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”

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

 

MoivePass Patent Contains Broad Claims That Span Well Beyond Theaters

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.


The post Seeking Alpha won’t let you see!  

Seeking Alpha would not let me post this to my blog on their site.  They sent me back the below note after I submitted the post.  While I know I will not win any future financial author awards, and also I realize I make the occasional grammar errors, I didn’t think my stuff was that bad.  With this stock, I actually know a lot about these types of businesses and have worked in this space for over 20 years. So I find it funny they won’t even let me post a blog posting on my blog about it.  I guess they think I am a pumper, or maybe they don’t like my ideas, or maybe they don’t like that I link to competitive sites. Who Knows? I have now had a few blog posts that Seeking Alpha has refused. I will continue trying to submit occasional things to Seeking Alpha – but with all my future stuff I am just going to post here on my own blog.    

 

Dear Bob Visse,

The blog post which you submitted has been declined for publication, since Seeking Alpha is a website which is focused on finance and investing.

If you’d like to submit another blog which is more suitable for our audience, we will review it accordingly.

Thanks for your cooperation.

Best wishes,

Seeking Alpha Moderation team

 

I think it is funny that they claimed my post was not suitable for their audience. Let me know what you think after reading it.  And I do appreciate anyone who takes the time to read it!  Even if you think I am a total nut job whacko!

Full disclosure:I have maintained that I am long on HMNY since I started writing about them about a month ago.  

 

So Here’s the Post Seeking Alpha wouldn’t let you see!  🙂

I think it needs to be said at the outset of this post, Moviepass is a very young company, and really does not yet deserve to be a public company at all.  Also it is important to note, this is in fact true- Moviepass IS NOT a public company! It receives investor attention like it is a public company, however due to its unusual and now hotly debated proxy ownership 80% ownership by (HMNY) Helios & Matheson.  But don’t forget, Moviepass is a private and still early stage startup.

In almost every way Moviepass behaves much more like a very early stage startup than it does a public or more mature company. If Moviepass was a well funded early staged company backed by a group of deep pocketed venture capitalists it’s unlikely we would see or even care about its every move to the extent that retail investors do.  However, this is what makes (HMNY) and MoviePass such a fascinating story for retail investors.  It is rare that a retail investor can participate in the sausage making of a new internet scale business and have an opinion, and even a share vote along the way.

MoviePass did something this week that no public company would ever do.  They removed their core product offering from the marketplace, and basically said nothing about it in their PR.  This major product offering change was buried in the small print of a new promotional offering launched with partner iHeartRadio.  The company made no effort in their PR to make it clear that this offer is now the exclusive offer being made from MoviePass.   The company has also made no announcement about how long this offering will be in place and when if ever the unlimited plan might return. They have only stated the new offer is for a limited time only.  Searching around on the MoviePass website, I can find no specific details as to when a customer will be able to buy the “unlimited” $9.95 –  1 movie per day pass again.

You have to think that management made a conscious decision to eliminate what has been MoivePass’s core product offering, the offering that created a major stir in the industry for the past several months!  The unlimited offer is what put the MoviePass brand on the map – and now poof it is gone?   And creatively it disappeared with a new bundled offer that restricts the number of movies to just 4 tickets a month.  

Moviepass’s promotional material places a $120.00 value to the new promotion.  That seems like an odd value to place on what would have previously cost a MoviePass customer only $30, the cost if a customers were to buy 3 months of the old, and more valuable MoviePass subscription, at $9.95 X 3 Months.  

I am not claiming that the new offer is not valuable, it clearly is a great deal to get 12 movie tickets over the course of 3 months for $29.95 and you get 3 months of iHearrtRADIO with it to boot.  But it is not the same value proposition as the unlimited offer, and it is the first clear signal that Moviepass is ready to move away from the publicity stunt of unlimited use, and move to a more sane but clearly valuable offering for consumers.

This is a significant development for Moviepass (HMNY) investors.  For those who have followed both the bull and bear thesis of this stock, we all know that utilization rate is a huge and complicated issue for Moviepass.  In a long interview with recode’s Peter Kafka Mitch Lowe has explained how Moviepass envisioned how the company could be profitable with an offer that seemed to good to be true.  Lowe said

“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.”

This has been Moviepass’s story on how they can make this offer work over time.  If they get enough people who are only casual moviegoers, they can offset the heavy users, who are like those people who load up at the buffet every single day.

Moviepass has up until now been willing to lose money on the heavy and unprofitable users because of the incredible word of mouth marketing they have provided for the service.  Mitch Lowe and Ted Farnsworth the CEO of Helios & Matheson have both consistently claimed great subscriber growth with zero marketing. This was all made possible because of the incredible value of Moviepass combined with people spreading the word of that value to friends and family – because who doesn’t want to tell you about a great deal they are getting!  This story has been amplified by the media, who loves a story about disruption, and particularly loves any story about a media company who is disrupting something as old and storied as the theater. Getting PR for this kind of story is as easy as bringing ants to a picnic. There is nothing the media loves covering more than media. So Mitch and Ted got a TON of free PR for this offer and were featured all over the business and media landscape with their new crazy offer for moviegoers.

Moviepass has entered the collective conscience of the consumer mainstream.  Some even call it a movement.  Here are a few stats to share on the burst of popularity of Moviepass.  There are 22,800 Videos on Youtube on Moviepass, everything from how to use it, how do they make money.   A Google Search on Moviepass now brings up over 4 Million results. A Google News search results in over 155,000 results.  There are facebook groups, meet ups on meetup.com, large and active reddit.com threads, instagram groups and more.   It is an amazing accomplishment for a small company that has spent almost nothing in marketing.  

But here’s the secret, there was a cost to that marketing, and that cost of marketing is now obvious, it was buying all that free publicity from passionate theater goers – the cost of sucking up to all those heavy MoviePass users who in turn told all their friends, who told their friends and so on.   There is no more powerful force in Marketing than word of mouth, and MoviePass bought a truckload of it! 

This is a classic marketing trick used by many upstart brands.  Find your passionate audience, get them hooked, make them your fan, get them to recommend your product, add fuel to that fire.  Moviepass played this very well, and now it looks like they have taken this play far enough and may be ready to begin the process of cashing in on that momentum.  

Think drink tickets now.  Its still fun and a good value – but the party is winding down…

The good times can’t go on forever!  Moviepass is about to reign in the fun on all those who are getting too drunk at the hosted bar. The new offers will look a lot more like drink tickets at your company party.  You can have a few drinks at a great value, but don’t get all crazy, and if you do want to go all crazy, you can pay for that yourself!  

This is a risky but necessary move, and it will likely take some time to pull it off. MoviePass has now shut the gates to the all you can eat deal.  They don’t sell it anymore. That doesn’t mean they will NEVER offer it again, but they are certainly testing the waters here.  That is the message Moviepass is giving with this new deal with iHeartRadio deal being their exclusive product offering for the company.   

The next step toward profitability.  Have you read the fine print in Moviepass Terms of Service?

There is a document that you agree to when you sign up for Moviepass called the Terms of Service.  By you using the service it states that you agree to the terms of the document. All software and services companies use these, and they are enforceable and legal.   

The Moviepass Terms of Service agreement is a doozy.  It is setup in a way that Moviepass could go instantly be profitable with a stoke of pen – or a keyboard.   Let me explain.

First as I already stated, all Moviepass customers have agreed to these terms and conditions, and they have written in protection from any class action lawsuits residing from changes to the agreement.  So not even an angry mob can do anything if they don’t like changes that may come down the pipe. Moviepass is in complete control of every aspect of the offering. That includes pricing, the number of movies you can see per month, the theaters and the actual movies that Moviepass customers can see.  Below is the specific clause

2.4. MoviePass reserves the right to change or modify the Service or subscriptions at any time and in its sole discretion, including but not limited to applicable prices, at any time, without prior notice.

MoviePass reserves the right to change the rules of movie-going attendance and ticket availability to members in connection with the Service at any time. MoviePass reserves the right to change from time to time the number of eligible movies a member can see per month. MoviePass reserves the right to offer members a new price option if they exceed watching a certain amount of movies per month.**

So you see, Moviepass has very thoughtfully crafted a Terms of Service agreement that puts them in total control of the service.  Not only can they limit the number of movies you can see with the pass you have already purchased, they can raise the price any time they like, and they even have a clause specifically targeted at those heavy users.  “MoviePass reserves the right to offer members a new price option if they exceed watching a certain amount of movies per month”.  I think this clause says a lot, they will likely launch a new plan and price for heavy users, it will be a good deal, but not as good as before.   Then they will move forward with a more sane 4 movies a month plan for ordinary customers.  I think that is a perfectly fine deal, albeit not nearly as exciting as the old offering.

This move to change the core value proposition of MoviePass is not without risk.  I personally signed up for the MoviePass deal because I was so intrigued by the unlimited concept.  It was easy to understand, it seemed to provide a crazy good value, and after all it was offered from my favorite store (COST) Costco!  I trusted the Costco brand far more than MoviePass, and I would have never bought the service or found out about this stock if it were not for that promotion.  The trust of Costco Brand with the incredible perceived value of MoviePass was a one two punch my little consumer brain could not resist!

The risk of moving away from the all you can eat unlimited deal for MoviePass is that people will start to do a lot more mental math. They will think harder about how many movies do they really see today, do they really care about committing to x# of movies per month.  It could give customers a reason not to buy it.  I don’t think that will happen though, NETFLIX had at various stages had different #’s of CD’s you could have at certain time when it started out, and the pricing tiers were different.  ATT and Verizon both had unlimited data schemes and ratcheted them back.   There are now enough people using MoviePass that if feels “real” to consumers.   And MoviePass can still offer a terrific deal to the 80% of customers who now only go to the movies 4 times a year.   

Unlimited is an exciting offer and people are irrational in now they make purchasing decisions. When they hear and think unlimited, they see a lot of value, even if they don’t use it, they could! And for many that is enough to get them to take the deal.  Now that the MoviePass name is becoming well known, and Theaters accept it widely, Moviepass does not need to offer unlimited to get the word out nearly as much as they did.   Of course, if MoviePass moves away from the unlimited deal more completely, the PR and free promotion will dwindle.  So that is a risk that they have to thread the needle with very carefully.  It is why this iHeartRadio promotion is so important. 

For now, they have turned off the spigot, and that is a BIG MOVE for this small company.  If they can thread that needle to keep enough existing customers happy, slowly wean off the over users, and add plans that work for the broader base of moviegoers, this company could have a very bullish future.  

Mark Gomes – One of MoviePass’s biggest bears wrote and video casted that the big moment to reconsider MoviePass and HMNY stock is when they make a move to reduce their cash burn and take control of their utilization rate.  I think we have now witnessed that pivotal moment.

Wisely I think, MoviePass did not come out and broadly with PR or advertise this significant change in their product offering.  Like a Trojan Horse – they snuck the new deal into the market where nobody was looking, and slyly snuck the old unlimited deal out of existence. (at least for now).  We will know more soon on what their future plans and offers may look like. I expect there to be more movie # limit caps on most if not all new offers going forward.  If MoviePass does a deal with Verizon, which I fully expect to happen, you should expect the offer will also have a cap limit on # of movies per month similar to 4 limit with the iHeartRADIO deal.

This will be another exciting week to watch for HMNY – Hope you call come back and read more of my posts!