A Detailed Revenue Model On How The MoviePass Business Can Succeed

As a former GM of Product Management for Microsoft I spent countless hours creating and reviewing complicated revenue models for large scale businesses.  Revenue models bring together all of the various revenue opportunities a unit/company expects to see.  The model makes assumptions for every aspect of the business – pricing, sell through, inventory, growth rates, competition, conversion etc etc.   They are complicated beasts – so complicated in fact a model with just slightly different assumptions can create radially different results and viewpoints of a business’s feasibility .

At Microsoft revenue models typically have multiple reviews, every assumption is talked about, tested wherever possible, debated by the best and brightest at the company, and finally submitted to executive management. The models are then used for funding specific initiatives for things like headcount, marketing budgets and other costs related to executing against a business plan.  The revenue models are eventually used by the company to make estimates for Wall St. on future revenues and earnings.

I spent more than 20 years in the sausage factory where these models are created debated and reported.   I can tell you with certainty, these models consistently have less than 50% accuracy.  All models have politics, specific agendas and bias baked into them.  The truth in models is almost always somewhere in the middle of the most optimistic assumptions and the most negative assumptions.  It is important to know when reading any model, what is the agenda of the person who created that model?   Is he/she looking to secure funding?  Is the person looking to kill the business because they would prefer some other initiative to succeed?   What does a person have to gain or lose if their viewpoint of the model is accepted as the “truth”.    I have witnessed many a Machiavellian business leaders purposely input wildly implausible assumptions into models to serve their own purposes and to advance their own personal fortunes.  It happens all the time.

I felt like it was important for me to introduce a new revenue model for HMNY investors to consider as the only detailed model currently floating around the web is the one published from Mark Gomes.  Gomes has been a consistent basher of MoviePass stock, he spreads a message of fear uncertainty and doubt about the company.  He has maintained that the company will likely end up a penny stock based on the business model and the need for continued capital needs that will come from dilution at bad terms.   I have reviewed Mark’s model (link below) and I believe it is both flawed, and contains some radical assumptions that would not be accepted by any experienced product manager or finance executive who has actually worked on a product like MoviePass.

In my model for MoviePass  (Link Below) I show how MoviePass can achieve profitability by the end of the year, as predicted by Ted Farnsworth CEO of MoviePass multiple times in the past.   My assumptions are relatively conservative across the board, and they align to the major assumptions that have been shared from Mitch Lowe (CEO MoviePass) and Farnsworth and they are outlined in the notes of the shared spreadsheet.   To create the model it is necessary to pull together public comments from both of the key executives of the company, and to research other various sources.   It is no simple matter, but with some time and thought a reasonable view of the company can be put together.

I invite you to compare Mark Gome’s model with my own.  It may well be that the truth is somewhere in the middle.   I am as my readers know, very bullish on MoviePass, so my view may be too rose colored.   I can almost guarantee that Mark’s view is way too pessimistic.

Mark Gomes MoviePass Model

2 Major Assumptions from Mark’s MoviePass Model of where I disagree include:

  1. Mark has a very radical assumption in his last two months of 2018 where Utilization Rate (# of movie tickets per month per sub)  jumps to 3.7 in November 2018 and  4.1  in December 2018.   Mark does this to account for high movie going season.   That would be acceptable if he dropped the rates lower in other months, but he does not.  That is likely not at all a realistic view of utilization rate and is estimated super high to make the cash burn look way worse.  It also does not consider new moves by the company to limit number of movies view on the new plans.  Mark even admits in his model that he uses a number of movies seen that “makes no sense” but was offered by Mitch and Ted, so he uses it anyway.  Mark has conflated some very important things here.  Mitch and Ted were likely including the “halo” effect that MoviePass has, where people bring friends and family members who don’t have a MoviePass.  At any rate, Mark cherry picks number here to make things look way worse than they likely will be for his November and December estimates.
  2. Mark assumes an $11 dollar Movie Ticket Price.  That is way above the $9 ticket rate reported by industry metrics.

Mark and I are reasonably close on other assumptions.  That makes sense, because utilization rates and ticket price are clearly two of the biggest factors in the models.  I hold my utilization factor constant at 1.4 movies per month – less than the 1.2 factor often used by Mitch.  I don’t factor in big seasonality jumps simply to show a simpler model, and because I believe subscription users are less likely to be as seasonal as normal movie going audience.   This is something I can adjust for later on as I fine tune the model.

Here is a link to the model.   I welcome your feedback, comments and thoughts.   I will be adjusting the model regularly as new information come available.   In summary, my model shows it is very possible for MoviePass to breakeven on a yearly run rate basis by the end of the year.  Meaning they could breakeven in 2019.

Bob Visse’s MoviePass Model

 

8 Replies to “A Detailed Revenue Model On How The MoviePass Business Can Succeed”

  1. Hi Bob.
    A few thoughts. You should adjust your subs to end the year at 6 million. That is Ted’s most recent projection he shared after the MF purchase. Also, I think 1.4 utilization rate is going to be low. I’m not sure what it will be for sure, but I think it was 2.0 in Q1 and likely will not get below 1.4 by year end. I agree Mark’s model has usage too high, ticket prices too high, and his discount on tickets is too low. I have told him that before, but he usually responds that he believes he is not far off. I do think Mark is generally correct that there will be need for additional funding, that usage is not coming down as quickly as anticipated and that the dilution is exacerbated by low valuations. The last round of funding proved that fundamental investors are still not interested, thus the big discount so the technical investors will buy. Is that because of Proxy? Management? Bad execution on the Model? Other reasons? Hard to say for sure. This very well may be a unicorn, but how many shares will be out before that happens?

    1. Thanks for reading and for your valuable feedback. I will look at the model and likely publish multiple models and give a series of ranges. Hoping for a new sub # announcement soon and some further sub guidance. Utilization guidance would also be helpful!

  2. Although the avg ticket price is $9, I believe where ticket prices are higher people would be more inclined to sign up for moviepass.

    If your model is correct then why these huge offerings, where is the money going?

    As far as ticket rebates, concessions and ad revenue, we just don’t know. HMNY tells us very little.

    I’m long but at this point I’m just frustrated and bag holding…

    Maybe movipass should make their pricing model based on regions. Such as New York subs pay a higher rate versus a state such as Iowa. Taxes and cost of living is different everywhere, why not reflect that.

    1. My model is a Gross Margin model. So I don’t have OE in the model. That that they don’t or won’t have it. Gomes model shows OE at around 1-1.5M a month.

  3. From the 10k: “MoviePass’ current buying power at U.S. movie theaters represents approximately 6.1% of the U.S. box office, with MoviePass buying approximately one in every seventeen tickets in the United States”.

    Looks to me like that excluded any halo effect.

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