
As described by Clayton “Characteristics of disruptive businesses, at least in their initial stages, can include: lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics. Because these lower tiers of the market offer lower gross margins, they are unattractive to other firms moving upward in the market, creating space at the bottom of the market for new disruptive competitors to emerge.”
Interestingly, as Christensen well explains in the Innovators Dilemma, the response from the incumbent player is both predictable and logical. AMC almost perfectly demonstrated the response. AMC has logically pursued sustaining innovations, these include improved theater seating, better food, 3D offerings, Imax, reserved seating, & rewards programs targeted at heavy moviegoers. All of this has been logical in pursuing more profitable frequent customers. As AMC pursued the higher end market with more frills, they essentially left an opening for a competitor like MoviePass to enter.
As Christensen puts it “Companies pursue these “sustaining innovations” at the higher tiers of their markets because this is what has historically helped them succeed: by charging the highest prices to their most demanding and sophisticated customers at the top of the market, companies will achieve the greatest profitability. However, by doing so, companies unwittingly open the door to “disruptive innovations” at the bottom of the market. An innovation that is disruptive allows a whole new population of consumers at the bottom of a market access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill.” Wow! – that sounds like AMC and MoviePass to me!
What’s wonderful for HMNY investors is new entrants almost always win in the marketplace. Across all industries, the basic theory and formula laid out by Christensen has proven again and again to accurately predict how companies will be overcome by innovative disruptors.
So why then has the stock of HMNY and the press on MoviePass been so negative? Well, this too is actually quite common for disruptors. Amazon, Netflix, and many others were first met with a TON of skepticism before being totally accepted by Wall Street.
There are of course other important differences between MoviePass and Amazon, Netflix.
One problem in particular for MoviePass is that its initial customer base was really a lot of heavy users, who were traditionally served as high-end customers at the theater chains. MoviePass, I believe, gave too much to these customers early on. The deal was really too good to be true, and those customers were very vocal in spreading the word how great it was. Unfortunately, they have been equally vocal as the deal was made more low end, so many of those heavy users are now displeased and they are grumbling on social media, and complaining to the press. For the casual moviegoer, however, MoviePass remains an excellent bargain and will bring many people back to the movies who had given up on it because of the expense, and often that disappointment brought on by paying a high price to a see a movie that was really not very good. MoviePass is definitely expanding the market by bringing people back to the movies, and their data proves it.
There are a lot of other examples of disruptive innovators you can study as well. American Automobile companies were disrupted by the Japanese who came in low and took over the sub-compact market, the steel industry is a great example where mini-mills like Nucor came in at the low-end steel rebar market and slowly moved up higher and higher. Nucor is now the largest steel manufacturer in the world.
So yes – MoviePass is a disruptor, and it is also a middleman, both are true. If MoviePass can survive, and cross the chasm, it will overtake AMC and other competitors in the market, and it will likely grow to a point where it soon has to find a way to defend itself from the next innovator.
I know that many have now totally given up on MoviePass and HMNY stock. I completely understand why, with the stock being almost totally wiped out now, and relentless shorting and uncertainty facing the company, it is hard to blame folks for feeling that way. Even for me, the committed 5 year long, this has been a remarkably unpleasant ride to take.
For me personally, I feel much worse about recommending the stock to people than I do about my personal losses. Again, I limit all individual stocks to less than 2% of my portfolio, but losing 2% is NOT fun, and it is made much worse knowing others lost money on my recommendation, and I do truly apologize for that loss and my poor timing here. Truly if you lost money based on my recommendation, I apologize.
Now with that out of the way, I thought I would share why I still hold out hope for the MoviePass and HMNY.
I am going to start with the worse case scenario, not that I think it is imminent, but given we are closer than I would like to be, we have to start thinking more about what is the asset value here if any, and how would you think about that.
I am not going to get into potential suitors for the assets in this post. There are quite a few companies that might find MoviePass an interesting target, and there are likely several private equity firms who might want to take a chance with it. The silver lining of HMNY not being able to secure significant debt is that stockholders should actually get some value out of whatever liquidation plan might come to pass.
There are a few different assets one can think about here and contemplate their value. In order of value, I think they have the following key assets.
Revenue Run Rate
Total Online Audience including Moviefone
Technology & Patents
Mastercard – Billing relationships
I am not suggesting that you can separate out these assets and sell them piecemeal. Rather, I think it is useful to think through what the company has built over the past few years, and how these different pieces can be thought of in terms of value. I will take a crack at each piece here, and of course, the mileage will vary on these types of valuations based on lots of variables.
Subscriber Base – This is the core asset of the company at this point. Everyone knows that this is a unique and slightly stressed asset in this case because MoviePass is losing a lot of money on these subscribers every month. Of course, MoviePass has taken significant measures to reduce the cash burn, but it is yet unclear how successful this has been and we won’t know for sure for a few more months. The important thing to note here is that MoviePass has up until now been making the conscious choice to spend money to build up their user base by spending big money to offer an incredible too good to be true offering. MoviePass I believe has all the levers it needs to drop the hammer, and turn the subscriber base to break even anytime they want. That would result in some significant churn of the subscriber base, but I believe MoviePass could raise their price, and combine it with surge pricing and get to breakeven very quickly. I think they could easily raise the price to $14.95, continue with Surge pricing, and that would get them very close to breakeven. I think the worse case scenario on churn- if they did drop the hammer -would be 33% of the base would leave, and many of those, probably greater than 50% or more would be heavy users who cost MP money anyway. A move like this would still leave MP as a great deal for most consumers, and they would likely also continue adding new customers who were not all caught up in the emotional baggage of change.
So with all that, I think MoviePass could easily have 2 Million Subscribers at breakeven @ $14.95 a month – or $180 a year. That would give them $360 Million a year in monthly subscriber revenue and easily another $40 Million in Surge Revenue. So $400 Million in breakeven revenue, with likely still very high growth rates. That is a valuable asset – no doubt about it.
Take Spotify for example – they claim it takes 12 months of premium subscriber months before they break even on their acquisition costs. Interestingly they use their free “ad-supported” service, as their acquisition vehicle to get their premium subscribers. This is NOT that different than what MoviePass is doing. The big difference, of course, is MoviePass is essentially doing a promotional price as their core offering to juice up their subscriber count. Knowing that they eventually would raise prices and do variable pricing via surge pricing. If you calculate the customer acquisition costs of Spotify premium users it ends up being at least $25 bucks a subscriber, however many people argue it is much higher. They don’t disclose it. But let’s just say that $25 is the number. And for the sake of argument lets say that a Spotify premium customer acquisition is equal to a MoviePass customer acquisition. That would mean there is a $50 million asset right there. This is not the LTV of the customer, but simply the asset customer acquisition activity. That is already above the current market cap of MoviePass. So that makes no sense at all.
You can start to do all kinds of new calculations with scenarios where MoviePass stops the bleeding and even makes some money on subscribers. You can come up with LTV (Lifetime Values) by taking the ARPA (Average Revenue Per Account x estimated Margins / over churn to come up with reasonable values.
I can easily model out scenarios that give $40 to $60 LTV’s assigned to a smaller more profitable MoviePass subscriber base, which again would get you to well over the today’s total market cap for HMNY. Here’s a good example of how people think about it for Spotify.
The point of the all of this is that the market is irrationally assigning an extremely low value to the MovirPass subscriber base. It is assuming that MoviePass will not see improvement in COG’s via more theater deals, and it is also assuming that MoviePass can’t raise prices without causing too much churn to their base. I think both of those things are NOT true – and that MoviePass will end up both reducing COG’s and increasing revenue while churning out many of their worst customers.
Revenue Run Rate – I have mentioned this before, but it is worth repeating it here. It is damn hard for companies to find 1/2 Billion in Revenue. And there are a LOT of companies that want to show revenue growth and would love to have an asset of reliable revenue growth at these levels, even if it were only breakeven for now. If you talk to any CFO who knows how to dress things up for Wall Street, the street wants 2 things. 1- Growth 2-Profit. There are companies out there sitting on decent profits but zero or negative growth. They might even have some fat left to cut to get more profits from their existing business, but still, they can’t find the revenue growth. MoviePass could add instant revenue growth, with the promise of more profits later down the road. That is a very attractive component of the potential valuation of MoviePass. Big Revenue Matters!!! Trust me on this one. Every CFO knows that profit improvement without growth is NOT good for their stock. Just look what happened over at Netflix today. Growth slowed! They got slaughtered!
Online Audience MoviePass has a unique situation with it’s online audience, it is now both large and very active. The Moviefone acquisition helped grow the audience to around 10 Million people. MoviePass so far has not done a lot with this asset but it can and I think will do much more over time. Some have tried to compare this only audience to Facebook ARPU numbers to downplay the value of the audience. It is a longer discussion, but in short, that is a very bad comparison. Sites that have active users who are considering a valuable transaction are much more valuable than sites that have users who are doing all kinds of things on social media. We called it the value funnel when I was working at MSN in Microsoft. The closer you are to getting a person to do something that is transactional, the more money an advertiser will spend on your site to get that user. So in the case of MoviePass & Moviefone, most users are very close to buying a movie ticket and going out of their homes to spend money in the very near term. That has real value. I think the audience value alone here, without the subscription side of the business is easy $7 -$10 Millon dollars, and I think that is very conservative fire sale type of price for that asset.
Technology & Patents There is definitely some value in the tech and Patents here with MoviePass. There is an active lawsuit underway with Sinemia to that effect. I have written on the value of the patents already. Please check that out. If we get to the scaping the bones of the patents – we will be in very bad shape. So I won’t go all crazy trying to say that this alone will save the stock, because it won’t. But there is very real value here.
MasterCard Billing Relationships. I am calling this out because of the unique way in which MoviePass is implemented, it requires that every subscriber has a MasterCard to enable the movie ticket transaction. As subscribers, we all get this and know how it works. It costs debit and credit card issuers approximately $200 to $300 in acquisition costs to sign up a new cardholder. Think about that for a couple minutes. Every single MoviePass one of MoviePass subscribers has a debit card issued to them, it works like any other debit card, but it is backed by a customer credit card that MoviePass has on file. MoviePass has done something extraordinary here. They have created 3 Million new MasterCard holders, who they can now bill for things at will (they customers will that is). Is it worth $200 per sub? No – but it is certainly worth $20 in a fire sale. That is $60 Million in value all day long. Again more than MP Market Cap valuation today.
Love or hate surge pricing, it was certainly easy for MoviePass to implement it against the payment vehicles they have on file with their customers. Customers only had to download the new app and accept the new TOS and that was it! They now had the ability to start charging customers for incremental transactions made with that MasterCard. Now, think how easy it is going to be for MoviePass to add things like movie merchandise to the experience. Think of the offers! Just watched Incredibles – how about a cool T-shirt, action figure, lunch box. coloring book etc etc. The amount of transaction revenue that could be generated from this MasterCard is very significant, and I see the market giving it essentially zero value. That is irrational.
So in conclusion, I am really bummed out about the irrational negativity surrounding MoviePass and HMNY stock. I am sorry for my bad timing and even more sorry to those who followed my lead into this stock and lost money.
But I have not given up on the company or the stock. There is a significant set of assets here, and there is real value in this company, even in the worst of fire sale situations. The stock is now priced so low, it makes absolutely no sense, and it is foolish to beleive that the management does not have options to unlock the value that has already been created.
I am not recommending that you buy more stock in HMNY, but I am also suggesting there is more value here than the market is giving to the company. We went from irrational exuberance to irrational pessimism.
The market tends to be rational over the long term and very irrational in the short term. I am hoping for some level of rationality returns here.
<<<agian – I do not recommend any single stock to represent more than 2% of your portfolio, and I recommend you keep the vast majority of your money in low-cost index funds over individual stocks. Please don’t send me messages saying I ruined your financial life based on my advice – because quite frankly if you had followed my advice this year you would be up overall in the market>>>