MoviePass, at just under $10 per month for unlimited movies, sounds too good to be true for the movie lover. After all, a single evening ticket costs an average of $9.16 – up 4% Q1 of this year compared with last year.
And sure enough, it looks like it is.
I started this draft post back in late June, and recently have seen my prediction of that time come true. MovePass is struggling. They ran out of cash back on July 27th, bringing services to a halt until they got an emergency $5 million loan. They’re paying $6.2 million for that $5 million loan, by the way. Now they’re changing their business model (frequently!) to try and save the company.
They bet the companies future on selling unlimited movies – and data. Troves of data. The company was hoping to leverage its tremendous user base and information about their movie habits, to sell to movie companies and theaters. The amount of data they were collecting actually triggered privacy concerns, because apparently they were watching you drive from your house to the theater. But, oh wait, no they weren’t.
They’re bleeding cash, but insist that they’ll survive because Netflix and Amazon also bled cash for a long time. But those of us who lived and invested through the dot bomb of the early 2000’s remember that there were many, many more companies who bled cash and did not survive. There’s survivorship bias in simply looking at the companies who were successful with this strategy, and conveniently ignoring those who were unsuccessful.
All this is why their shares are at an all-time low.
As investors, and consumers, it’s important we learn lessons from our experiences. I didn’t invest in MoviePass, both because I only invest in index funds, and because it seemed too good to be true. It was not a sustainable business model. Losing large amounts of money every month, running out of cash (how do you not know you’re running out ahead of time???!?!), and frantically announcing massive changes to their strategy (this week we’re increasing prices! surge pricing! now we’re implementing blackouts! Oh wait, now we’re restricting you to three movies a month!) aren’t recommended business strategies.
So what lessons can we learn as investors, consumers, and potentially as business owners?
If It Sounds Too Good To Be True, It Probably Is
MoviePass was a little known company used only by true movie buffs before it slashed its prices in August 2017 when they were purchased by Helios and Matheson, a data analytics company. You can read the full timeline of the company on Wikipedia.
The main reason they’re bleeding cash is that they pay full price to the theaters while getting only $10 per month per customer. As soon as a customer sees one movie in a month the company lost money. And that’s before accounting for any of their costs, like labor, infrastructure, and software development.
Lots of people bought this for Christmas, thinking it was a great bargain. And it is! Even in my town, with my cheap movie theater, if you see three movies a month you’ll have saved money buying a MoviePass.
Many, many people thought it was too good to be true. They still do. After all, you’re likely only going to buy it if you think you’re going to save money. Or increase your movie watching to the point where it pays for itself. And of course, some people will buy it and not see the movies. This is what many subscription companies hope for (cough, gyms, cough).
If something sounds too good to be true, it probably is.
Do Your Research – Read The Filings
Many investors, and few consumers, read a companies SEC filings. But the SEC’s EDGAR database is a trove of great information for any company. What documents should you read? The 10K is a good place to start, although all the documents can be interesting.
Here are the MoviePass filings. Normally, companies file their annual report, quarterly reports, and an occasional other announcement. Looking just at the filing dates, you’ll notice an awful lot of 8K filings recently. Interesting.
In the 10K, you will find this statement:
Our independent auditors have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
The report of our independent auditors on our consolidated financial statements for the year ended December 31, 2017 included an explanatory paragraph indicating that there is substantial doubt about our ability to continue as a going concern. Our auditors’ doubts are based on our incurring significant net losses and our working capital position. Our ability to continue as a going concern will be determined by our ability to obtain additional funding in the short term to enable us to continue the development and integration of our MoviePass business.
What does that mean in plain English? Their auditors, the people they pay to look at their financial information every year and assure their owners (stockholders) that the company is stable, have said that they have “substantial doubt” the company will survive.
The other risks are also interesting:
- If we fail to successfully integrate MoviePass into our internal control over financial reporting, the integrity of our financial reporting could be compromised which could result in a material adverse effect on our reported financial results.
- MoviePass has incurred losses since inception. To continue to support the business objectives of MoviePass, we have a present need for additional funding, which may be unavailable to us.
- MoviePass has a limited operating history and history of net losses, and it is likely that they will experience net losses for the foreseeable future.
- Increased monthly usage by MoviePass’ subscribers will cause it to incur losses and negative cash flow.
- MoviePass may not gain acceptance from large national exhibitors (movie theater chains), which could have a material adverse effect on MoviePass’ financial condition and results of operations.
And many, many more.
When you’re investing in an individual stock, you need to understand their financial situation and the risks that they are facing as a business.
If Your Business Model Can Be Easily Copied, Beware
Losing money selling movies is a pretty easy business to copy. Especially if you’re AMC. Or Cinemark. And those companies don’t need to pay full price for tickets, of course, because they own the theaters. They’ll be betting on the “gym effect”, where you pay and pay but don’t actually go to the theater. They also charge more, and aren’t unlimited.
But most people don’t see a movie every single day anyway. And those that do want to see a movie every day will drain your cash.
When you’re starting a business, you need to look at what makes you unique – now and in the future. If suddenly, say, buying toilet paper at Costco and reselling individual rolls made me a millionaire, I’ll soon have a ton of competition. This will drive prices down to the point where it’s not profitable anymore.
Companies Can Change Industries Without Surviving
Even if MoviePass doesn’t survive, it’s changed the industry forever. AMC and Cinemark would never have started their own subscription services if it hadn’t been for MoviePass.
You can also look at Napster. The company forever changed the music industry, even though it eventually failed, by showing that customers wanted online music. It was the beginning of the end of CD’s, and the birth of the online music industry we know and love.
So rest assured, even if MoviePass doesn’t survive, it likely contributed to changing the movie industry for the foreseeable future.
Survivorship Bias Is Real
Nearly every article I read, the head of MoviePass is comparing it to successful companies that lost money for a long time and survived. That’s fine, until you remember the hundreds (thousands?) of companies that lost money and didn’t survive.
You see this in a lot of other industries too. Take blogging, for example. People will look at successful bloggers and think that it’s easy. Or successful business owners and think it’s simple. But they don’t see the hundreds (thousands? tens of thousands?) of failures.
Before starting a business, or investing in one, you should think about failures. If you’re starting your own business, study up on failures. What made them fail? What was different about the successful ones? How can you avoid the mistakes, and do what the successful ones have done?
And losing money is not a long term business strategy. It can work in the short term, but only if the company has a clear vision and line of sight into their eventual profitability.
I Want To Hear From You!
Are you a MoviePass customer? Have you ever made an investment without doing your due dilligence, and regretted it later? Let me know in the comments!