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 

Why Did HMNY (MoviePass) File That Alarming 8K?

We all now know that HMNY filed an 8K that set off alarm bells, causing a media panic claiming MP was close to running out of cash, sinking the stock 60% in two days.

The specific statement read.

As of April 30, 2018, we had approximately $15.5 million in available cash and approximately $27.9 million on deposit with our merchant processors for a total of approximately $43.4 million. The funds held by our merchant processors represent a portion of the payments received for annual and other extended term MoviePass subscription plans, which we classify as accounts receivable on our balance sheet and which we expect to be disbursed to us during the course of 2018. We believe that our average cash deficit has been approximately $21.7 million per month from September 30, 2017 to April 30, 2018. By the end of April 2018, we implemented certain measures to promote the fair use of our MoviePass subscription product, which we believe should reduce our monthly cash deficit significantly. These measures include a technological enhancement which prevents MoviePass subscribers from sharing their accounts with non-subscribers and allowing subscribers to see a movie title only once per subscriber using the MoviePass subscription. We believe these measures enabled us to reduce our cash deficit during the first week of May 2018 by more than 35%. In addition, by returning to our $9.95 per month unlimited MoviePass subscription, enabling subscribers to see up to one new movie title per day, we believe our subscriber acquisitions and subscription revenues will continue to increase for the foreseeable future. However, we will need proceeds from sales of our common stock pursuant to our Equity Distribution Agreement with Canaccord Genuity, or other sources of capital, starting in May 2018. Further, if we use all or a portion of the anticipated net proceeds from sales of our common stock pursuant to our Equity Distribution Agreement with Canaccord Genuity for acquisitions of other companies or financial interests in additional movies (through our subsidiary, MoviePass Ventures), we will need additional capital to offset our monthly cash deficit. In 2018, we expect our cash deficit from month to month will vary significantly based on the amount of movie tickets MoviePass is required to purchase for its subscribers during the month, the amount we spend on acquiring financial interests in additional movies through MoviePass Ventures, the amount we may spend on any other types of acquisitions, and our ability to develop the MoviePass business model in the near term generally, including developing and growing sources of revenue other than subscription revenue. Because the length of time and costs associated with the development of the MoviePass and MoviePass Ventures business model is highly uncertain, we are unable to estimate the actual funds we will require. If we are unable to obtain sufficient amounts of additional capital, whether through our Equity Distribution Agreement or otherwise, we may be required to reduce the scope of our planned growth or otherwise alter our business model, objectives and operations, which could harm our business, financial condition and operating results.

But many of us could not figure out WHY the company came out with this statement, and why NOW?!  There was very little new news in the statement.   If you break it down, the company said they will need to raise more cash, which they have already said they had planned to do by selling shares, and they said they would do this as they needed the funds.  So that was nothing new.   The cash burn level reported was also not new news.  Mitch and Ted have both said that they were burning in the $20M a month range in several previous interviews.   The statement also said that management had taken steps to reduce COGS, and that by adding the limitation of only seeing a title one time, and enforcing photos of ticket stubs, had reduced usage and fraud, helping to bring usage down more than 35%.   This was great news, but it had also been mentioned in prior interviews earlier in the week.  Nothing really new again!

So why then did HMNY – MoviePass -feel the need to release this 8K at all?   I have researched this, and the answer is that this is a requirement that they must fulfill by SEC regulation based on that fact that they are operating under a “going concern” audit finding.    The going concern part of this is nothing new.  In fact, it has been known for some time now.   What most investors do not realize is that once you have this finding attached to your company, the disclosure rules for the company change.

This is a complicated bit of accounting rules and regulations and if you want all the details you can read them here.  But the cliff notes version is that any updates both positive and negative that could significantly impact the “going concern” status of the company must be announced as they occur.    So the changes to MoviePass to reduce cash burn had to be disclosed.  And with those changes, the change to the cash position, and the intention to stick to the plan of raising more money with additional stock, also had to be disclosed.  Regardless of the fact that both of these things were already known by investors who were closely following the company.

To put a fine point on it – new developments that are POSITIVE – that will help reduce the “going-concern” issue with the company, must be disclosed.

Specifically —-

“The going-concern standard explains that these disclosures may change over time as new information becomes available and that disclosure of how the substantial doubt was resolved is required in the period in which substantial doubt no longer exists (before or after consideration of management’s plans). In addition, the going-concern standard states that the mitigating effects of management’s plans to alleviate substantial doubt should be evaluated only if (1) the plans are approved before the financial statement issuance date and (2) dboth of the following conditions are met: a. It is probable that management’s plans will be effectively implemented within one year after the date that the financial statements are issued. b. It is probable that management’s plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.”

It is reasonable to believe that Mitch and Ted actually believed that the filing was routine and that there was some substantially positive news in the filing that had only been mentioned one or two times in TV interviews, and this filing would make it official that MoviePass is making great progress in moving toward a more profitable future.

Unfortunately, the 8K hit within less than 24 hours of AMC CEO Adam Aron throwing MoviePass under the bus.   Adam made a bunch of nasty and false comments on how MoviePass was certain to be in a death spiral.  And made a bunch of false assertions on usage amongst other bizarre comments.

The timing could not have been worse for HMNY to release the 8K, it set off a literal $hit storm of bad headlines, causing retail investors to panic sell the stock.

Was this bad execution on the part of HMNY?  Probably – however as SEC forms go, it takes a few days to file them and companies may not know exactly what day the form will hit the SEC website.   So maybe it was just unfortunate bad timing.

Should HMNY and MoviePass do more to stop the stock price from falling?  Maybe, but there could be other restrictions they are under for releasing information.  We are close to ER, where there is normally a quiet period prior.  Also, we don’t know what is happening with the final acquisition of MoviePass and the rebranding of HMNY to MoviePass.  Also, we don’t know what is happening with the spinoff of Zone and if there is a quiet period there.

It is actually possible that this entire episode is very much ado about nothing.  And that Mitch and Ted both have their hands tied in how much more they can really say to calm investors fear of near-term Bankruptcy.   Afterall, Farnsworth and Lowe have both stated in separate interviews that they are confident they have plenty of options for additional funding and that they at least are not worried at all about insolvency.

My conclusion, the drop was scary and shook out a lot of early shareholders and retail investors who just don’t have the stomach to take these kinds of losses, even if they are just on paper until you sell.  The series of events was a great gift to the short sellers who are paying big money to short this stock because they don’t believe in the model, or they have ulterior motives for wanting to have HMNY not be successful.

It seems unlikely that HMNY is headed for Bankruptcy anytime soon given they have virtually zero debt, and a lot of options to keep on trucking as a “going concern”.

My view – if you liked this stock at $7 or $4 or even $2 – you should love the stock NOW at .85 cents!

Nothing significant has really changed!   Go review all the video interviews I have cataloged here.   You will see that the story has been consistent, that there was really no big new news at all, and that Farnsworth and Lowe consistently have said they would need to raise more money as they built out a 5 Million user subscriber base.

Don’t let greedy Wall Street hedge funds and sneaky short attacks from competitors like AMC scare you out of what will be a great long term investment!   Hang in there, average down if you can stomach it.

As Mark Twain once said.

“The rumors of my death have been greatly exaggerated”

Adam Aron’s (AMC CEO) Bizarre Responses to MoviePass Subscription Questions

AMC had a pretty good quarterly report today.   Box office – and ticket admissions did better than expected.  Not so surprisingly Adam Aron took a few shots at MoviePass – a service he would love to see go away as it threatens AMC in a way they don’t like and don’t fully understand.   Aron seems to revel in the better than expected Ticket and Box office numbers beat for the quarter, while also tacitly acknowledging that MoviePass was a significant driver of his business.    While at the same time trying to deny the popularity and acceptance of MoviePass, all while trying once again to throw the company business model under the bus.  Desperately, and probably stupidly,  wishing they entire thing would just go away.

First, let’s just take a look at some of the numbers here.

As you can see, US Market Attendance was actually down to 61.5M from 68.8M.  Aron raised ticket prices from $9.27 to $9.78.   All underlying Aron’s strategy of reducing seats, upgrading some of AMC theaters and get more money out of every moviegoer.   It is his strategy to actually REDUCE moviegoing.  And I give him credit there! – he has achieved his goal of fewer people going to his theaters.

Now – here are some quotes from the conference call, that demonstrate how far a CEO can delude himself from a near-term reality he must face.   And that is, like it or not, MoviePass success at AMC, has become the success of AMC.  That is, Aron can’t have one without the other.  He knows it and is having a harder and harder time dancing away from it.

From Today’s Conference Call

Ryan Sundby

And then I guess I hate to be the one to go here, but I am surprised we haven’t hit on subscription this late into the call. Any color you can provide on what subscription services going to add to the quarter? And then any thoughts on how you see that evolving now that we see a new entrant into the subscriptions game as well, I guess?

Adam Aron

I have been waiting for that question the whole call. So thank you for asking it. We have had a very successful subscription program for three years in the United Kingdom, called Limitless in the Odeon circuit. And our views about subscription have not changed 1iota since the August press statement that we put out on the first day of movie passes, in my opinion, ridiculous price reduction. We said go back and look at our statements. We said that there’s nothing wrong with subscriptions programs. They can be quite positive actually if they’re done rationally and intelligibly. But they have to be done at a price that is sustainable. And it was our view that 995 for up to 30 or 31 movies a month is not enough money to spread around MoviePass, Hollywood studios and theater operators, so that Hollywood can make quality movies and theaters can operate quality theaters.

Fast forward to today, in March and April, MoviePass paid AMC $12.02 per ticket on hundreds and hundreds and hundreds of thousands of tickets each month, hundreds of thousands of their subscribers came through AMC theaters to enjoy our product. They did so at a frequency of 2.62 times in March and 2.75 times in April. Now, I took the calculator out and I multiplied 2.75 times $12.02, and I got to a number that was considerably larger than 995. So just as we were hearing that — the MoviePass price point was unsustainable in August, we have the same questions today. And apparently we’re not alone in that view. Our doubts are now shared and articulated by MoviePass’s orders.

OK, Aron – we know you hate MoviePass! – you have made that very clear, and you hate that it has a model that can result in lower prices and you refuse to acknowledge that the lowering of price can result in higher demand – even as it seems to be showing up in your theaters and driving better than expected attendance numbers at your theaters.   (Hitting my head against the wall now!)  But at the end of your statement, you now claim that your doubts are now “shared and articulated by MoviePass orders”?!    And you back it up with no data whatsoever?   And what do you mean by “shared and articulated by MoviePass’s orders?”  I mean seriously, what do you mean?   Are you saying MP subs are down?   Because that is a pretty bold claim – given MP has not backed down from their sub growth #’s at all.    Or is Aron saying that AMC is seeing fewer ticket sales from MP?  That seems counter to his other previous claims of hundreds and hundreds of thousands of tickets.   Is it just me, or does it seem like Aron has a hard time splicing all of this BS together to a coherent argument on why MoviePass sucks, other than he hates it, and does not believe in lowering prices to drive up demand?

Aron also states that MoviePass is paying $12.02 per ticket while also claiming in AMC’s own reports that the average ticket price is $9.78.   I am starting to smell a rat here.   How could MoviePass be paying more than $2 over AMC’s average ticket price?  Particularly when MP does not allow for 3D or Imax viewing?  Something stinks here.  Either Aron is lying, or he is knowingly ripping off MoviePass.  I don’t see how either of these things can last.  I know some will say the price difference is for regional higher prices where MP is more dominant, but I don’t buy that argument, not when you take out 3D and Imax.

Now – if MoviePass paid for “hundreds and hundreds and hundreds of thousands of tickets each month” what would have been the result had MoviePass aggressively redirected those subscribers to other theaters?

Let’s do some conservative math on that statement against the reported numbers.   Since we Aron won’t give a real number beyond hundreds and hundreds of thousands.   I will pick some conservative numbers to work with.

If you assume that MP brought in the mid-range of “100’s of thousands” of tickets each month, at the $12.02 price point Aron claims. If you add to that a conservative Halo effect of 20% (For friends who go with MP subscribers that probably would not have done otherwise)  That would amount to about $23M in tickets sold by MP in the QTR.   A significant amount for the company to be sure.  If you add to that the average $5.04 concessions the company claims, it amounts to another $9.6M.   This is all VERY conservative estimates.   And the total estimate here would be just over $32 Million for the QTR that can be DIRECTLY attributed to MP.    And for those people who say that these people would have gone to the theater anyway without MP, I say, you are nuts and delusional to think that way.  The data is absolutely 100% clear MP customers double their movie consumption after signing up with MP.

Ticket Revenue Concessions
MP Tickets Sold Halo Effect 20% Total Ticket Sales  $                12.02 $5.04
Jan           500,000            100,000               600,000  $    7,212,000.00 3024000
Feb           600,000            120,000               720,000  $    8,654,400.00  $ 3,628,800.00
March           500,000            100,000               600,000  $    7,212,000.00  $ 3,024,000.00
Totals        1,600,000            320,000            1,920,000  $  23,078,400.00  $ 9,676,800.00  $ 32,755,200.00


The question is would this relatively small estimate of increased revenue make a difference to AMC’s results.  And the very clear answer to that question is absolutely yes!!  In a very big way.  AMC posted earnings of 14 cents per share, topping the Wall Street consensus estimate of 9 cents per share by 5 cents per share. Net earnings were $17.7 million for the period.  That’s right net earnings were $17.7 Million.    So does $32 Million of additional revenue make a big difference to AMC?!    I think the answer is obvious.   Without MoviePass AMC almost certainly would have missed Wall Street consensus, and instead of seeing a nice lift in stock price, they likely would be getting crushed in tomorrow’s trade.

And for those who say, you can’t just add that additional revenue straight to Net Earnings, I say, you must consider that MP sells perishable inventory that AMC likely would not have otherwise sold.  Meaning a HUGE amount (almost all of it) goes straight to higher profits for AMC.

So while Aron continues to hope that MoviePass goes away, he also must secretly be thankful that MoviePass is saving AMC’s bacon by goosing their numbers.  Aron can’t seem to wrap his head around the idea that a whole lot of people would like to see more movies at a more reasonable price.  He is blind to his own strategy of raising price, reducing audience, and slowly killing off all but the most passionate theatergoers.

I have seen this movie before, where the old laboring incumbent just can’t wrap their heads around a new business model that is likely much better for them.  The disrupter just keeps charging forward, and finally deals a crippling blow to the old guard.     AMC is now very vulnerable to MoviePass, Aron knows it, and it is why his statements continue to get more bizarre and more paranoid.   The more Aron continues to bash MoviePass, the harder it will be for him as CEO of AMC to walk back his comments and do a deal with MoviePass under his watch.

I believe MoviePass is nearing or already at a point where they could do serious damage to any one of the major chains by seriously reducing consumption at any one of them for a sustained period of time.  That is a nightmare scenario for Aron, who has come out swinging hard against MoviePass and shows no intention to back down.

I expect a showdown soon enough!

Incredible Positive Interview Fox New & Maria Bartiromo

MoviePass Investors should be very excited today.    An absolute home run interview with Mitch Lowe & Maria Bartiromo.  She calls it a “Movie Lover’s Dream”.  Says it the momentum is “incredible”

  • Mitch talks about exclusive events with John Travolta at 5 different locations to promote the Gotti film
  • Mitch says multiple 10’s of thousands of new subs yesterday alone.
  • Maria says she is excited to see the Gotti film
  • Maria says that people “LOVE” their MoviePass
  • Mitch reiterates the experience and getting out of cocooning – a new PR message they are pushing

“Oh my god,” he told FOX Business’ Maria Bartiromo during an interview on Thursday. “I think tens and tens of thousands of people have just subscribed since yesterday.”

Folks – you can’t buy an ad this good.  I mean literally, you can’t buy this type of endorsement from a major media show host like Maria Bartiromo.  I was in the business and I can say without a doubt these people will not sell an endorsement like you see in this interview.   Incredible value here!

Mitch is doing a great job in these interviews.  He comes off as personable, excited about the product and the business.   I have done a few video interviews in the past and worked with many different executives in prepping for TV interviews including Bill Gates, it is not easy.  Mitch is a natural.   It is rare to have a CEO leader this comfortable in front of a camera.   A tremendous asset to a young company like MoviePass.


Mitch Lowe CNBC Interview – GREAT NEWS!

Mitch Lowe finally broke the silence on the MoviePass news cycle today on CNBC.  Masterfully creating huge attention by bringing back the $9.95 unlimited program.   A beautifully played PR move.  Bringing back what customers love, with limitations now in place that makes the model much more effective.

Watching a film on your phone is a lot less than going to the theater: MoviePass CEO from CNBC.

Key News Bits

  1. $9.95 Unlimited is back – shows fine tuning is working
  2. The share of smaller markets is going up- average ticket price going down.
  3. “Around 30% cost reduction”  This is absolutely key.  30% utilization reduction has a HUGE impact on Gross Margins – Updated model coming soon to reflect
  4. All but one independent theater said “send me a contract” to get a deal done with MP at CinemaCon
  5. Move shows confidence in model- no chance they would reintroduce unlimited if they feared near-term bankruptcy

Just when people were thinking there may not be a strategy here.  It turns out they are working an incredible PR strategy of manipulating the media to stay out front and center and top of consumers minds.   Yes, it seems haphazard, but I believe MP is playing this very smart, they know what they are doing and these somewhat bold plan moves are part of an overall strategy to keep media buzz high.    And it seems to be working!

Want some proof of how MP thinks about PR strategy?   MP and HMNY use PPMG Corp as their PR Firm.   These guys are good at what they do.  They have been organizing the PR blitz for MP since the beginning and looking for ways to leverage and sustain the initial PR Buzz from the first unlimited announcement.     

Data and analytics company Helios and Matheson Analytics purchased a majority share in Netflix co-founder Mitch Rowe’s company MoviePass, allowing the subscription service to drop its fee to $9.95 monthly for unlimited movie theater viewings. The explosive news disrupted the industry as the agency worked with HMNY CEO Ted Farnsworth and MoviePass CEO Mitch Lowe on a week-long New York City media tour and blitz, ranging from top tier national broadcast outlets such as CNN to national movie trade outlets such as Variety. The MoviePass news escalated further when AMC Theaters publicly denounced the service, enabling the agency to prolong coverage and take both companies into another editorial cycle in national and local news nationwide.

So what may feel like random changes, and potential uncertainty around the business model, in fact turns out to be a very organized campaign to sustain the media attention needed to keep interest in MoviePass extremely high.

I have worked on campaigns similar to this, it is not easy to keep the momentum going, CNBC and other big TV News outlets don’t just take anybody on the show.  You have to have news to share, and it has to be something the producers think will be interesting.   MP and Mitch have done a fantastic job here keeping the buzz going, and keeping people talking about MP.   As I have written in the past, these media impressions are worth Millions for MP, it is advertising they don’t have to buy.

Here’s the link to my updated model with the new information today.