Don’t be a selfless startup

Published January 14, 2020

One of the enduring truths of big companies is that they aren’t innovative. They are “innovative” in the marketing sense, but fail to ever execute on new ideas, particularly when those ideas cannibalize existing products and revenues.

So it often takes a real competitor to force these incumbent, legacy businesses to evolve in any meaningful way. Usually that change leads to disruption, in the classic way that Clayton Christensen describes in “The Innovator’s Dilemma.” An upstart company creates a new technology or business model that is better for an under-served segment of a market, and as that company improves, it competes directly with the incumbent and eventually wins over its market with a vastly superior product.

Unfortunately, real life isn’t so easy, as WeWork and MoviePass have shown us over the past few years.

In both cases, there were incumbents. In movie theaters, you had AMC and the like, which built a business model around ticket sales (shared with movie studios) and food/beverage concessions that targeted occasional customers at a high price point. Meanwhile, in commercial real estate, you had large landowners and family holders who demanded extremely long rent terms at high prices, often with personal financial guarantees from the CEO of the tenant firm.

MoviePass parent drops another 46%

Published May 9, 2018

There’s been another bomb at the box office, and it isn’t a movie.

MoviePass parent Helios & Matheson lost nearly half of its remaining value today as investors continued to flee the cash-burning movie service. That drop followed a 31 percent dive yesterday, after the company filed a statement with the SEC warning that it would have to sell equity in the coming weeks for it to remain solvent. Since Thursday’s opening bell last week, the stock has moved from $2.13 to $0.79, a drop of 63 percent. The company’s market cap is now $51.44 million.

MoviePass CEO Mitch Lowe said in a written statement that “Our burn rate has been slashed by 35-40% by the implementations and abuse prevention measures we have put in place over the last few weeks. We have always known, from when MoviePass took off in August, that it was going to be a high cash burn business model. We are not changing our guidance on 5 million subscribers by the end of this year – which should make us profitable/cash flow positive according to our business model. We have access in capital markets to over $300 million. So there is plenty of cash available to sustain the subscriber growth and movie-going habits of our users.”

Those are the facts as we know them, but let’s consider some of the options the company has now.

Even if you believe the market demand for Helios’ stock (I, for one, find them incredulous), there is an enormous challenge of converting that money into equity now. The envelope math looks like this: A month ago when the stock closed at $4.21, buying 20 percent of the company would have cost roughly $55 million. At the company’s current average burn rate of $21.7 million per month, that cash would have lasted approximately 2.5 months.

Now though, with the stock price so low, getting cash on the balance sheet today is a much harder proposition. That same $55 million that bought an investor a fifth of the company last month would be a complete buyout today. Buying 20 percent only costs a bit more than $10 million now, or roughly two weeks of burn.

So what’s the trick here that will save the company?

The obvious option is to radically control burn. The company could offer pricier tiers for heavy users of MoviePass, and could put a ceiling on the number of films a customer can watch per month as it did temporarily a few weeks ago. Lowe seems deeply committed to overall subscriber growth though, and that makes any sort of constraints on the product unlikely. The reason is that subscribers are the leverage Lowe needs to negotiate better partnership arrangements with theater chains, so he has to keep trying to grow users rapidly.

One theory is that the company could be negotiating equity deals with theater chains like AMC, which could be enticed by the low price of the stock to “buy in” to MoviePass’ popularity. Such media equity partnerships are not unusual — Sony, for instance, was a major shareholder in Spotify, as was Warner Music group, although both have since sold off large percentages of their holdings. Given the reliance of MoviePass on theater chains, building an equity partnership could prove to be the service’s savior.

A well-publicized partnership — including discounted movie tickets for MoviePass — could boost the stock significantly since the cost savings would improve the company’s burn rate. That could be an enticing proposition for the chains, since they could realize an almost immediate gain on their investment, plus the ongoing proceeds of a partnership going forward.

The other tactic would be to sign up more MoviePass subscribers who watch limited films. This is what might be called the “gym membership model” of trying to identify customers who want to buy a membership as an aspirational purchase, but who won’t actually use the facilities often. The challenge, beyond the incredibly short time period to try to build that marketing funnel, is that MoviePass appears to lose money on the very first ticket a customer purchases. The question isn’t how much revenue each customer generates, but how much the losses can be minimized.

The situation is a high-wire act, and the company will either hit the ground in the next few weeks, or it will right the ship, limit expenses and get enough equity investors to give it some cash to burn and keep on growing. I’d say use your MoviePass while you have it, but then again, that’s exactly why the company is faltering to begin with.

MoviePass parent drops 31% on looming cash crunch

Published May 8, 2018

The big question in the media world today is whether MoviePass parent company Helios and Matheson can stanch the bleeding of its cash flows before it becomes insolvent.

In a new filing today with the SEC, Helios informed investors that it had $15.5 million in available cash, with another $27.9 million in accounts receivable from members of MoviePass on longer-term subscriptions. Under accounting rules, those dollars can’t be used to fund current expenses. The company said that it has lost $21.7 million a month between September and April this year.

Investors dumped the stock following the filing, and the stock was down 31 percent at the close of the equity markets today.

While linear math would seem to indicate that the company is on track for insolvency in a matter of days, the filing and its CEO are maintaining an optimistic line. The company said that following a series of product changes, including more verification that a subscriber actually watched a film themselves, it should reduce its cash loss on the service by 35 percent during the first week of May.

In an interview with TechCrunch, MoviePass CEO Mitch Lowe struck a positive view on the future of the business. He argued that unlike in the past, where a new app or service would raise venture capital and then invest it in the business, you can just handle capital concerns as you need them. “Today what you do is you raise enough money month by month to fund essentially that negative cash flow,” he said. “We are 100% confident that we have the committed funding to do it.”

In order for the company to avoid insolvency, the company will need to continue to sell its common stock to investors on a regular basis to fund that negative cash flow. The company said that sales of its common stock will need to begin this month in order to fund operations. If the company is unable to do so, “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,” it wrote in the filing.

MoviePass CEO says he doesn’t know if the one-movie-per-day subscription will ever return

Published April 26, 2018

MoviePass is known for a pricing model that sounds too good to be true — in exchange for paying $9.95 per month, subscribers get up to one movie ticket per day.

At least, they used to: If you try to sign up now, that isn’t quite what you’re offered. Instead, there’s a bundle that combines a three-month trial for iHeartRadio All Access with four tickets per month on MoviePass — still a pretty good deal (especially since MoviePass says 88 percent of users see fewer than two movies per month), but not quite as irresistible as the old plan.

Does this represent a permanent change in the MoviePass business model? Well, the company has experimented with bundling before, but when The Hollywood Reporter asked CEO Mitch Lowe whether the movie-per-day-plan might return, he replied, “I don’t know.”

“We just always try different things,” Lowe said. “Every time we try a new promotion, we never put a deadline on it.”

We reached out to a MoviePass spokesperson who confirmed that The Hollywood Reporter story is accurate. They also said that this doesn’t affect any of the subscribers who signed up under the old plan.

MoviePass’ parent company Helios and Matheson Analytics sold additional stock last week in what seemed like a move to raise money for the service. (TechCrunch’s own parent company Verizon/Oath recently sold Moviefone for a stake in MoviePass.) At the same time, filings revealed that an independent auditor had raised “substantial doubt” about whether MoviePass would be able to continue operating as “a going concern.”