5/3/2018 Update: Schwab is now paying retail 35% for Hard to Borrow on HMNY. That makes shorting even worse than article below.
The owner of MoviePass, (HMNY) has become extremely expensive to short. (HMNY) has been put on the hard to borrow list at Charles Schwab. Meaning, there is a low supply of shares available to short for HMNY stock, so Schwab is making a market for more shares by paying retail investors a very high-interest rate to borrow their long shares.
I have personally confirmed with Charles Schwab that they are paying an incredible 29% interest to long shareholders of HMNY. More incredible, this is ONLY ½ the interest Schwab charges to institutions for the shares. Schwab splits the interest charged to institutions with the retail investor 50/50. This means that some large hedge funds are paying an incredible 58% interest to short HMNY. (Note: this rate can change daily, the rep at Schwab was very careful to point out the rate can go up and down quickly based on Schwab’s demand for the shares)
It is a little tricky to wrap your brain around how risky this is for hedge funds. I am going to try and explain the math here, to give you an idea why a hedge fund would make such an expensive and risky bet. I will also show you how this can backfire badly for shorts, potentially causing a short squeeze.
First, let’s look at how expensive it is for Short Sellers of HMNY to pay the brokerage fees when the Hard to Borrow rate is at 58%. For this calculation, I used Ally Financial’s calculation
What this calculation means is that a hedge fund that wants to short HMNY 100,000 shares has to pay $174,000 a year to fund that short at the current broker fee for this “Hard to Borrow” stock. Or put another way, they must pay a daily fee of $483.
Put this in perspective. If HMNY were to essentially stay flat to today’s trading price of $2.28 for one year, and the short position was not covered, the hedge fund would lose $174,000. By comparison, a long holder of HMNY would have zero loss, they would still own $228,000 shares of HMNY, and if they were with Schwab, they could have collected 29% interest on those shares amounting to a $66,120 profit.
Of course, if the stock of HMNY starts to rise, the potential loss for a short seller could theoretically rise to infinity, There is no cap on the potential loss amount for shorts.
A scary proposition for shorts, even a small rise in HMNY could have devastating losses. Consider if HMNY rose just .50 in share price to $2.78. That small jump in stock price would make that 100,000 short buy immediately $50,000 under water. The math on that is simple enough. 100,000 shares * $2.28 = $228,000 for shares sold short. 100,000 shares * $2.78 = $278,000 to Cover. The difference to cover the shares is owed =$50,000. This is already a significant loss. But the loss gets much harder to take when you add in the brokerage fees for the “Hard to Borrow” shares. If the short tried to hold on for the entire year – it would mean the total year’s loss would be $174,000 (for brokerage fees) + $50,000 (Cost to Cover) = $224,000. In this case, by comparison, the long investor would have 100,000 shares at $2.78 per share. Or a total investment now worth $278,000 on their $228,000 original investment – a $50,000 gain.
Now, why might any firm or person take on such a risky short play. The answer is that they believe the stock will be further pushed down in the short term and they can play the stock for a short-term gain on that downward trend. Here’s an example of how that can work in favor of short-term short sellers. Take our example again of 100,000 shares. The daily cost of holding those shares short (Daily Hard to Borrow fee in the above table) is $483.33. Now let’s say that a short makes a short-term bet for 5 days and the stock price goes down -12% or .2736 cents. If a short covered that decline and took their profits – that cover would gain them $27,360. (use same formula from above). While expensive, the 5 days of “hard to borrow fee” would be 5 (days) * $483.33 (daily hard to borrow rate) = $2416.65 for 5 days. Netting that short 5-day trade a nice profit of $25,213.35. Not bad for 5 days!
So you can see, the folks shorting this stock, desperately want the stock price to continue going down. Now here’s the rub. HMNY has a very small amount of total float of their 53M shares outstanding and has a very small market capitalization of only $120M. This makes the stock volatile. It is a flea-sized stock, and it trades more shares in a day than many companies 100 times its size. Any piece of news can send the stock swooning or jump depending on the news – good or bad. If a significant piece of good news comes to light the stock could quickly jump up, it could force short sellers to try and cover their outstanding short positions to minimize their losses. With such few shares available to cover, the shorts could be forced to pay very high prices to get out their positions.
Here is a list I have of things that could surprise short sellers and cause the stock to jump up.
Completion of control of MoviePass, Ending the Proxy Ownership Problem, Changing the Brand Name of the Company, Changing the ticker of the stock symbol to MVP or like name,
Announcing a partnership with a major theater chain like Regal or Cinemark
Announcing a distribution deal with a major partner like Verizon
Announcing a surprise subscriber number increase
Announcing updated financial results with better than expected earnings – or smaller loss than expected
Having either of the MP Venture films score big at the box office
Any rumor of a potential acquisition
On the downside – shorts could be helped by these developments:
Worse than expected losses
Sub numbers not as strong as management has forecasted
I am bullish on MoviePass’ business model over the long-term. Please see my model and my other posts on www.bobvisse.com to see why I think the recent narrative of MoviePass not being able to sustain itself is a bad bet.
In summary – shorts stand to lose a lot of money even if the stock price for HMNY remains flat. At this price, it makes way more sense for HMNY investors to remain long. Any positive news event could send this stock into significant short squeeze.
One year before Steve Jobs passed he predicted a service like HMNY’s MoviePass would change how studios market their films. Now 8+ years after the marketing genius’s death, MoviePass stands.
Now 8+ years after the marketing genius’s death, Moviepass stands to deliver on Job’s prediction that technology would allow studios to efficiently reach audiences reducing their spiraling marketing costs.
At only 10% share of Studio Marketing budgets, Moviepass could stand to reap $230M a year in revenue from Studios. 10% is a conservative estimate given the efficiency of Moviepass.
Way back in 2010 Steve Jobs predicted at an industry conference a change from technology would emerge that would fundamentally change the way movie studios go to market and connect with their customers. His prediction was early, but is now being delivered via MoviePass.
Jobs stated “What the studios need to do is start embracing the front end of the business,” he said, “to start knowing who their customers are, and to start building mechanisms to communicate with them, and tell them when their new product is coming out.” Within two years, the Apple CEO predicted, selling films “is going to get a lot more interesting, more precise, cheaper, efficient.”
Jobs’ vision is now being precisely played out by Mitch Lowe, CEO of MoviePass. MoviePass is the ONLY service that can deliver the exact value Jobs prescribed.
MoviePass know’s their customer, in a way studios have never known who their customers were before. MoviePass can deliver a precise, efficient, and cheaper mechanism to get butts into movie seats, previously unavailable to studio marketing chiefs. And yes, they can do it in a way that is more interesting and exciting to the coveted millennial audiences studios are desperate to connect with. Only MoviePass can tell studios exactly who is going to their movies, and reconnect them with sequels, sell them add on products and introduce them to similar films. And only MoviePass has the power to do this on their mobile app platform, knowing the precise history of the users previously viewed movies, locations and times.
Mitch Lowe stated in his interview with Peter Kafka of ReCode
“..we have all these different ways that we make your life better as a customer. We know how to market films to you. You know, the studios are incredibly inefficient the way they market small films. Over the last three weeks, we bought one in every 19 movie tickets in the country, but when we promote a film, we’re buying one in 10, so we’re lifting. These are for subjective $50 million box office films. The studios are paying us to be a more efficient marketer of films.”
MoviePass is a dream come true to Marketing executives who knowingly waste billions every year on big TV advertising binges trying to ensure that big budget films don’t go bust at the theater. An increasingly big risk in the crowded movie marketplace, that has been seeing reduced attendance. MoviePass stands to be the single best way to ensure that a movie does not fizzle out in the all important opening week.
According to Variety Magazine,
Marketers know the power of digital media, but also are becoming more cognizant of its limits. Several executives say they are not convinced, for example, that trailers posted online aren’t just as readily avoided by consumers as are TV ads skipped in the age of the DVR.
“You only know for sure that the consumer saw the first second or two of your trailer. After that, it’s unclear,” suggests a marketing consultant. “And was the volume even turned on? We don’t know. We need better verification of who is really watching and hearing what.
MoviePass – is similar to – but better- than Google keywords for movie studios. MoviePass takes all the guesswork out of connecting directly with prospective theater goers by utilizing their deeply personal and engaging mobile platform. Simply put, there is no surer way for studios to drive customers to movies than using MoviePass as marketing partner. If and when MoviePass hits their 5 Million subscriber goal they have predicted to hit by the end of this year, that power of connecting to large scale theater audiences only continues to grow.
It is important to note, that MoviePass has already been extremely successful extending out the all important opening week for many movies as of late. CEO Mitch Lowe shares details in his interview with ReCode here.
In that same interview Lowe answers Kafka’s question of-
“What’s an example of a movie that the studios have paid you to promote?”
“I could list a bunch of them. “Maze Runner” is one over the last couple of weeks. “Lady Bird,” “I, Tonya,” almost every film …”
So it seems that MoviePass is already enjoying success promoting films for studios. We don’t yet know how much those deals are earning MoviePass, and it has been reported in SEC filings that many of the deals are performance based. Meaning that MoviePass gets paid and bonused on the number of actual tickets they help to sell. We will find out soon how material this is to MoviePass earnings, but because MoviePass is still private, (HMNY) has no right or even any good reason to share these details. I think we all may end up surprised by how big this advertising business can be.
MovieFone acquisition ups the anti on MoviePass advertising business potential.
When HMNY bought MovieFone – they upped the anti for their advertiser value proposition BIG TIME. The addition of MovieFone brings MoviePass 6-8 Million additional monthly UU’s to market films to. Taking the total addressable market for MoviePass advertisers to someplace near or above 10 Million people. Additionally, the deal cut with Verizon to by MovieFone allowed for MoviePass to continue working with AOL’s Oath division for ad sales. This is a big win for MoviePass because Oath has the largest display advertising salesforce in the business. Oath sells ads for all AOL properties, Yahoo, and Microsoft. This is a big benefit to a small company like MoviePass who would not be able to afford to build their own large salesforce early on. Having worked in this space, I can tell you that getting a large company like Oath to agree to sell inventory for a small site is very hard to obtain. When I was at Microsoft and we had a large ad salesforce, we were constantly asked by smaller partners to sell their inventory for them, but we would not do it because it created sales and channel conflicts for our own inventory. This may sound like small details, but I can assure you this stuff is critical for building a large ad business.
It is estimated that as much 1/3 of revenue for a movie is achieved in the first week of a movie’s release, and further, it often can determine if an expensive film makes or loses money for the studio. This fact, along with tight windows that can’t be moved for movie release dates is what forces movie studio executives to spend $100’s of millions of dollars to “ensure success” of big budget films.
A quick look at the potential revenue MoviePass could score from this powerful marketing asset reveals a potential big windfall for HMNY the majority owner of MoviePass. It is easy to believe that when MoviePass hits its estimated 5 Million subscribers by the end of the year, they could nab a 10% share of total marketing spend, estimated at $2.36B. Or $230 Million in revenue conservatively estimated. MoviePass CEO Mitch Lowe has previously estimated a potential of $6 Per Subscriber Per Month. Simple math of 5M Subscribers X $6 = $30 Million a month, or a yearly revenue run rate of $360 Million. This revenue source could easily be delivered at a Gross Margin in the 90% plus range.
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.
2 Major Assumptions from Mark’s MoviePass Model of where I disagree include:
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.
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.
MoviePass owns an incredibly valuable Patent (US Patent # 9135578) with wide ranging claims that span well beyond the theater industry. In this post I will try to cover some of the key language in the Patent, how it protects MoviePass from potential competitors like Sinemia who MoviePass is currently actively litigating for Patent infringement.
There is a LOT of technical mumbo jumbo in all Patent applications, and Patent Law is extremely complicated. I am not a Patent Lawyer, I don’t play one on TV either. I have had quite a bit of experience with Patents – I have invested and led companies who had important Patent claims worth millions of dollars. I have also served as a key witness in a very large Patent infringement case for Microsoft. Unfortunately, we were the defendant in that case, we settled, for a LOT of money, even for Microsoft it was a lot of money. I spend weeks on the case and I saw first-hand how valuable and important a good patent can be.
The most important part of a Patent is what is claimed, and if those claims can be adequately protected. Again, I am not a lawyer, but have some experience in these matters. After fully reading through the MoviePass patent it is my opinion the claims are sufficiently specific and broad enough to protect MoviePass from competitors offering a copycat service. Further the claims issued cover many different potential future products that may or may not be developed or marketed by MoviePass. Below you can read the full specific claims directly from the Patent. Just for a highlight here is one of the more potentially valuable claims made in the patent.
(A ticketing system comprising: a plurality of databases coupled via a network; a plurality of processors coupled to the plurality of databases; a plurality of electronic scanning devices coupled via the network wherein each of the electronic scanning devices is associated with a venue;)
Now that is a lot of lingo. But it is VERY important. This essentially gives MoviePass a claim to connecting a cloud service ticketing system to a credit or debit card. This is a very broad claim. Think if Ticketmaster, Stubhub or any other number of ticketing companies wanted to deliver a similar method ticketing and transaction. They would have to negotiate with MoviePass or risk violating this clear claim. This alone could be worth many many 10’s millions of dollars over time.
The claims go on to cover a wide variety of features and application uses for the MoviePass invention and transaction system. Claims include the activation of the subscription from a mobile device, to the activation of the credit/debit card, the location based check in, the clever way that MoviePass clears the transaction with the merchant for a specific predefined amount, and more. I have read a lot of patents, and helped apply for many. It is unusual to receive such a wide claim so clearly documented. I have to believe that MoviePass had some very clever lawyers and made a very significant investment to obtain this patent.
To give you an idea of how potentially valuable a patent can be consider the patent settlement between Google and Yahoo! where Google had violated a search patent that had been obtained by Yahoo! when they had purchased Overture. Overture was the originator of paid search, and the patent settlement was considered so important and valuable it was actually holding up Google’s ability to IPO back in 2004. Google settled by giving 2.7 Million Shares to Yahoo – valued at about $300 Million. It was a stroke of luck for Yahoo! and that investment quickly skyrocketed above $2 Billion. Yes, patents are very valuable!
You can also learn a lot about what a company may be planning and thinking by looking at patents. Here are a few art exhibits from the MoviePass patent that show some feature ideas we have not yet seen in the app. Some of which would be clearly valuable for marketing purposes. And others that will help MoviePass create more commerce with the app.
Here you can see how MoviePass could make a simple change to limit consumption by only allowing a user to see a particular movie one time.
Here you see how MoviePass could market a DVD directly from the MP App.
Here you see a clever way for MoviePass to integrate with Facebook, allowing for a more social experience, and spreading the word of MoviePass
Here is an additional view of inviting friends to MoviePass. A powerful marketing tool.
In summary, MoviePass has a very valuable patent, which it is already seeking to defend vs. competitors. The claims from the patent are surprisingly broad and apply beyond just going to the movies. This creates a strong moat for the MoviePass business by protecting the MoviePass experience from easy copycat competitors. Finally, you can see that MoviePass has a lot more cool ideas on the back burner that will improve the service and create new revenue opportunities for the company.
The full language of the claims from the patent are here:
What is claimed is:
1. A ticketing system comprising: a plurality of databases coupled via a network; a plurality of processors coupled to the plurality of databases; a plurality of electronic scanning devices coupled via the network wherein each of the electronic scanning devices is associated with a venue; and at least one user device coupled to the processors and the databases via the network, wherein the at least one user device comprises at least one of a smart phone, a handheld mobile device with communication capability, and a personal computer; wherein the plurality of processors are configured to, via the network, register a subscriber-user for a subscription in exchange for a subscription fee, wherein the subscription comprises a predetermined number of events in a time period, wherein the subscriber-user is associated with the at least one user device; via the network, from the at least one user device, receive a subscriber-user request to book a ticket for an event; determine that the subscription is current; determine a venue and a time for the event; communicate with the venue to reserve the requested ticket booking; associate a pre-paid credit card with the subscriber-user, wherein the pre-paid credit card is associated with an account; automatically detect, in real time, a location of the at least one user device at the determined venue to determine that the subscriber-user is at the determined venue; immediately fund the account with sufficient funds to pay for the requested ticket only if the location of the at least one user device is detected at the determined venue; determine, a predetermined time after funding the account, whether the sufficient funds remain in the account; detect a physical location of a scanning device via the network when one of the plurality of scanning devices is used to scan the pre-paid credit card; and collect and store data related to the subscriber-user in the databases, wherein the data comprises names of events attended by the subscriber-user, venues of the events attended by the subscriber-user, types of events attended by the subscriber-user, times of day of attendance by the subscriber-user, and frequency of attendance by the subscriber-user, and wherein collecting data comprises automatically receiving the data via the network.
2. A computer-implemented method for targeted selling, comprising: a processor via a network registering a subscriber-user for a subscription in exchange for a subscription fee, wherein the subscription comprises a predetermined number of events in a time period, wherein the subscriber-user is associated with at least one communication device; the processor communicating with a financial institution to set up a subscriber-user account for funding ticket purchases; the processor receiving and storing subscriber-user data comprising a name, an age, a gender, a home address, an email address, a phone number, product preferences, and names of friends in a database coupled to the processor; the processor receiving a request from the at least one communication device of the subscriber-user to book a ticket for an event; the processor determining a time for the event and a venue for the event; the processor communicating via a network with a venue system to reserve a ticket for the event; the processor sending the subscriber-user a ticket token to the at least one communication device, wherein the ticket token is scannable from the at least one communication device at the venue to give the subscriber-user access to the event; the processor automatically detecting, in real time, a location of the at least one communication device at the venue to determine that the subscriber-user is at the venue; the processor immediately funding the subscriber-user account with sufficient funds to pay for the requested ticket only if the location of the at least one communication device is detected at the venue; the processor determining, a predetermined time after funding the subscriber-user account, whether the sufficient funds remain in the subscriber-user account; after the end of the event, the processor detecting whether the ticket token was redeemed, comprising determining via a network whether the subscriber-user account has been debited for a price of the ticket; if the ticket token was redeemed, the processor collecting event data, including a time of the event, a type of the event, a name of the event, and a location of the venue, wherein collecting comprises collecting scanned electronic data from scanning the ticket token; the processor associating the event data with the subscriber-user data; and the processor storing the event data in the database.
3. The method of claim 2, wherein detecting whether the ticket token was redeemed further comprises, if the ticket token was not redeemed, the processor allowing the subscriber-user to request to book another ticket for the same event.
4. The method of claim 2, further wherein detecting whether the ticket token was redeemed further comprises, if the ticket token was redeemed, the processor disallowing the subscriber-user to request to book another ticket for the same event.
5. The method of claim 2, further comprising: the processor sending the subscriber-user an electronic message inviting the subscriber-user to associate via a social networking site to become a networked subscriber-user; the processor providing a networked subscriber-user a facility to invite friends to an event via the social networking site; the processor receiving a list of friends invited to the event by the networked subscriber-user; the processor collecting friend data regarding invited friends of the subscriber-user, comprising which friends accepted invitations, and which friends are also subscriber-users; the processor associating the friend data with the subscriber-user data; the processor storing the friend data in the database.
6. The method of claim 5, further comprising the processor generating data reports from the subscriber-user data, the event data, and the friend data.
7. The method of claim 2, further comprising the processor allowing the subscriber-user to book a predetermined number of events over a predetermined time period for a fixed price.
8. The method of claim 7, further comprising the processor tracking a number of events booked in the time period and disallowing requests to book events over the predetermined number of events over the predetermined time period.
9. The method of claim 2, further comprising, after the event is scheduled to be over, the processor sending an electronic message to the subscriber-user with a request to review the event.
10. The method of claim 2, further comprising, after the event is scheduled to be over, the processor sending an electronic message to the subscriber-user with at least one offer to purchase items related to the event.
HMNY and Moviepass is a hotly debated battleground stock. Moviepass provides a product that seems too good to be true. It is loved by consumers who see a fantastic value proposition, and it is despised by those who think it diminishes the value of going to the movies and will hurt the industry over the long term if the company does not survive.
The key reason the company has been so hotly debated by investors is the divisiveness of its unusual business model. Investors either see it as a product that is too good to be true – and thus will not exist as soon as the company runs out of capital. Which on the surface, using simple math models, makes a lot of sense. When you consider that a MoviePass subscriber with enough time and love for going to the theater can see a movie every day of the month for the small monthly subscription fee of $9.95. If a customer took full advantage of that 1 movie per day offering they could rack up COG’s to MoviePass of $300 or more. Too many heavy using subscribers on Moviepass could make the company go bust in a hurry. Bears have covered they story well and the stock price of HMNY has suffered as a result.
On the other side, there is the Bull case who believe in a more nuanced view of how Moviepass can turn a profit and save the movie industry from itself. Movie theater attendance has been in decline for years as theaters have steadily raised prices in the face of those declining attendance numbers. Theater owners have defied basic and traditional economic supply and demand models, leading them venerable to a disruptor with a clever new pricing scheme and business model. The nuanced view is a little harder to understand than the simple math model, but if understood and validated it offers investors of HMNY a misunderstood buying opportunity. If the model ends up being proven successful, MoviePass could end up on the fast track of being the next major $billion dollar tech unicorn.
I believe that the Moviepass business model works, but the nuance in the model is that it takes advantage of behavioral economics over classical economics. Only simple math that would say it is doomed. With key behavioral economics concepts fully considered, investors might find it easier to take that leap of faith needed in order to believe the business model for Moviepass can and will work.
Behavioral Economics is a “relatively” new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions.
According to conventional financial theory, the world and its participants are, for the most part, rational “wealth maximizers”. However, there are many instances where emotion and psychology influence our decisions, causing us to behave in unpredictable or irrational ways.
Moviepass is a poignant example of behavioral economics and demonstrates several of its key theories in practice. Let’s consider a few of the well researched concepts of Behavioral Economics and how these might apply to Moviepass consumers.
Mental Accounting. is the tendency for people to separate their money into separate accounts based on a variety of subjective criteria, like the source of the money and intent for each account. According to the theory, individuals assign different functions to each asset group, which has an often irrational and detrimental effect on their consumption decisions and other behaviors. There are many examples of how people use mental accounting. People tend to spend more of their bonuses or tax returns on frivolous items because they treat it as “found money”. We can all relate to our friend who wins big at the casino and becomes suddenly generous in buying everyone drinks and dinners until the buzz of that found money wears off. Logically of course, money should be interchangeable, regardless of its origin. Treating money differently because it comes from a different source violates that logical premise. Where the money came from should not be a factor in how much of it you spend – regardless of the money’s source, spending it will represent a drop in your overall wealth.
How does this relate to Moviepass? Moviepass customers fully admit that they spend more on concessions than they normally did in the past without Moviepass. The reason for that can be attributed to mental accounting. A Moviepass customer likely has a mental account or budget for how much they are willing to spend going out on any given night. Maybe that amount is $40 or $50 for a couple. If the couple goes to the theater and pays for the ticket price that night, they have already expended somewhere between $18 and $25 dollars – just to get into the show. Leaving them with only $20 to $30 dollars left for the entire evening. Other expenses could include a babysitter, uber, dinner out beforehand etc. When using Moviepass, the mental accounting for the evening does not include the cost of going to the theater, so Moviepass subscribers will “feel” as though they have spent less so far for the evening and can much more easily convince themselves that they have the necessary budget to spent $5 on a soda, or $7 to $10 on a popcorn. Mental accounting helps theater owners sell significantly more high margin concessions. It is a win for theaters, and for Moviepass, and for the consumer who feels like they are getting a high value night. Of course the consumer is paying for the Moviepass subscription. But that Moviepass subscription is in a different mental account, and it also connects into another important behavioral economic concept – Sunk Cost Fallacy explored below. It is clear that Mental Accounting concept is a winner for Moviepass.
Sunk Cost Fallacy Consumers commit the sunk cost fallacy when they continue a behavior or endeavor as a result of previously invested resources (time, money or effort) (Concept was demonstrated by Arkes & Blumer in 1985). This fallacy, which is related to status quo bias, can also be viewed as bias resulting from an ongoing commitment. For example, individuals sometimes order too much food and then over-eat ‘just to get their money’s worth’. Similarly, a person may have a $50 ticket to a concert and then drive for hours through a blizzard, just because she feels that she has to attend due to having made the initial investment. If the costs outweigh the benefits, the extra costs incurred (inconvenience, time or even money) are held in a different mental account than the one associated with the ticket transaction (Thaler, 1999).
How does this relate to Moviepass? Sunk Cost Fallacy relates to Moviepass in two important ways. One which is immediately and obviously positive and mentioned above in the Mental Accounting concept. When a Moviepass consumer goes to the theater, they view the price of the ticket as a sunk cost. They have already paid for their Moviepass, and in many cases they paid upfront for the year and it may well have been several months ago that they spent that money. Because of mental accounting, the price paid for Moviepass now has no bearing on what that consumer is willing to spend for their evening out at the movies today. This is why a Moviepass customer is so much more likely to spend money on high margine concessions, their mental accounting is free from the sunk costs of the Moviepass subscription long previously paid for. $5 Sodas thus don’t feel like such a bummer, nor does overpriced Popcorn or Candy.
The second implication of Sunk Cost Fallacy could be good or bad for Moviepass depending on the customer segment you are looking at. Here is where Sunk Cost Fallacy intersects with the all important utilization factor of Moviepass. A quick primer on utilization factor is necessary here to fully explain these implications. Moviepass CEO (Mitch Lowe) has explained that 88% of existing subscribers are profitable, and only 12% are heavy users.
Heavy users are unprofitable – because their utilization factor – AKA how often the user goes to the movies and uses Moviepass surpasses the amount that the subscriber pays each month for their moviepass subscription. (This is a bad thing for Moviepass Cost of Goods- potentially very bad to the point where Moviepass economics don’t work).
Here is where things get tricky, and where Mitch Lowe and Ted Farnsworth need to be pretty close to the mark with their data and utilization predictions. For the remaining 88% of Moviepass customers who exhibit low utilization rates, the best outcome is that these customers go the movies more often than they did prior to having Moviepass, but not so often that they tip the scale to being a high user who is unprofitable. The stats that Mitch and Ted use are from the MPAA, they state that the average moviegoer sees a movie 4 times a year. When the average moviegoer buys moviepass that number of outings doubles to 8 times a year. That is pretty much the PERFECT scenario for Moviepass. This is perfect because Moviepass needs to demonstrate to theaters that they can both increase attendance and increase consumption of concessions. If they can prove this out, they can legitimately claim they are making a big increase not only in attendance, but they are also driving up the real profit making machine for theaters – concessions! If they can prove this out, it could lead to one or more of the big chains doing a deal with Moviepass where Moviepass gets both a reduced rate on ticket prices for Moviepass customers, and they would also get a cut of the juiced up concession sales. Moviepass reports positive progress with independent theaters who are more progressive and buy into these economics already.
So back to Sunk Cost Fallacy – how does that concept help make Moviepass customers who were previously only seeing 4 movies now step up to seeing 8 movies a year. Take the example of the person who buys the concert ticket for $50 who will risk driving through a blizzard and a traffic jam because he bought the damn ticket already. The ticket is a sunk cost, the money was already spent, it should have no logical connection in the consumers mind if the costs outweigh the benefit. But that is not how the human mind works. The concert goer will risk life and limb not to lose the $50 bucks they already spent! Similarly with Moviepass, if a consumer is already paying for a subscription, they will feel more compelled to go see a movie, even if there are few attractive movie options available. The consumer will figure that they have already purchased the Moviepass, so they might as well go ahead and use it so they can derive value from that sunk cost. Think about people who have a seasons ski pass, they are more willing to ski in less than ideal conditions for the same reason, it is a sunk cost, they might as well use it and get whatever enjoyment they can out of that sunk cost on the seasons pass.
Of course this same Sunk Cost Fallacy can work against Moviepass for high consumption users. There will be people who were already going to the movies 8-10 times a month, who will now go twice that amount, and those people will be unprofitable for Moviepass. Even if they buy a lot of concessions and Moviepass gets a cut of them, they will be money losers. They may be good evangelists for the service, but over time, they will be a problem that needs to be dealt with.
Loss Aversion Finally, there is one last concept to consider. Loss aversion is an important concept encapsulated in the expression “losses loom larger than gains” (Kahneman & Tversky, 1979). It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gaining. As people are more willing to take risks to avoid a loss, loss aversion can explain differences in risk-seeking versus aversion. Loss aversion has been used to explain the endowment effect and sunk cost fallacy, and it may also play a role in the status quo bias.
How does this relate to Moviepass? This concept has its roots in something investors are very familiar with, the pain of losing hurts more than the pleasure offered from gains from an investment. A concept all to familiar to longs on HMNY. In this case the concept is stretched to the fear of going to a bad movie, and losing money from taking that action, as well as the loss of your free time that you spent viewing that movie. We have all been there… We got the babysitter, we took the trip to the theater, we bought the ticket to the show, and you sit down and the movie is a dud! You hate it, yet because of sunk cost fallacy concept, you sit through the movie anyway. But in the back of your mind you are angry. Angry that you wasted the money and your precious free time, angry that the theater is so expensive, and now resentful that you spent that $5 bucks for a soda. It feels like a loss when you see a bad movie, and after you experience it, you seek to avoid that loss and pain in the future. As Mitch Lowe has pointed out, Moviepass helps you to avoid that risk. With Moviepass, you can take a chance on a film, and if you don’t like it, you can simply walk out! This is possible because you are protected by sunk cost fallacy – you feel like you didn’t really “pay for that movie”. And of course if you leave quickly, you get your time back to do something more fun.
Similar to Sunk Cost Fallacy, Loss Aversion can rub both ways for Moviepass investors. On the positive side, the concept can get people going back to the movies again, driving up movie attendance from those who only attend the average 4 times a year, to a higher number. The obvious downside for MoviePass is that it could drive utilization too high with over consumers which can negatively drive up Cost of Goods sold. It seems however more likely that Loss Aversion works more in favor for MoviePass than against it. Heavy MoviePass users are likely already going to as many movies as they can, and don’t view it as a possible negative experience. Disenfranchised moviegoers are much more likely to have experienced a bad movie going experience, and have decided to avoid theaters for other less “risky” entertainment options. Many Moviepass customers on social media have reported that Moviepass has brought them back to the movies again, and I believe the elimination of Loss Aversion is a big part of that new found enthusiasm for going back to the movies.
A long position on HMNY & Moviepass requires a basic understanding of behavioral economics concepts to validate its proposed business model. Key Behavioral Economic concepts appear to favor Moviepasse’s presribed business model. While traditional simple business and economics models would point to an obvious failure for Moviepass based on simple traditional models. The less traditional, and even “illogical” view offered by Behavioral Economic concepts point to a successful model that takes advantage of consumer behavior not easily predicted by simple explanations. Mental Accounting has the potential to drive significant high gross margin concession sales, Sunk Cost Fallacy and Loss Aversion concepts can drive up movie attendance from infrequent moviegoers making more money for the entire Movie ecosystem. In doing so Moviepass stands to help save the movie industry and profit handsomely by providing that value.
Final Note: This is a post I wrote a about 10 days ago. Since writing this post MoviePass has at least temporarily ended the unlimited subscription offering. I wrote in an earlier post why I believe this is a significant development for the company. Later I will make an update on the potential implications of the change and how the new capped offering could impact the behavioral concepts discussed in this post.