Newsletter: Published Thursday, 11 May 2018

  1. The risk with growing at all costs, the MoviePass debacle;
  2. Zillow buys houses.

1. 🌳TECH TREND

Growth at all costs.

This is the mantra of tech companies these days:

Rapidly grow your business by selling your product for less than it cost to make it, subsidise that by enormous venture-capital investments, in the hopes of one day converting to profitability once you’ve achieved scale.

I mean, it works, if you can get to the profitability part. It works really well.

But if you’re listed on the stock exchange and your accounts are public and everyone can see how much cash you’re burning just to achieve scale, then it might become awkward for shareholders who are in it to make some money and are worried you might run out.

Here is a story of a company that hasn’t quite pulled off this new model:

MoviePass is a subscription company that allows you to watch up to a movie a day for a month (in the cinema). Until very recently it was charging $US9.95 for this, which is uncomfortably cheap given that’s less than the price of one ticket, let alone 30.

MoviePass received a happy capital injection last August by data analytics company Helios and Matheson, when they bought a majority stake for $27 million, and that’s when they dropped their subscription price from $45 a month to $9.95.

Predictably, the idea was to eventually have so much customer behavioural data that other companies would pay for it.

Also predictably, there was an explosion of signups (because going to the movies as much as you want in a month for $9.95 is a sweet deal) and MoviePass enjoyed some lively growth. In twelve months, subscriber numbers have grown from 20,000 to almost 3 million.

The thing is, Helios and Matheson is listed on the Nasdaq so it was forced to reveal in its recent annual report that MoviePass was buying 1 in every 35 movie tickets in the whole United States, which is costing them more than $20 million a month.

That’s a lot and could be worrying? Helios and Matheson was only valued at $40 million to begin with and independent auditors found the company only had $15.5 million in cash left.

Shareholders have freaked out at this and have sent the shares plummeting more than 90%.

“The transparency is killing them,” one analyst told Reuters. “You don’t hear about how much money Uber loses every time you get in one of their cars, you hear about how fast it’s growing.”

The lesson here is an interesting comparison between private and public markets, especially when it comes to the popular growth-at-all-costs strategy.

Venture capital firms seem happy to burn billions of dollars per year in order to artificially grow companies, but investors pouring over the annual statements of listed businesses are less likely to see the blue sky potential.

If the company is exposed to the rigour of the public markets too early, they might not last all that long.

It's not unlike an author buying all their own books in order to drum up sales.

(Spaceship does not have exposure to Helios and Matheson. Just thought this was interesting.)

2. 🏡 PHYSICAL ASSETS

Zillow buys houses.

A rather firm trend at the moment is for tech companies to shy away from owning physical assets and instead boast five laptops, a minibar and access to the cloud.

But Zillow Group - operator of a series of enormous property websites in the United States - looks to be bucking that trend.

In a world where some people just want to sell the damn house, Zillow is now happy to step in, in the name of convenience, and buy the property instead.

It’s an interesting development for the US property platform that has successfully managed that golden middle ground where real estate agents, mortgage brokers and contractors across its seven websites are happy to pay subscription fees.

It’s now worth around $US7.5 billion and pulled in $1.1 billion in revenue last year.

The company managed to draw millions of users to its platforms leveraging it’s main technological innovation; an algorithm that estimates home values (called a “Zestimate”), showing aerial photographs of houses and prices of other properties in the areas.

This is a neat play on the human curiosity to see what your place is worth compared to others, I suppose.

Zillow’s CEO Spencer Rascoff explained the company’s pricing strategy saying that as the program rolls out, the main goal is just to come out ahead on homes.

Rather than try and nab properties for a bargain, the company just wants to build the offering out. Rascoff expects the margin on each home to rise as the home sales business grows.

“It’s too early to estimate how many sellers might choose to sell (to Zillow) or what our typical net profit per transaction might be, but as an example, if 5 percent of sellers select this method, that is 275,000 transactions,” Rascoff said.

“For illustrative purposes at scale, using $250,000 as the typical home value, a $3,500 net profit per transaction would result in a nearly $1 billion profit opportunity annually.”

And interesting new development.

(Spaceship has exposure to Zillow Group in its superannuation GrowthX portfolio.)