3 Counterpoints to Silly Motley Fool Story on Moviepass

I take it as a bullish sign that Motley fool has the one big nasty hit piece out this weekend on HMNY.  The article “3 Reasons AMC Is Beating MoviePass at Its Own Game”     is so bad that I felt like a counterpoint to each of their reasons would make sense.

Motley Fool has helped more people lose money than just about any site out there, they are pumpers, dumpers and make horrible calls on a regular basis.  I called it quits with Motley Fool after they made multiple very bullish calls on 3D Printing Stocks.  I was a sucker and believed the hype on that one.  Not that 3D printing isn’t amazing and holds a bright future.  They were just bad picks and bad timing for Fool readers.

The fools and the Fool pumped these dogs like crazy, the hyped never delivered.   I have seen the Fool website be wrong so often, I can hardly recall a time where they have been consistently right.

Now, of course, I have to acknowledge I have been wrong on HMNY to date.  I get it!  My call on Moviepass sucked even worse than Fool’s call on 3D printing!  But I must say, it is a bit different here.  These were established companies with years of revenue and profit behind them.   While by no means were they “safe” investments – you don’t expect to see the bottom fall out of companies of this size, with such huge projected growth.

OK – on to the matter at hand.   Motley Fool contends 3 Reasons AMC is “winning” of Moviepass.   Let’s take a look at each claim.

Claim #1- AMC can do Marketing in their own theaters.   That is true, AMC owns the theater, and they can promote whatever they like on their screens.  Now, does anybody think for a second that Moviepass has a hard time getting publicity?   No- me neither.  Unfortunately, as of late, most of that PR has been negative.   I fully expect that when Moviepass turns the corner, the PR will change for the positive, and will do so with a massive comeback kid story.  The amount of free marketing that Moviepass has received as a startup has been nothing less than mind-blowing.  There are still plenty of people who loath AMC for being hyper negative and aggressive against Moviepass.   If Moviepass does make a comeback I expect the free PR to continue.   If they continue to grow larger than AMC – expect the press to start covering Moviepass as the leader and innovator in the space.

Claim #2 – MoviePass has devalued itself this summer.   Hard to argue that Moviepass didn’t have to change their plans to kill the hogs and abusers.   And the summer was obviously a rough ride. But does that really mean AMC is winning?  I agree that heavy users who have a viable AMC option can see more movies for less on the AMC plan.  As many have argued, AMC actually did a great service to Moviepass by sucking away a big chunk of the most costly Moviepass users.  It was like a gift to Moviepass.  They could not get rid of these people fast enough.   Remember – AMC has something like 23% market share – the vast majority of the moviegoing public does not have a good or viable AMC theater option available to them.  Customers like choice, and having the option to choose whatever theater they want to go to remains a valuable feature for most moviegoers.

The most important point here is that most people don’t see more than 3 movies a month.  They simply don’t have the time or the desire to go to the movies that often.   So why pay twice as much to lock yourself into AMC if you really don’t see yourself going all that often as a casual moviegoer.  And that is the key, Moviepass wants to get the casual moviegoer, they guy or gal who normally sees around 4 movies a year, and try to get them to go more like 8 times a year.  This is where the business model works the best.   And it works best here for a few reasons.   First, because it keeps utilization rates lower for the Moviepass subscriber base – which helps keep COGS down.   Second, this group of casual moviegoers is attractive to Hollywood for marketing purposes.  Heavy moviegoers are great for Hollywood, and Hollywood loves them.  But for marketing purposes, when you are trying to move the needle on a film, getting the next group down from heavy users is really important.  It is sort of like going after swing voters in an election.  You spend your money on those who are undecided, who might not bother getting off the couch and going to the theater.  The guys that go all the time, they will likely show up anyway, the casual user, they need a little more prodding to get them to turn up to the theater.   This makes that casual group a sweet spot for Hollywood to deals with Moviepass to push that group to go see a particular film.   If Moviepass can keep their numbers in the millions, and use their Moviefone audience to push audiences to certain shows, it will be an advantage over AMC.

Claim #3 – Sustainability “The fatal flaw with MoviePass’s original model is that it doesn’t have full control of its input costs. It has to pay retail for the movie tickets it’s buying for its members, and that easily adds up to more than $9.95 a month.”  This reasoning has been claimed over and over again by the bears and bashers.   When the service was unlimited and had a lot of really heavy users, the argument held a lot of merit.   Now the argument is much weaker.   It is true that Moviepass has been slow to get to deals with theaters – they have admitted as much.  But it is a lot less clear that having physical assets is a big strategic advantage in today’s marketplace.   The argument that “controlling all the operations” is a big winning strategic position seems like an idea from yesteryear.   You don’t see Uber very concerned about not owning the Yellow Taxi companies.  You don’t see AirBnB very concerned about not owning hotels, resorts, or vacation homes.  Even lowly Amazon seems fine not holding all the inventory for items they sell online.  The argument that Moviepass can’t be successful without owning the theaters seems suspect, if not downright ridiculous.

Final thought.  With the recent changes, Moviepass is not playing a very classic disruptor role.   Moviepass is now IS NOT for the high-end heavy user, and that is a GREAT thing.  It follows the disruptive innovation model much closer with the new plan.  

The offer from Moviepass is now a classic move of coming in at the very low end.  They are offering a lesser service for a low price, that only appeals to the lower end of the market.  Naturally, this market and these customers are less appealing to established players like AMC.  AMC is looking to maximize profit and to do that they look to create more margins by offering fancier options to their most loyal customers.  In fact, it actually makes perfect logical sense for AMC to ignore Moviepass as they move into the low end of the market where there is little profit to be had.  From AMC’s perspective, the logical move is to move higher upmarket and leave the low-end low-profit space to new entrants.   This is classic disruptive innovation.    None of this is to imply that AMC is purposely doing something wrong or stupid.  AMC is trying to save and optimize their profits – that is what management is SUPPOSED TO DO!   It will feel to AMC and some others that AMC is actually winning.  But what they are missing is that the incumbent just allowed a new entrant to get a toehold in their marketplace.

What naturally happens after a new entrant moves into the low end of a market is they continually innovate and find new ways to move upmarket and take increasingly large pieces of the market.  At the same time, the incumbent keeps trying to optimize more and more upmarket in an ever increasing race to find fatter margins in the highest end of the market.   Eventually, time runs out for the incumbent and they are overtaking by the new entrant.   This pattern repeats time and time again across multiple markets.    Steel, Automobiles, TV’s, Computer Chips, – even Netflix vs. Blockbuster and then HBO, –and many more industries have experienced this exact phenomenon.  There is really no reason to believe that moviegoing is immune from this well know theory.