I’ve been keeping up with the MoviePass (MP… or HMNY) fun on Seeking Alpha… but as you know, I no longer participate there.
While a few authors have been doing a great job of covering the latest news, I haven’t seen ANYONE properly address the most important issues as it relates to MP’s future profitability.
Specifically, in the long-term, the “end game” is ALL (100%) about CAC, LTV, etc. Basically, we need to calculate / estimate the lifetime revenue per average customer (plus partners) and subtract the lifetime cost to support the average customer.
So, here’s how the bull versus bear debate should be structured:
- In the long-run, MP will earn $XXX over the life of the average customer and spend $YYY supporting them.
XXX – YYY = Profit Per Customer (ZZZ).
If ZZZ is a positive number, multiply by the number of subscribers and value the company accordingly. If ZZZ is a negative number, they’re dead.
Remember, we’re doing LONG-TERM calculations here. The CURRENT calculation of ZZZ is of course negative right now, but it’s the long-term (endgame) ZZZ that matters.
So, let’s investigate that…
- Based on MP’s publicly-stated attrition rate (4%/month), the average customer will be a customer for 25 months (~2 years). Based on their pricing structure (accounting for things like annual pricing and Costco’s cut), I estimate they’re getting about $90 per customer per year.I think that will rise to $100 per year (use your own number to arm yourself for debate), so MP will generate $200 over the life of the average customer, from the customer. That’s a fixed revenue stream.Of course, that leaves one month unaccounted for (25 months = 2 years + 1 month). I’m going to be generous and say that one month of revenue will cover their cost to support these customers, making the $200 a pure fixed profit stream.
MP will ALSO generate a variable profit (or loss) from its third-party dealings (theaters, studios, etc), which will vary based on how many movies the customer goes to see.
In my “Ultimate Bullish Dream Scenario” that looks like this:
* MOVIE TICKETS…. a $10 COST per movie (a bit higher than the national average)
* THEATER “ROYALTY”………….. a $2 BENEFIT per movie, if we assume that they stop supporting every theater that doesn’t give them 20% of every ticket (which would of course impact their long-term penetration rate, and therefore potential). In this part of my Ultimate Bullish Dream Scenario, they get 100% penetration and a 20% cut of every ticket.
* CONCESSION REV SHARE……… Yes, I was generous to assume that they’ll get $2 from every theater, but you won’t convince me that they can also get concession $$$ from every theater too. If the business model works that well, the theaters will eventually reach a point where it makes sense to band together and form their own MoviePass to cut out the middleman.
But if you want to argue it, here’s how:
MP increases concessions by 120%. Concessions are typically 50% of ticket revenue (about $5 per movie), so the 120% uplift will make concessions = $12 per movie. If you want to argue that MP will get $2 of that on top of $2 per ticket, you’re free to do so. All opinions are valid (though not necessarily correct… or sane). LOL.
In the Ultimate Bullish Dream Scenario, this = a $2 BENEFIT per movie.
* STUDIOS…………… Management rhetoric is already clear that MP is viewed as advertising by the studios and appeals mainly to smaller-budget films. This is because the major studios spend most the majority of their advertising $$ on TV ads (the exact data is public knowledge, so arm yourself with the facts before debating anyone on this!).
The bottom line is that the big studios (for the most part) are NOT going to give MP royalties, because there’s no way to know if the MP customer would have gone to the movie anyways (and for most blockbusters, the answer is YES, the customer would go to the movie with or without help from MP). So, it’s more likely that MP could get some fixed advertising from the big studios, but that would be a small fraction of their total budget (AGAIN, do your research on this — I already have and don’t feel like writing another 2 pages of content to explain it.
This is why Mitch and Ted have been talking about their attraction to the smaller studios. With those movies, Mitch said they represented 1 in 10 tickets sold over the past 3 weeks for movies that they pushed to MP customers. This is versus 1 in 19 tickets sold overall. In other words, MP can roughly double the attendance for a small budget film. This is likely because small budget films don’t have the $$ to spend big on TV advertising.
Regardless, it’s a good thing for MP.
Unfortunately, major movie studios represent about 80% of tickets sold in the U.S. (the top 5 alone represent over 70% of sales). If MP earns the business of 100% of the non-majors and gets $2.50 per ticket (a very generous 50% of the studio’s share of a $10 ticket sale), they’ll be getting an average of $0.50 of royalty on each ticket they purchase (since 80% of tickets won’t earn them a dime).
If you think they’ll get 50% of the minor studios’ royalties AND still get advertising from the majors, consider this — studios make about $5 per ticket sold, which goes toward recouping their cost to make/advertise it (and the rule of thumb is that they spend 50% making the movie and 50% advertising it). If we assume that they break even on the average movie, they’re spending $2.50 per ticket on advertising.
Again, most of this is TV advertising. When I did my research, I was shocked by how small a piece of the ad pie MoviePass is truly in contention to win. They’re competing against every TV channel, every social media outlet, every website, every billboard, etc. Ultimately, I thought it would be a runaway miracle if they could get more than 1% or 2% of this pie. That’s $0.05 per big-studio ticket at most. That’s not being biased (if that isn’t already clear from the tone of this article). It’s being honest.
I was generous on the $0.50, so I’ll be stingy on the $0.05 and say that MP can eventually get a $0.50 BENEFIT from the studios.
(see https://bombreport.com/articles/when-does-a-movie-break-even-at-the-box-office/ for some good info).
So, so far, we have MP spending $10 per ticket and getting $4.50 back from their biggest / most obvious opportunities. I’m open to ideas, but I don’t see how they can get this number much higher.
Yes, they can MAYBE strike deals with local restaurants, Uber, dot dot dot, but 1) if I spend 120% extra ($12) on concessions, I’m probably not going to spend much after the movie (less money in the wallet; less room in the belly)… and 2) would Uber really give MP a cut of their already low fees? If you think so, WHY??? It’s not like MP can convince me to not take an Uber (and good luck switching me to another ride-sharing service).
I’m open to ideas, but I don’t see how I can give them credit for more than another $1.50 of BENEFIT, even in my Ultimate Bullish Dream Scenario… but I’ll still give them the $1.50, giving us a GRAND TOTAL of $6.00 recouped from each $10 ticket sold.
- That’s a $4 LOSS per ticket purchased in my Ultimate Bullish Dream Scenario… but that’s not necessarily a bad thing. Remember, they’re making $200 of lifetime subscription revenue from each customer!So, we have to calculate how many movies the average customer will attend over their 25 month life…
- If those customers do as MP originally believed / stated (more on this below), the average customer will attend about 6 movies in the first three months, 3 in the following 3 months, and 9 in the final 18 months of their 2 year membership.That’s a total of 18 movies, generating $72 in losses (18 x $4 loss per movie).So, in my Ultimate Bullish Dream Scenario, MP will earn $128 over the life of each customer. That’s not the $500 that many have been talking about (those people obviously haven’t done the math — they just assumed that MP is NFLX), but it would be VERY BULLISH for the stock.
But not so fast, bulls. We have a problem here.
First of all, this was the Ultimate Bullish Dream Scenario. In a more reasonable (but still bullish) scenario, I think MP would get closer to $3 than $6, creating a per-movie deficit of something closer to $7 than $4.
18 movies x $7 = $126, which leaves a lifetime customer value of $74 ($200 – $126 = $74).
BUT HERE COMES THE “BUT”…
Of course, that was the bullish (and ultimate bullish) scenario. The bearish scenarios would surely have them generating something closer to $1 per average ticket, creating a $9 deficit. Of course, 18 movies x $9 = $162, which still leaves a $38 lifetime profit per customer. However, what will happen to the attrition rate as customers come to realize that they’re paying $200 to go to 18 movies (only $180 worth).
Yes, many will keep paying because 1) the MP will give them the kick in the @$$ they need to get out of the house, or 2) people don’t do math or, 3) insert your argument here… but no amount of arguments will account for everyone. Some (large) % of customers will non-renew after one year, as they realize that their usage has dropped from 3 movies per month back down to 0.5 (which is required for my 18 movies per subscription life to work).
But it’s worse than that.
In his most recent interview, Mitch said that MP bought 1 in 19 tickets over the past 3 weeks. In one of my recent blog postings, I did the math and that equals about 3 movies per customer per month. Why is it still that high if only the first month is supposed to be 3 movies? Half of all MP customers have been on board for months and should be down to 1 per month, driving the average to something closer to 2 movies per month by now.
I’ve used multiple methods to calculate this and each method tells me that usage has been 50% higher than I expected. If that’s the case, we have to multiply all the losses above by 27, not 18. That would drop the bullish scenario down to about $10 of lifetime profit per customer, which would equate to 5% operating margins (and that was with an insanely optimistic operating cost estimate of ~$10 for each customers’ complete life cycle — the truth will likely prove be closer to $40).
The problem might be this — 15% of moviegoers buy 50% of all movie tickets. That’s more than triple the average. Frequent movie goers attend around 1.5 movies a month (which more than doubles if they have MP, per Mitch’s most recent statements = 3 per month).
MP has only signed 2M customers to date. That means that there are at least 34 MILLION more “frequent” moviegoers, who would presumably average 3 movies/month (75 over a 25-month life cycle — though I bet that these customers will tend to stay on board a lot longer than 25 months).
This creates a customer mix problem. If half of their customers are “average” moviegoers and the other half are “frequent”, MP’s average customer will be going to nearly 50 movies over a 25 month period (18 x 50% + 75 x 50%). Even in the Ultimate Bullish Dream Scenario, that results in exactly $0 of lifetime profit per customer…
…and I have a hard time believing that MoviePass can avoid attracting the frequent moviegoers, especially over time. The usage numbers I extrapolated from Mitch’s last interview only serve to solidify this concern.
The other problem is this — even if MoviePass does achieve per-customer profitability, we currently have to divide those total profits by the 43 million fully diluted shares that are outstanding.
When we embarked on this MoviePass odyssey, the assumption was that they were going to have something like 14 million shares outstanding. Some people don’t think that balance sheet matters, but that thinking goes against the principles of Finance 101. Balance sheet always matters… even companies like AMZN and NFLX carefully calculate their investment versus the expected return (regardless of the size of the investment or the size of the opportunity).
Thus far, HMNY has done an exceptionally poor job of financing this opportunity. Every new raise increases the share count, which decreases everyone’s share of the future profits (assuming profitability eventually comes). That’s o.k. if the rounds of funding are done at reasonable valuations, but that’s not been the case here.
At some point, they’ll reach their terminal customer limit. Customers come and customers go. Eventually, they will go as fast as they come. If that happens at 20 million customers (the bullish Wall Street scenario) and they earn a lifetime $10 per customer, that’ll equate to $100 million in annual profits ($80 million fully taxed).
We’ll have to divide that profit by the shares outstanding at that point… and at the rate they’re going, that number could easily be 80 million. If so, their EPS will be $1 many years in the future (once they’ve assembled 20 million users and put all the third-party deals in place). With a 20x P/E (a fair “mature company” multiple) that will be $20.
That sounds nice from today’s levels, but if it takes 10 years to get there, that return will only equate to 15% per year. You don’t make it big on 15% per year (I averaged over 40% per year for the dozen+ years leading to my retirement in 2008).
Of course, if they can do all that and average $20 or $30 (or more) of profit per customer, then the number start to get more interesting.
But here’s the biggest problem of all…
I HAVEN’T SEEN ANYONE GO THROUGH THIS EXERCISE.
I HAVEN’T SEEN ANYONE RUN THIS MATH.
I HAVEN’T SEEN ANYONE DEBATE THESE POINTS IN AN ORGANIZED MANNER.
Instead, I see a lot of unstructured debate with no quantification of effect.
Bulls say “it’ll work out”. Bears say “it can’t possibly work”.
That’s not how professionals invest… and the average non-professional does not outperform the market. So, if you’re not willing to do the work, you might as well buy SPY and spend your time learning how to golf.
That’s not me. I got in and out profitably by running the numbers. I’ve avoided losses by staying away for the same reason… running the numbers.
So that’s my 2-cents on how to frame the opportunity and the debate.
Unless you disagree with this framework, the only thing left to do is to debate the individual components. Everything here is pretty quantifiable, enabling us to adjust our thinking properly every time an input assumption changes.
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