Chapter and Lesson #1

Chapter One

 

“The first duty of a human being is to assume the right functional relationship to society – more briefly, to find your real job, and do it.”

Charlotte Perkins Gilman

 

My first Microsoft Job:

My very first job at Microsoft was as a temporary worker or what they had called a “contractor position” it was the year I graduated from College, 1991; I landed a job on the DOS 5.0 sales hotline.  The only reason I got the job was my brother’s x-girlfriend had taken a job at a temporary staffing agency that was placing lots of bodies inside of Microsoft.   Microsoft was growing very fast in those days and frankly could hardly hire people fast enough.  If you had a college degree, a pulse, and could work on the telephone for 8 hours a day, you were pretty much qualified “enough” and you were in.  There may have been a basic typing test involved as well, I have a hard time remembering it all now.  I knew quite a few people who got their start at Microsoft this way over the years.   Many of whom went on to have very successful careers inside the company and out.

It was not a glamorous start.  The specific job I was assigned was taking telephone orders for a new version of DOS, which is short for Disk Operating System.   This particular release of DOS had some new stuff- or “features” as they say in the software business.   The release was notable as it was the first time that Microsoft made an effort to sell an Operating System to retail customers as an upgrade.    So, DOS 5.0 kicked off a big business for Microsoft, selling upgrades of computer operating systems to their installed base of somewhere around 60 Million users at that time.   The installed base of Windows PC’s is in the billions now.

The office park where they set up this temporary sales order desk I was working in was not on the main campus of Microsoft. It was about 3 miles away near downtown Bellevue in a nondescript office park called “Ridgeway Campus”. Microsoft had taken a lease there and occupied 3 of the buildings.   Pretty much all of the employees in these outpost buildings were temporary or contract employees.   They did not officially work for Microsoft.   It was mostly a bunch of young kids in their early 20’s getting a start in the job market.   The only “benefits” offered with the job were free soda and a pretty nicely stocked kitchen with decent snacks.   I remember that pretty well because I was coming off of being a starving student, and while I was only making about $5.50 an hour with no “benefits”, I thought it was great that I could drink a lot of free soda and eat a LOT of free snacks.   For the temps, it was always clear that you were a 2nd class citizen of Microsoft, there were no health benefits, stock options, gym memberships or any of the respect shown to full-time employees, but you did get the free soda and snacks, and the people were generally nice enough.

It was a good place to get some experience in the business world when you were fresh out of college with no real prospects.  The job market in 1990 was not very strong, and it was particularly slow in the Seattle market.  I was just happy to have a job.

My days consisted of sitting in a very small cubicle all day for my 8-hour daily shift. The workspace was really too small to even call it a cube; it was more like one of those long row desks that you see at a library with little privacy walls in-between each sitting area spaced out at about every 3 feet or so.   It was adequate space to get the job done.   And for the most part, it was all young kids who were just out of school and it was not all the different than studying in a crowded library.  Everyone there was just looking to make some money, get some experience and move on.

I, and the group I worked with actually had a lot of fun doing that job.   I remember that we had a script which we had to follow when we answered prospective callers.  We were told to answer the phone saying.  “MS-DOS 5, No PC should be without it!  My name is “Bob” how I can help you!”    To entertain ourselves during the day we would make up fake names and accents when we answered the phone.  The guy sitting next to me was hilarious, he would do an entire call with a very deep southern accent.  He would answer the phone using this long drawn out southern hillbilly sounding accent, “M…S…..D-O-S ..FIVE…, No dang PC should go without it, this is Alligator, how the heck can I help ya!   He would keep it up for several calls in a row.  His hijinks encouraged us all to come up with our own characters.  You would never know who was going to use what character next, it was like a zoo at times.    It was fun having a job where you could have some laughs and goof off a bit.

About half the time the customers calling in had absolutely no clue why they needed or wanted this newfangled DOS 5.0 operating system.  Luckily, we had a script that had some basic features and selling points we could read to persuade these eager callers.   In those days memory constraints were a big deal with PCs.   PCs were not the awesome multifunction devices we think of today, where you can play games, socialize with friends, buy anything on earth etc. etc.  PCs were for serious stuff like watching a green blinking cursor and trying to figure out what bizarre command you could input to make the PC do something interesting.  There were, of course, some programs out there like Word Perfect, Lotus 123, and lots of different business apps for the PC, a big problem people had back in the early PC days was literally running out of RAM memory and the program you were using would just stop working.  So, DOS 5 had a memory saving feature, it also had an undelete feature for the first time, and was the first time that DOS was sold as an upgrade.   This dorky video was made for training salespeople and the retail sales channel.   Watch it for a good laugh…  https://www.youtube.com/watch?v=dmEvPZUdAVI

Funny enough, none of us in this sales group actually had a PC at our desk and almost nobody really had a PC at home in those days.  So, we had pretty limited knowledge of what it was we were actually selling.   Microsoft did provide PC rooms where you could go and learn more about PC’s and the various programs.   That would prove to be very valuable to me as I would spend my break time and time after work playing around with the PC and with various programs, as I was naturally curious about how things worked and figured it would be useful for me to actually know what it was I was trying to sell.   I learned some pretty decent PC skills in those labs, and it turned out to be very valuable later on as my career started to blossom.

Oddly, none of us had PC’s at our workstations, PC’s were still very expensive, and networking them together in a meaningful way was just starting to take off.  So, while we were on the phones we used paper forms to fill out orders as they came in, and we read our sales scripts straight off of good old-fashioned paper.   At the end of the day, we would pile up all the orders we had taken and put them into a big bin, where somebody would plug them into a PC and I never knew what happened after that… To me, the day was done, there was no homework, no stress thinking about the next day, no worries, I just clocked out, and went home to have fun, play a game of tennis, or do something fun with friends.  There was no evening email to check, and there was no sense of things “piling” up at the office while you were away.  It was a nice way to live.  Even if I was still living like a poor college student.

The DOS 5 job was a short-term assignment, it lasted just a few months my first summer out of college.  I was offered a fulltime job at the end of that contract to work at Microsoft’s inside sales call center.  Incredibly and stupidly, I declined the offer, for two reasons.  First, I thought the work was pretty damn boring, so signing up to do inside sales of whatever the next version of DOS was going to have seemed like a great way to kill myself with boredom, even if it was relatively fun and easy, I could not imagine signing up for 2-3 years of that kind of work.  Second, I had another offer on the table for a couple thousand dollars more, and I wanted to buy a car!  Microsoft offered stock options, but I thought those things sounded like total bullshit!  J  In my idiotic view, I needed some cash now for a new ride!  So, I took a competing job at a small airplane parts manufacturer in South Seattle and proceeded to waste about 2 years of my life selling specialized plane tools to airplane manufactures and airline repair shops.    It was a bad move, of which there were others to follow…

Learning Lesson #1 – For those who are early in career – Always think long-term when making a job choice!   The best thing you can do is find an early stage growing dynamic company, start anywhere they will have you, & create your own luck by working hard & being at the right place at the right time.    For my part, I could have listened to the many people who gave me this same advice, but I first chose a less than mediocre company that was going nowhere so I could make a few extra bucks in the short term.  THAT WAS A DUMBASS MOVE!  And it probably cost me several hundred thousand dollars in lost opportunity and stock options!!  Uhgg!

Helios & Matheson Has Become VERY Expensive to Short

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)

Schwab offers this program to retail investors via their Securities Lending Fully Paid Program. This is a little-known program that only some big brokerages offer to retail investors. Ameritrade, for example, does not offer this program at all.  The program offers the opportunity for retail investors to loan out their long shares for shorts to sell. Essentially the long shareholder is paid interest for the period of time the brokerage borrows the long shares for big hedge funds who want to sell the stock short.   

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

Current Stock Price 2.28
Number of shares short 100,000
Hard to Borrow Rate 58%
Current Industry convention 1.02
Market Price * Current Stock Price 2.3256
(Per share collateral amount) x (share quantity) $300,000.00
(trade value) x (annual hard-to-borrow rate) $174,000.00
(annual hard-to-borrow fee) / (360 days) = Daily hard-to-borrow fee $483.33

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.

 

Why I see MoviePass utilization rate staying in the 1.2 to 1.5 range

I have now received a LOT of feedback on my MoviePass revenue model published on Seeking Alpha today.  By far the biggest area of feedback has been from people who disagree (sometimes violently and rudely) with the  utilization factor I used in the model.  This is the number of times per month on average MoviePass users will see a movie.  I used 1.4 in my model.  Many people emailed me and said I was crazy, the usage will be way higher the say! Lots of people gave me anecdotal evidence about how they use MoviePass all the time and so all of their friends!    It will be at least 4 a month!  Your model is junk!  2 is the lowest it will ever go!  booo !  Hiss!!    models like Mark Gomes ramp it to over 4.   and shorts have loved that logic!

Why do people care so much?  Investors know, the Utilzation rate has a massive impact on the model and on MoviePass’ fortunes, so I wanted to revisit my assumption here and more fully explore the topic.  As if I am way off, my model will be wrong, and it would not be good for the company or my long position in HMNY.

First, it is worth noting the company has claimed it sees utilization rate settling at 1.2 average over time.  

Many have pointed out that the company had mentioned a number over 2 in SEC reports, I have not been able to find those numbers as of yet. But if somebody has a link to send me, please do!  

In the most extensive interview done yet on the MoviePass business model Mitch Lowe and recode’s Peter Kafka –  Mitch explained the usage numbers this way.

Here’s the trick: 89 percent of American moviegoers only go to four or five movies a year. When they join MoviePass, they double their consumption and go to about 10 a year. That’s a little bit less than one a month. They balance out the 11 percent of the population that go 18 times before joining MoviePass and then after go three times a month. It works out. Over time, it actually works out to be about one movie per month per subscriber. Now, some people do go to 10, 15. We even have one guy who on this 40th birthday challenged himself to go to 40 movies in 40 days. We do have people with a fair amount of time on their hands.”

So if we use these numbers form the CEO! – It would put the Utilization factor at 1!

As you all know, I am believer and a bull on MoviePass.  But even I have a hard time accepting a usage factor of 1.  It just seems too low to me. That is a gut feeling.

Another interesting source for utilization rate was posted here on reddit.

This model does an extrapolation of total movie tickets sold and the % of tickets sold by MoviePass over a 4 month period and does a calculation from there to come up with an average number of tickets per subscriber.  This model lands at around 1.3 to 1.5 Movies per month. The author comes up with a final analysis stating.

“With a TLDR: Moviepass bought at most 14,499,069 tickets from movies released between Novemember 1st – March 24th which is an average of 1.53 movies per subscriber.

A better estimate using 6% of the box office for the missing data is 12,384,621 tickets sold for an average of 1.3 tickets/month per subscriber. Most likely the average subscriber goes to 1.3-1.53 movies per month”

In my model I factored in that MoviePass has capped users with the most recent promo with iHeartRadio at 4 movies a month.  That keeps the heavy users from skewing (& screwing) up the average. MoviePass has also made some significant moves to reduce fraud and started to get more aggressive enforcing its terms of service.  In some cases discontinuing Heavy Users subscriptions.

So the hard facts we have from the Company CEO, and from other detailed models do show that my estimated 1.4 Utilization Rate is actually pretty reasonable after all.  It is higher than what the Company publicly states, and within the high range of the most detailed model I could find.

Then there is a more subjective view I think is important to consider.  

Most people simply do not have the time to see more than 16 to 17 movies a year. Which is what a 1.4 utilization rate would bring.  In reality most don’t have the time to see more than 1 movie a month.

Let’s look at some data to backup that claim.   

The Average feature film is around 90 Minutes long.  That does not include previews, ads etc. that accompany most viewings, that easily ads 15 minutes to the experience.  If you add in the commute time to the theater, I estimate 15 minutes each way for 30 minutes total commuting time you get to a total time commitment of at least 2 hours, likely more, but I will use that number to be conservative.

A 1.4 Utilization Factor or about 16 movies a year x 2 Hours equals 32 hours a year committed to movie going.  Almost an entire work week spent at the movies? I just don’t think most people have that kind of time to spare.   

We have all read the research and seen the many articles on how busy Americans are.  The work week continues to get longer, people don’t take their allotted vacation days, we live in what is now called the “busy culture”.  Not to mention there is incredible competition for our free time and lots of attractive media options when you want that media escape.   

Going to the movies typically means finding somebody else to go with you – although more people are starting to go it alone with MP.  It also means finding a show and a time that works for you, it could mean getting a babysitter, and it may mean you have to leave your warm dry house and go through inclement weather just to see a show.  There are a LOT of good reasons that people think they will go do something, and finally reality sets in and they make other plans, admit it, it happens to you all the time!

Finally, If you are reading this article – know that you are NOT normal!  You likely care about movies more than most people. That is likely why you found out about MoviePass in the first place.  You are also a subset of the population who actually cares about individual stocks. You live in a small cohort world, you are not the “average” consumer.  So if your gut – subjectively is telling you people will see a lot more than 16 movies a year. You are probably wrong, and you just don’t know it. The data doesn’t back it, nor does a longer examination of the subjective thinking on the topic.  

So with that – thank you again to all who sent feedback – some of it angry 🙂 on how stupid my model is because my Utilization rate is a fantasy!   Maybe that fantasy is actually your own….

 

Steve Jobs Predicted A MoviePass Like Service One Year Before Passing – He Saw The MoviePass Business Model

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.

(Source Variety.com)

Put simply, within 20 months, MoviePass + MovieFone has the potential to deliver a quarter billion dollars in run rate revenue from studio marketing budgets at incredible gross margins.

Remember, that Mitch Lowe, CEO of MoviePass has stated that the subscription business would run at breakeven at approximately 5 Million Subscribers.

My model shows that is indeed possible for MoviePass to breakeven or profit by next calendar year.

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