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The Entire Economy Is MoviePass Now (nytimes.com)
447 points by jds375 9 months ago | hide | past | web | favorite | 241 comments

> The king of money-losers, of course, is Amazon, which went years without turning a profit. Instead, it plowed billions of dollars back into its business

The key difference with Amazon is that Amazon could choose to be profitable at any time- just raise prices ever so slightly, reducing growth in customer demand, and the stop building out its enormous logistics empire and new businesses. Amazon could have had profits for a very long time, but Bezos understands that re-investing money in the company grows the value quickly. Plus, you only pay taxes on profits.

MoviePass can't really do that. They don't have potential profits that they can just stop re-investing. They aren't spending money on investments- they just don't have income high enough to cover the costs of their product. And lots of other start-ups have the same problem right now.

No, I think the key difference with Amazon is that they aren't losing money on each individual transaction - ie selling everything at a loss. Amazon's non-profits were due to aggressive reinvestment, not pricing.

Exactly! It's the difference between losing money on a macro-level and losing it on a micro-level. You can't lose money on every transaction and make it up in volume, as the old joke says. But you can make money on every transaction and choose to invest it in expansion, so that you lose money overall.

> You can't lose money on every transaction and make it up in volume, as the old joke says.

You actually can. It's the oldest trick of the industrial age, mass production and economies of scale. A good rule of thumb is that increasing production of a physical good by a factor of 10 will drop the unit cost by half. For non-tangible goods the effect is even more pronounced. The fist copy of Microsoft Windows might cost 1 billion dollars to produce, while every next copy is essentially free.

What this new breed of money loosing company signifies is a shift of business models to the software-eat-world paradigm: high upfront capital investment, zero marginal cost, exceptionally strong consumer lock-in (thus profits) once you break through and dominate the market. There is nothing fundamentally different between Amazon Prime and MoviePass, they are both loss leaders designed to increase foothold in the market, with a view to later use that dominance to dictate the rules. One was built on good economics and well executed, the other is not and will fail, but it's essentially the same business move.

But what you're saying is that eventually you'll make money on every transaction which just goes along with the comment made before. The joke is really about goods where you can't lower the cost or increase the price enough to make the economics work.

> The fist copy of Microsoft Windows might cost 1 billion dollars to produce, while every next copy is essentially free

You'd have to split R&D costs by the units sold here. If you spend 1B and sell 1000 copies a price of 100$ per copy won't help you.

You are of course correct in your math, but the point is that it reverses the equation. Windows doesn't cheaper to make if you plan to sell fewer copies: the production cost is set (Roughly) so you have to target volume.

Then you have the secondary effects of lock in (with software/services) that makes every sale also reduce the cost of a future sale or economies of scale (physical goods) that again make volume more desirable.

This doesn't contradict the adage about having to sell at a per unit profit, but it complicates figuring out what number that is and can lead to some non-intuitive results, which does trash the value of the adage as a simple way of looking at things.

Not saying every company that is selling at a loss to get customers in hopes that they'll mysteriously figure out how to later profit is doing so correctly, but some are. Oversimplification adds little value to these problems.

MoviePass and Amazon Prime aren't the same, because Amazon Prime produces a lot of its own content, and is the consumption point for the other content it serves. Amazon buys the rights to shows, and produces shows - so it has a fixed cost. It then sells access which has practically 0 marginal costs.

MoviePass sells subscriptions and then buys tickets. For each extra subscriber they've got an increase in marginal cost. You might argue they can make a profit by charging more for the subscription than they pay for the tickets, but there's lots of factors working against that:

1. When they IPO their suppliers will know their revenue and can demand high prices to match, seriously threatening their marginal cost.

2. Their suppliers already have scale and so will be difficult to leverage - further hitting marginal cost.

3. Their suppliers are extremely capable of producing a competing product undercutting them- destroying the lock-in component. The suppliers control access to the content not MoviePass.

The saying isn't about economies of scale eventually turning money-losing transactions into money-earning transactions, though.

There's a key flaw in the wording that might lead to confusion if trying to explain this to someone new to investing.

Amazon stopped making /losses/ rather quickly. They /invested/ in the health of their business and future opportunities instead of delivering profits to outside investors.

Arguably, a better structure for incorporation does exactly that; it provides benefits to it's employees and the community it serves.

To a limited extent large retailers like Amazon and Walmart actually can lose money on every transaction and make it up in volume. By delaying payments to their suppliers they get 2 - 3 months of float and can earn extra income by investing that capital. Of course in today's low interest rate environment it isn't much, but at their scale it adds up.

As Sliceline discovered, you can't make up for losing money on each order with volume.

It appears that moviepass is mostly an arbitrage play,where amazon is not....

I wouldn’t even call it arbitrage. There is usually some gain in the difference in price with an arbitrage

It’s not arbitrage, it’s “let’s burn all our runway til the next round”.

This is so suspicious though. Apple somehow managed to become a bigger company by revenue and profit while being profitable most of the way up.

There is a lot of trust here that Amazon is secretly really profitable not just growing because their profit margins are unsustainably low. It wouldn't be the first time a large company engaged in questionable accounting if it turns out their unit numbers are actually not as good as they claim because of some accounting shenanigans.

Apple and Amazon operate completely different businesses, your comparison doesn't make sense. Walmart has more than double the revenue of Apple (or Amazon) and yet has less than a 2% profit margin [1]. Is that suspicious? If anyone is an outlier I'd say it's Apple selling luxury priced goods (along with their fat margins) at consumer like scale.

[1] https://ycharts.com/companies/WMT/profit_margin

Apple invented and brought to market a revolutionary new product at the right time (3G mobile internet), and their products are obviously high quality that can't be matched by others due to extremely high barriers of entry.

It's completely different to retail, which historically has low margins and has to compete with Walmart.

I don't think Amazon is cooking the books, investors think that Amazon has a better more sustainable business and that Apple is just one misfire away on the next iPhone from imploding. Most of Apples money either comes from the iPhone or services based on iPhone sells.

I'm not saying I necessarily agree with this assessment.

Plus Amazon is Amazon. They've essentially been saying to investors for years "sure, we could make more money for YOU, or give YOU dividends, but WE can do better with your money than YOU could." It's worked, of course, enabling them to grow into the gargantuan enterprise they are today. A smaller company without that proven track record wouldn't get such a license from investors for long.

This argument is funny to me mainly because I hear it all the time, about how different they are because they don't want to be profitable. The other thing management is supposed to do is manage cash flow and profit in such a way as to reduce risk (by piling up cash, not too much of course, but just enough...). They also survived the dot com crash because they were thrifty and always kind of cash flow break even.

Amazon simply does not need to have cash on hand. They can attain massive profits at literally any point by just increasing their margins ever so slightly across whatever business lines they operate in. This is the benefit of the scale they operate at.

They would have profits if they stopped reinvesting the proceeds from retail into new businesses. They wouldn't need to increase their margins or reduce costs, just stop willfully adding new costs.

Stopping adding costs is effectively increasing margins.

They wouldn't need to increase their marginal margins, or increase their margins in existing business ventures. However you'd like to view it.

Wasn't Amazon doing that in their early days, when they didn't have a track record?

Sort of?

I mean unlike 99.9% of the first wave of DotCom startups they managed to avoid actually going bankrupt.

They got lucky and secured a line of credit right before the bust.

That was a dark time. I was living and working near Seattle, and there were basically seven big employers for techies:

* Microsoft * Boeing * T-Mobile * WaMu * Amazon * Concur * Real Networks

And three of the seven were in severe financial distress. It was like, "hmmm is it time to leave Seattle?"

"Will the last person leaving Seattle - Turn out the lights"


And didn't the share price reflect that at the time, which has now grown considerably now that the market has more confidence in them.

I'm sure they ran a lot of experiments in the earlier wild west days of e-commerce that wouldn't look so great today, but we've learned a lot about what a successful e-commerce business looks like since then.

I also think there is a key difference between re-investing in the business and simply bribing customers. I'm sure Amazon sold plenty of products at a loss but they also ruthlessly cut costs and found places where they could truly make money.

I feel like a lot of startups are simply using investor money to give unreasonably inexpensive products to customers.

For software companies, there is often a point where growth simply makes you profitable because your costs are relatively fixed. For my own B2B startup, we had plenty of graphs that showed at exactly the point where we no longer subsidizing our customers businesses and instead making a profit. Sadly we ran into a few road blocks and ran out of cash before hitting that golden mark. But, when your costs rise linearly to the number of customers you have, then you can never achieve profitably through growth alone.

My Amazonian friends commonly mock or complain about the Amazon "frugality" practices that mean things like no mechanical pencils, just wooden ones.

I believe "frupidity" is the in house nickname for this.

Actually the biggest key is a distinction between profitability and cash flow. Amazon has been cash flow positive since 2001. Sure, it spent huge number of years burning cash building it's revenue from $2 billion in 2001 to $200 billion today, but because they have a structure where they don't have to pay their suppliers until close to 3-4 months after the collect from their customers, they can sustain that without needing to raise outside cash.

That's a huge distinction, if you start having to raise more debt or equity in order to fund your growth it's going to negatively impact the long term free cash flow per share of your business and will make it harder for your to generate outsized returns.

Amazon makes weird non-GAAP claims. In terms of GAAP, Amazon had negative free cash flow of $4.2 billion in Q1.

If you are referring to the cash flow statement, which I think you are, there are no "weird non-GAAP claims" involved.

Their latest 10Q shows GAAP pretax income of $1.9 billion.

If you're referring to total change in cash which was -$4.2 billion, that's because they reduced their accounts payable by $10.2 billion from paying all the suppliers after the holiday season. Looking at the consolidated statement of cash flows of a seasonal business very, very easily leads to misunderstanding the business.

Operating cash flow was $18 billion for the year ending 3/31.

I'm talking on a yearly basis, not a quarterly basis. Due to the seasonal nature of their business, I'm sure the quarterly numbers are more choppy. I think the general point, that they've been able to self-finance this enormous growth (save for some certain real estate purchases or acquisitions), stands.

“Self-finance” may not be the best term to use, given that their asset growth of $90bn (from $40bn in 2013 to $131bn in 2017) is mostly coming from the increase in liabilities (equity has increased less than $20bn, from $10bn to $28bn).

Long-term debt was $3bn in 2013, increasing to $8bn in 2014 and $25bn in 2017. Capital leases have also gradually increased from $2bn in 2013 to $8bn in 2016 and $13bn in 2017.

Free cash flow is a non-GAAP metric. Amazon provides three different free cash flow calculations (depending on how leases are accounted for). In 2015-2017 the corresponding figures are $26.4bn (7.5+10.5+8.4), $14.8bn (4.9+6.5+3.4) and $5.8bn (2.6+4.7-1.5).

A 2015 commentary on this issue: https://www.ft.com/content/cfb6975d-4503-3fb5-85f4-5c11c142b...

The three different cash flow calculations in 2012-2015 were $4.4bn (0.4+2+2), $1.7bn (-0.1+1.3+0.5) and -$2.4bn (-0.4+0.2-2.2).

As forecasted, the divergence of these metrics has continued.

It is even more basic than that. Amazon, Uber, Netflix, and almost any other successful and established business creates value. MoviePass is not creating value and is simply trying to purchase its way into being a middleman between theaters and theater goers. If their pricing structure ends up showing the slightest chance of generating more revenue for the theater industry as a whole, there is nothing stopping the theaters themselves from adopting the pricing structure themselves and cutting MoviePass out.

As a Moviepass subscriber, they create a lot of value for me.

I can go to any movie I want at any local theater. That is a lot better than subscribing to five different plans, one for each theater.

I'd counter that MoviePass is not creating any value for you, they're literally just paying for you. That's not anything special.

I disagree. They are saving me a ton of money. To me as a customer, that is a lot of value.

I sure hope that Moviepass and the theaters can figure out a way to make it work.

You are misunderstanding the point. We aren't saying that MoviePass doesn't provide value for customers. We are saying that MoviePass doesn't create any value for customers. They are not increasing supply. They are not increasing demand. They are not adding efficiency. They are simply paying for the money you save with capital from investors. Every dollar you save on a movie ticket is a dollar that MoviePass pays to the theater. That is great for quick growth but I can't think of a single successful business that works that way.

Well you can just subscribe to the theater closest to you. Why would you want to go to the ones across town?

This may not be common outside urban areas, but I have theaters from 4 different chains all within a 40 minute walk, and I've visited them all within the last few months. If I were asked to pick just one to subscribe to, I'm not sure how I'd choose.

Why don't you buy the tickets online whe you want to go to the cinema? what do you get by subscribing? how much would it cost?

In the UK, several cinema chains offer subscriptions where, by buying an annual subscription, you can see as many films as you like. The fee is equivalent to somewhere between 2 and 4 movies per month.

If you're visiting the cinema very regularly, this saves money.

They can do this because they own the theatre, so when a subscription is used, it only costs them the _opportunity_ cost of one seat - which is very little, unless the showing is sold out, and they still make money on snacks. As MoviePass doesn't own the theatres, they pay the _retail_ price for every ticket a subscriber uses.

1) theaters pay a sliding percentage of the ticket to the distributor, as high as 90% in the first week(s) a film is out, dropping the longer the film has been in theaters. This means (unless the chain is cheating the distributor, which admittedly has happened for brief periods) that seat is a very real cost to the theater.

2) with reserved seating, I'm much less likely to buy a ticket if the showing is almost full, so those filled seats can reduce additional ticket sales.

I have 3 theaters within a 20 minute drive. I might choose one over the other because of movie availability and showtimes.

Different movies.

And some are even beginning to experiment as it is, such as Cinemark’s Movie Club.

Exactly, "years without turning a profit" is very different than "years burning through rounds of investor cash without hope of ever turning a profit".

Exactly! Cash flow =/= profit.

Building out warehouses does not hurt earnings. The whole point of accounting is to try to match revenue with cost. If you build a warehouse you don't expense it one time. It gets expensed over time.

If they develop software than that is treated as expense or buy movies that gets expensed.

Their core retail business is not that profitable. It goes from 0-3%. Its pretty much the same as walmart or any other retailer.

AWS is more profitable than their entire retail business.

If true, wouldn’t that just be a sign that AWS is not reinvesting fast enough?

Reinvestment is only good when there are profitable investments to be made. AWS already dominates its market; maybe investing more wouldn't help it make any more money, in which case it would be better to start paying dividends.

In one quarterly earrings reports, Amazon as a whole earned $500m- of that, AWS earned $600m of it.

> The king of money-losers, of course, is Amazon, which went years without turning a profit. Instead, it plowed billions of dollars back into its business

Because Amazon isn't about making short term profits. Amazon is about becoming the middleman for as much of the economy as possible by facilitating the transformation of the economy into its network/computation intermediated version. Amazon isn't so much a money loser as it is an economy absorber. It has been that since before day zero. That idea predated the notion that Amazon would sell books.

> Amazon, which went years without turning a profit.

This is semantics. If I make $100 on a $60 spend, and then choose, like Amazon, to reinvest the $40 in the knowledge that it will improve efficiency next year, my "profit" is technically $0, but my company is not worth a lot more than $40.

If like MoviePass, I spend $100 (of borrowed money) on revenues of $60, with no clear explanation of how I've added $40 of value to the company, that's a bit of a red flag. Saying "I'll figure it out eventually" is a bit touch and go.

In accounting it is known as contribution. Any sale that covers its variable costs is worth making.

Your sink costs are sunk and your investment costs are optional.

there is a very solid argument that what Amazon is doing IS an antitrust issue. http://www.yalelawjournal.org/note/amazons-antitrust-paradox

Except it is not, because US is near full employment, so bribes go long way to avert the looks. Until a solid recession hits, and double digit unemployment is in, corps like Amazon will never be on the quartering table by the masses.

It is not just that Amazon could or could not turn profits at will.

Turning a profit (paying dividends) or reinvesting is a decision every investor relations team must make, simplifying the subject it is based on whether you predict your company will get the investor more money (by stock price growth/future dividends) than if he invested in other equaly risky set of assets.

I don't believe this is the case for Moviepass.

It’s funny to think of IR departments deciding on one of the most strategic capital allocation issues at any company (or maybe you consider that the CFO is part of the investor relations team, that wouldn’t be completely wrong but it’s not the usual definition).

Yes, IR doesn't make the actual decision. That was said to me by a IR I knew in a previous company. Granted the decision making was obviously above his head and included other strategic decisions and the intents of the key stockholders, to say IR makes this decision is an exageration, but he produced the data to support and justify that decision. How much is that number flexible I guess depends on market regulation.

Nearly all of the most profitable Internet companies are platforms:

* eBay is a platform for sellers to connect with buyers

* Many think that Amazon is a online retailer, but it's not; it's a platform. A huge percentage of the items sold on Amazon are owned by small businesses who are leveraging Amazon's platform (website, warehouses, logistics, delivery.) If eBay had been more ambitious, eBay could've replicated what Amazon has done.

* Facebook is a platform for people to connect with other people

* even Google is a platform; it's basically taken the entire Internet and added ads to it. The Internet itself is Google's content, and that content was created by other people

And that's why MoviePass is doomed. If MoviePass had become a platform where movie theaters could unload excess inventory, then it could succeed, but the current model is simply selling movie tickets at a loss.

It seems to me that Amazon the business doesn't really need to turn a profit as long as it's stock price stays high because then its investors are still making money.

Now the thing that Amazon has for it that Moviepass does not is that Amazon gets to collect user data and use that to sell more for itself. Moviepass seems to get to collect user data, however it doesn't own the theaters so it must find partnerships with the bigger theater chains. They're hedging that they can create such a large user base and show that they can bring a lot more traffic to theaters and with that increased traffic (and lower ticket price for the customer) will sell more concessions.

For Moviepass to work ticket prices must go down (at least for them) while theaters still make more money because of larger concession sales.

But MoviePass "could also choose to raise prices ever so slightly". It seems very likely it would not work.

What's the categorical difference between the two business models? Guess it's the fact that when MoviePass tries to change prices it will force every user to opt in all over again. Opting in is part of the everyday user interaction for Amazon.

MoviePass doesn't have to raise prices ever so slightly to be a viable business. It has to raise prices by significant integer multiples.

(And heck, Amazon don't even need to raise prices, they could be very profitable just by investing in growth less. But their investors are clearly happy with the current state of affairs).

Raising prices may even make things worse, as it will just narrow their customer base to those that are most expensive to service.

How are higher-paying customers more expensive to service?

More likely to use their service regularly. At $10 you have a certain percentage which will go once a month. At $50 you only attract the people who go twice a week.

Not really could just have tiered prices 6.99 for weekdays before 5:30, 9.99 after - and say 12.99 at the weekends/holidays.

For example my local VUE in the UK I can get a ticket on Mondays for less than $6 full price is $16

I suspect that its the paying up front for a year when a substantial majority of its customers wont goto the cinema

Moviepass is an all you can eat subscription. The UK has those - Cineworld and Odeon both do them. But the point is that they're significantly more expensive than Moviepass is, and the price of quite a few individual tickets (they're usually £35/40pm, which is $50-60 US). And they're run by the chains themselves so they have less infrastructure cost to check for fraud.

That's what I meant by integer multiples. If Moviepass was $60 a month it might be sustainable. But it's not, it's $10.

If the all-you-can-eat subscription is run by the chains they might also be hoping to make back what they lose on ticket sales in concession sales.

Moviepass doesn't get any of that sweet concession stand money and they'd have a hard time convincing theaters that they should unless they start leveraging their user base (i.e. threatening to drop MoviePass from working at Cineplex) to pressure theaters. Even then they add so little value to the system that it'd be hard for them to do that while sustaining a competitive advantage against new market entrants.

MoviePass is just a terrible idea to be in as an independent business.

Cineworld is £18/month, not 35/40.

I think you are misreading the business model.

The MoviePass price is per month. There is NO cost per viewing.

You could in theory see up to 31 movies for your single $10 payment.

jessaustin, I don't often see more than a movie or two per month, but back when I had a MoviePass (before they cut the price so low!), I found myself seeing movies I wouldn't otherwise have bothered to see. When the marginal cost is zero, it becomes a lot easier to drop by a theater and see what's playing, and even walk out if the movie's no good, feeling no sense of loss.

I was paying $40/month for MoviePass, and most months they still lost money and me, and I saw a lot of movies in a theater that I would normally have waited to see at home.

I can't think of a month in which I wanted to see three movies in current release...

If you live in a city with many independent theaters showing limited releases and foreign films, 31 movies per month isn't enough to scratch the surface.

PS. Staff at indie theaters tell me that 70-80% of tickets are purchased with Moviepass cards.

But normal people wont they will see 1 or 2

I live in an area with a cheap cost of living and even if I only went to one movie a month a MP is still about a buck cheaper.

You have to pay for a year up front + another fee

Amazon was making profit on every incremental sale, but invested more money than the sum of that profit.

This is the key. Amazon was profitable in the unit economics, Moviepass is not.

Raising prices would solve lots of problems for Amazon. They’d lose some market share, reducing the monopoly accusations. Most likely companies are going to face increasing pressure to do something about inequality levels, so maybe a $5 / hour (hopefully more) pay raise for their 28k a year warehouse workers could also be in the store.

I'm not a lawyer, but I think if you are accused of being a monopoly, suddenly increasing your prices is a bad legal strategy because it proves you have pricing power, which is the classic sign of a Sherman-style monopoly that regulators like to break up.

Are Amazon's prices really that much lower than Walmart's? I shop at Amazon for the convenience and selection, I rarely do a price comparison. In other words is price really thier competitive advantage?

On the other hand, I don't think AWS is the low cost leader for equivalent services. I use AWS because of the breadth of services.

Not sure how many workers would be impacted but it could cost more than a billion dollar per year. Salary is probably is primary expense of Amazon, like any large company.

Yeah, I wouldn’t be surprised if they ended up the way CyberRebate ended up way back when they’d reimburse your purchase 100% on marked items (supposedly they’d take the money reinvest and then make enough to reimburse you completely..., ha!)

In the state of Washington you pay Business tax on revenue.

Amazon already is very profitable. For a certain group of people. And on the backs of other people.

It's a matter of how you define profit. Or rather, whose profit you're looking at. (And, ergo, what profit is actually driving the business forward.)

> The key difference with Amazon is that Amazon could choose to be profitable at any time

Wait what? No. They were a loss leader because they kept doubling down on a bad business models until they made headway on the reseller market to push themselves as an online retailer, which brought them out of the red. Only after the massive success of AWS, did they solidify as the most successful retailer because THAT got reinvested.

Notice, Google tries to follow this EXACT model, as it has for decades. It has little profit to show for chasing this fable-strategy because it doesn't work. Grabbing Doubleclick was a minor misstep (there were far superior companies to choose from), but at least they got youtube and were able to keep the boat floating (with a little Ad Tech dust). Riding their search engine product as far as it will go and then building an ad network on top of their search+youtube is where Google has settled.

Amazon has been looking into advertising for the last couple years and will probably be less successful than Google without a big new thing, which is unlikely to come from this mythic "reinvestment". Why does this fairytale story about Bezos keep getting pushed? Successfully keeping a company running is not the same as him being nigh prescient about how to manage the resources.

> But it also reflects the willingness of shareholders and deep-pocketed private investors to keep fast-growing upstarts afloat long enough to conquer a potential “winner-take-all” market.

That's the gamble. Destroy competition, get lock in, become a monopolist and the free market is your money printing machine. If regulators had teeth to break up such monopolies, we wouldn't be seeing these gambles, and maybe more honest competition.

This strategy only works if you can effecticely build new habits that are sticky enough to persist when the friction increases. Even better is if the new behavior has interesting interactions with other things.

The reason enterprise tools tend to be “worse” is because the stickiness is arbitrarily enforced instead of being rooted in reality. Uber/lyft are non-sticky because theyre basically the same.

> Enjoy It While You Can

I love the conclusion of this article. As someone who has participated in the online "deals" community for 10+ years, I have definitely benefitted from many of the opportunities.

However, I do spend a considerable amount of time wondering what will happen when this house of cards comes falling down.

But you know, I think that for every one person like me taking advantage of these "arbitrage" scenarios, there are like 10 people paying full price. They keep this economy going.

> But you know, I think that for everyone person like me taking advantage of these "arbitrage" scenarios, there are like 10 people paying full price. They keep this economy going.

That seems contrary to what the article is saying, which is that for every person taking advantage, there are zero people paying full price, because it's the investors who are keeping this economy going.

As such, it may never end without a regulatory end to the winner-take-all scenario, as a different comment suggested.

All it would take for it to end is for investors to stop investing in money-burners.

Isn't that a tautology, though?

My point is that actual[1] investors have an incentive to pour their money into money-burners because if just one of those initially money-burning is the next Google, Facebook, Amazon, or whatever overwhelming winner-take-all breakout profitable company, they will have more than justified dumping all that cash into the losers.

[1] for lack of a better term. I've never quite understood why it's considered "investing" to buy stock in a company if someone other than the company itself previously owned the stock. That cash isn't going into company coffers. This activity seems more like asset ownership/speculating than asset allocation (which is what I think of when I hear the word "invest").

Your point is well taken.

I think I just don't agree that government stepping in is the only way to end the cycle. Seems to me it can/will die of natural causes when the "bubble" bursts.

But what bubble? Where's the irrationally increasing asset values at a macro level? Where's the "greater fool" that's buying it all up?

Without that, there's nothing to burst.

Moreover, this has been going on for so long, at least since (before) the dot-com boom, and we've had quite a few economic downturns. It's not very credible that any bubble would survive that.

I don't think the house of cards is going to fall. In this case what is happening is that the money made in a few lucky startups (Facebook, Gogole etc) are reinvested into those trials.

In the end, it is the circle of life, A few mega winners are subsidizing those losing experiments. We should be there to take advantages of those as we are usually paying the price to the huge winning ones (indirectly, but still)

It's not reinvested capital. It's highly leveraged funny money from a decade of ZIRP.

And this isn't really a "tech" problem at this point. The "real" economy is full of huge companies that are barely making any money, but are racking up debt and revenue. This article goes into how the same thing is playing out in the agriculture sector.


Yup. I know things are too good to last, but (for the time being) I am happy to be on the 'winning' side of bad investments.

I'm curious what is attracting investors to these start ups in the first place, is it really just the idea that 'this could be the next amazon'? As the article pointed out - Amazon dumped a ton of its money back into the company to expand services. Most of these burn rate services are happy with just getting people signed up and then stagnating.

> what is attracting investors to these start ups in the first place

Growth, basically. As long as you can make a case that your 75 cent dollar store is rapidly accumulating customers, investors will be more than happy to overlook the economics of the business. Sometimes that works out, but I guess at that point it's more like gambling than investing for investors.

> But you know, I think that for every one person like me taking advantage of these "arbitrage" scenarios, there are like 10 people paying full price. They keep this economy going.

A SiriusXM subscription comes to mind. Since they care about their subscriber numbers, they are willing to give you the "promotional" price if you ask or threaten to cancel.

Reminds me of VC Fund My Life. It's an index of discounts offered by startups, which you more or less know they're taking a loss on. Clever name.


That site seems like it’s all fake promotion - e.g. coinbase is on their and last I looked coinbase’s fees were monstrously high compared to Gemini and other exchanges. It’s definitley not saving you anything choosing them.

Agreed, and Gemini is not well known enough... it's basically no fees for most users moving between USD and BTC, and it's legit, based in NYC and follows all of the NY state regulations on crypto.

Gemini recently increased fees to 1% so it's now far more expensive than GDAX.

Wow, that’s insane. I can no longer recommend retail buyers use Gemini if they’re charging 1%. Very disappointing.

Guess it's Robinhood then. Free to buy BTC.

Note that you can't transfer BTC into or out of Robinhood so you may be stuck if they increase fees in the future.

It is all fake promotion. Virtually every single link, if not every single link is an not-disclosed affiliate/referral link; half of them aren't VC or startups.

$10 on $100 is far more than their fee. If you signed up, bought on Coinbase and sold on GDAX at the same price you'd make $8.51. Small but indeed free money if you know what you're doing.

Is there a community around this like /r/churning?

Preferably sorted by reward to effort ratio (e.g., $20 giftcard for a 5 min referral signup with personalcapital.com that you can just cancel after was pretty good).

Pretty much. Seated was another gravy train. You got a $15 Amazon or Uber gift card just for going to restaurant with a second person. There were no minimums. you just had to show up and had to order food. There was a 2-3 month period where my girlfriend and I were getting good meals for a net $15-$20 total. It was awesome, but I knew it wouldn't last. Then they put in restrictions - to qualify for the $15, you needed at least 4 people or spend $X. It's no longer even a "good" deal, so now I don't use it anymore.

I got an even better deal: I cook my own meals, or eat at even cheaper restaurants. I'm also looking in to joining a community garden and growing some of my own food.

Amazon restaurant deals are not worth it for me, even with their discounts. But I understand that a certain segment of the population doesn't think much of such an expense, and that's who Amazon is targeting.

That sounds like a different product, not a better deal.

I am curious if this will end with a "bubble-burst" or a slow burn like twitter has experienced. Surely the money has to dry up sometime? It is too bad that none of these companies create any kind of net good for society like a startup that pays you over minimum wage to clean up a park or sort recycling.

The thing that was different about the Dot Com Bubble is that it felt like the whole Internet thing might have been overrated. There was definitely a feeling of "perhaps we were all wrong about what the Internet can be."

I think that's a big part of the reason that the crash was so deep and epic; there were a lot of people who felt like it might just be a fad.

Keep in mind that when the bubble burst in Y2K, Netscape Navigator was less than six years old!

In a lot of respects, the dot com bubble was similar to the videogame crash of 1983. In 1983, everyone thought video games were a fad that had passed.

> Surely the money has to dry up sometime?

Why? A bit simplified, but think of the money as coming from the profits from the companies that have been successful. It's just how investment works. And when you add up all the gains and losses, it's still a net positive as the economy grows a little bit more year after year.

And what do you mean no net good? The companies create jobs which create huge amounts of income taxes (always) and corporate taxes (when profitable) that pay the salaries of the people who, for example, maintain our parks, or manage a city's recycling systems.

Jobs aren't intrinsically good. These startup jobs might be, but it's an insanely complex system you're trying to suss a value judgement out of.

If these startups didn't exist, the money going into them would be seeking returns elsewhere. There would probably be jobs involved there too, and the people working those jobs might be doing something better for society than building a short-lived money-losing consumer product.

If the mysterious "elsewhere" didn't create jobs with the money say because it was spent on capital assets, that's still not the end of the story. Wherever it went, someone else has it now and they're probably spending it, perhaps hiring some people with it ie creating jobs.

The simple interpretation of your second line is the broken window fallacy, which is false. The grasping-at-straws interpretation is that paying software engineers to work on junk is a better than average way to route capital through our economy - measured in terms of how much real value the capital produces for people as it changes hands from company to coder + tax man, coder to shopkeeper + tax man, and tax man to public works employees, etc forever. I don't think we could possibly measure the latter interpretation, but I don't believe it.

These companies losing investor money isn't anything like the broken window fallacy.

If I pay a company $0.75 for a $1 widget with a $0.25 VC subsidy, I get the $1 widget and I'm ahead a widget. Nobody had to destroy a widget to make me buy a new one.

The underlying widget suppliers still get the full price so the money is flowing into the economy. The VCs are the only ones losing anything.

So paying people to clean parks is not better for the economy than VC subsidizing blue apron meals.

The mistake you are making is assuming that a company losing money cannot provide more value to society than it loses.

You're right it's not quite the fallacy in that there isn't any destruction going on. It's something adjacent though:

The whole point of markets is that people decide where to spend their money based on the value they can get for it. When 3rd parties subsidize services like Moviepass or Blue Apron, they break the pricing mechanism that's supposed to lead us to efficiently use limited resources eg seats in a movie theater or space on mail trucks.

If a company losing money is providing more value to the customer than it costs to operate, they don't need to be losing money and they should raise prices. Otherwise, you're arguing these companies have a beneficial externality of some kind, and society at large gains in the transaction even though the company is burning more value than the customer gains from its product. I don't think that's the case for Moviepass or Blue Apron.

It's Bastiat's idea of the unseen alternative, except we're talking about LP money channeled through VCs instead of taxpayer money through the government.

I'm not blindly against VC-, cross-business, or any other kind of subsidies. If positive externalities exist they're a good thing. Eg, Amazon was "losing money" or barely breaking even on its physical goods business for a long time, but that money was strengthening our logistics network (both internal to Amazon and in USPS, FedEx, UPS) so they could be profitable later at the same or lower price points. Healthcare probably ought to be a money-losing business because a healthy labor force has huge positive externalities. I just don't think leisure or mild convenience/lifestyle products are positive on the balance.

> A bit simplified, but think of the money as coming from the profits from the companies that have been successful.

To be honest, most of the money is coming from pension funds, endowments, and state bodies (i.e. large institutions with monstrous piles of money). They allocate most of that money to post-IPO stocks and bonds, but they'll hand over a small fraction to 'alternative investments' too.

Post-financial crisis, when interest rates came tumbling down, two things happened. First, bondholders (i.e. large institutions) made a lot of money. Second, bonds became less attractive as an investment, making alternatives like early stage tech look good in comparison.

It's partly accurate to say that the hot money pouring into silicon valley comes from previous companies' successes. But a lot of the money is coming from 'me too' institutional investors who are chasing previous investment performance.

> The companies create jobs which create huge amounts of income taxes...

It's possible to create jobs wastefully. I could pay ten people to dig a trench while I pay ten other people to fill it in. Your arguments would seemingly still stand, but not much of value would get built.

You're right that the money wouldn't necessarily dry up, but attitudes towards the risk might change if the likelihood of success of these startups goes down over time. There may be a point where investors don't want to stomach the risk. I'm not saying it's logical, but investors aren't always rational.

Pressure is relieved from the bubble slowly via acquihires and M&A. Engineers get redistributed once a "winner take all" is proclaimed.

Not as impactful as the dot-com crash... but a RIF is usually involved in these bubble corrections.

There will eventually be a pets.com of the tech bubble.

Something like Tesla or Uber or Blue Apron going belly up.

Pets.com is probably the wrong example from the 90s. Webvan.com is a bit better: hundreds of millions spent on actual warehouses, trucks and more.

Pets.com clearly overspent on advertising, but I don't think they risked too many assets on the line. So when Pets.com eventually died, it wasn't a big deal. Its funny, because they had superbowl commercials and huge outreach. But nothing like like Webvan's huge warehouses or fleets of trucks.

I recall Webvan well. Still have a few of their crates holding stuff in my attic[1].

No idea what it looked like elsewhere, but their spending blitz in the Bay Area was incredible. Everywhere you looked, there was their name. For a little while...

[1] When they first launched, they used really high-quality, solid crates for deliveries that were well worth the too-cheap deposit.

Pets.com was a potent and visible symbol that the money for nothing dotcom era was over.

I suspect that the upthread poster picked exactly the right 90s example for what they wanted.

Or take a look at Cargolifter. They wanted to carry goods with Zeppelins around the world. Their facilities are still the largest free standing buildings on the planet, with an entire tropical resort in the former main hangar.

Advertising seems like a good description of the subsidy applied by Uber and Blue Apron?

Blue Apron going belly up won't even create ripples. They are not in the same league as the other 2 companies you mentioned. Just saying..

Also, if you look at the bleak bleak picture of Blue Apron's stock price since IPO, them going bankrupt wouldn't even be close to shocking.

Pets.com only had 320 employees when its IPO flopped.

It is a different era now. Top 6 most valuable companies are all tech now. Blue Apron has laid off more employees in the past year than pets.com had in total.

Tesla and Uber aren't going anywhere. There's way too much invested for them not to secure another tiny drop in the bucket to keep going. That doesn't necessarily mean it's a good idea ("throwing good money after bad"), but that's the reality of what will happen, especially since it will probably be someone else's money as they dilute.

Tesla's financials are terrifying. I hope that Tesla succeeds, and I believe that they can. However, there is nothing about the company that makes an investment in TSLA feel like a sure thing to me.

Look at Ford http://www.businessinsider.com/ford-f-150-truck-production-m...

A fire accident of a supplier of Ford caused this, it wasn't even on their hands. Any freak/unlucky accident plus Tesla being tight with cash and time you do the math.

Oh ya, I hear you. I worked at GM in the early 2000s and I remember personally dealing with an issue where we needed over 100,000 of a particular part for a recall and the vendor could only supply about 2000/month (not including what we needed for current production). Most of the other major automakers also used that part and they needed them for recalls too! It was insane.

I've been in automotive ever since and worked for a number of the major automakers and I currently do a lot of consulting for one automaker (not Tesla). So, I understand very well how one tiny thing can really throw a wrench in production (or sales, or service).

But, Tesla has an illogical amount of goodwill right now and they can't seem to burn through it. So, until that goodwill really starts to dwindle, there are going to be investors willing to take preferred stock.

There's a chance Tesla will not exist as an operating company this time next year. Given their published financials, it wouldn't take much at all.

There's a chance Tesla will last a century, and people will point and say see! I told you they weren't going anywhere!

You got it exactly right.

What is beautiful with this is that whatever happens next year, the "winning" camps will say that they knew this would happen.

It is a game of Statistics and chance at this point. Both outcomes are possible, but once the outcome is clear, the ones that got it right will dismiss it is based on luck and chance at this point.

This reminds me of the quote that the four most expensive words in investing are "this time it's different".

Hooboy, it only takes a bit of loss of confidence for a corporation to liquidate. Never underestimate the difficulty level of refinancing corporate debt in a shaky macro environment.

Isn't this what we said about the housing market a decade ago?

Blue Apron stock is barely holding on. It going away won’t do much really. Not compared to the other huge examples.

from the article: “The fact that Google and Facebook were able to generate such enormous profits and growth does give hope to some companies,”

IF the bubble bursts, companies that seemed profitable might not remain so. companies like Facebook have made a fortune in advertising on things such as mobile (80% of its revenue), which to my knowledge really doesn't work. likewise a lot of desktop adds don't work, but many of these cash burning entities spend a lot on adds. so that revenue will disappear, then other people who want to sell adds can negotiate better prices or simply choose not to do so.

I am curious, why do you believe that ads do not work? Why would large entities continue spending on them otherwise?

I ask because I operate a few businesses that have ROI > 1 on FB ads. I assume larger corporations, especially those like Amazon, Newegg, Fashion Nova, etc would be profiting off of them too.

I have talked to CEO's of ad companies. They use to try and prove how much ROI their adds where. What they found was their large clients didnt want to know. An exec at a large firm would be given a huge add spend budget, and they got that no matter what. Getting numbers that their add spend didnt work would = budget cuts, but a fancy power point presentation with an arrow pointing up so long as sales are good doesnt get questioned.

What did the add companies have to say about mobile? most of the time, if something gets clicked, its because they were intoxicated and accidentally did so.

I agree, many companies do not care. I know a guy who does online advertising for a Middle Eastern airline. Many of his campaigns do not work out, he's blown large budgets due to simple mistakes and no one cares, and he's given a budget that he just _has_ to spend. However, campaigns do work; many of the viral content you see has been carefully engineered and propogated by clever ad agencies.

I have to disagree on your opinion about mobiles. Mobile e-commerce is very intuitive and fast for many users (see Kim Kardashian). Consuming and sharing of media on mobile has led to clickbait and some brands have earned big money from that (see Buzzfeed). People scroll through mobiles addictively, and the invention of the "feed" by Zuckerburg combined with targeted advertising has users doing exactly what ad companies have want them to do, whether it be sharing, consuming, or purchasing.

Next time you use some ad supported app, take notice on the share of the ads are are for some other ad supported company.

That is the share of the market that will vanish in a bubble pop. On my experience, it's something around 90%, but YMMV.

That's a bit like the dot com thing, where companies spent a lot on banner ads, to get people to come to their site that made money off of banner ads. I'm exaggerating of course. But it is good to think about which VC funded companies may depend on other VC funded companies for clients.

What makes you say mobile advertising doesn’t work? Google makes a larger and larger portion of their revenue and profit from mobile as well. I’d assume the same is true or going to be true for distant third place player Verizon/Oath.

Advertising has stuck around on TVs and all sorts of formats that can’t be tracked at all for this long, online or mobile advertising not being at the pinnacle of efficacy doesn’t mean it doesn’t work.

Your knowledge is wrong.

> Surely the money has to dry up sometime?

Yup, this fall. By the close of 2018 all the world's central banks will be in quantitative tightening after having spent the past 10 years perpetuating an unprecedented level of quantitative easing.

Three data points:

Fed Balance Sheet https://fred.stlouisfed.org/series/WALCL Fed Balance Sheet hasn't been reduced in any meaningful way.

Bank credit: https://fred.stlouisfed.org/series/TOTBKCR Bank's have themselves continued increasing the money supply.

Worldwide debt: https://www.iif.com/publication/global-debt-monitor/global-d... Random snippet from Q32017

1. Does not account for inflation, which would show a 5.8% drop between 2014-2018.

2. Viewing this chart on a logarithmic scale as it should be, or viewing the same data charted as year over year percent change, paints a much less intimidating picture. https://fred.stlouisfed.org/series/TOTBKCR

3. "This publication is available to IIF Members only."

Well that's the stuff of nightmares.

QEs been tapering off for a long time (US QE ended in 2014); there's very little reason to believe that it's global final (for now) end will do much to capital markets.

This only means that the FED hasn't been increasing its purchases since 2014. It has maintained an over $4 Trillion (trillion with a T) balance sheet, and it continues to roll this money over. Ending QE would mean stopping repurchasing and letting the balance sheet shrink - quite different in substance and effect than tapering.


This also ignores the fact that QE purchasing has continued to accelerate at an unsustainable rate in many of the world's largest economies, such as Japan.


In addition, central banks are (and have been) purchasing stocks directly to prop up the markets. The Bank of Japan spends over $800 billion yen a month buying stocks and ETFs, resulting in the central bank owning a massive 75% of ETFs in the entire market.


If you don't understand the problems with central banks owning three quarters of the market and what that means in the future (near and far) then you don't understand markets. Nobody knows when the "extend and pretend" strategy employed by central banks around the world for the last decade will fall apart, but everyone informed understand that it won't last forever. The longer we keep our heads in the sand the worse the problem will ultimately be.

If you think the bubble is going to pop you should take out some options and you should be able to make a killing.

There's no question its going to pop - the question is when. It could be tomorrow, or it could be 5 years from now. Certainly central banks are going to do everything in their power to prop up the markets with continued equity and bond purchasing to delay the inevitable as long as possible - which will make the pop that much louder when it does come to pass.

Free markets are based on price discovery. Central bank purchasing destroys price discovery by artificially creating demand. Its simply a matter of basic logic. Either central banks end their purchasing and demand falls to its organic level, or they continue to accelerate their purchases and increase the artificial disparity. In addition, as the share of markets owned by central banks increases the liquidity of markets decreases, meaning that when there is a crash those running for the exit will find the door much smaller.

If you blow a bubble, I won't know how long it'll float around before it pops. But I know it's going to pop.

Yes easing has been tapering off, but the balance sheet reductions are a whole other beast that only started in ~November and only from the Fed. Once the ECB starts, and potentially the JCB (although I think they've changed direction now), there will actively be a drain on the world's economy instead of the artificial faucet.

Don't quote me though, I'm several months out of date on following it super closely.

Can you provide data to back that specific claim around timing?

For how long? My conjecture is that they will re-start "easing" as soon as some index drops by 10%. And this new easing will exceed in scale all prior "easings" combined. Just a pure speculation :).

VC bucks creating discounts is about the only form of wealth redistribution we [the U.S.] can count on these days.

Not quite. The US is currently undergoing a renaissance of successful government programs that have massively cut poverty and homelessness over the last 15 years.

"Child Poverty Falls to Record Low [nearly a 50% reduction since 1967], Comprehensive Measure Shows Stronger Government Policies Account for Long-Term Improvement"


"The U.S. Social Safety Net Has Improved a Lot. ... Its social safety net is only a couple of percentage points below the OECD total, and larger than that of Canada, Australia and South Korea."

"Furthermore, U.S. government transfers have been increasing over time. The U.S. system of taxation and spending has become more progressive during the past two decades. Per-capita government transfers were about $8,567 a person in 2016, up from about $5,371 at the turn of the century (adjusted for inflation) — an increase of 60 percent"

"After 16 years of expansions in the safety net under Republican and Democratic presidents alike, the U.S. has a much more robust welfare state than people seem to realize."


The National Alliance to End Homelessness, reports that total US homelessness declined by 27% from 2005 to 2017. The drop was from 763,000 to 553,000 for all forms of homelessness (while the US simultaneously added 30 million people to its population).

"the rate per 10,000 people is at its lowest value on record."


(their 2013 report which gives figures back to 2005):


Given how much larger our population is, what would be shocking would be if our social safety nets were smaller than those of Canada, Australia, or South Korea.

The relative measure used in the linked article is a percent of GDP used on social welfare programs.

It's not an absolute value comparison.

Sounds like someone's procrastinating :)

Cryptocurrency seems like another.

It allows miners in poorer parts of the world to resell their electricity at massive profit to more wealthy parts of the world.

Yes. It also allows for some to get rich.

Pump and dumps are also wealth redistribution.

Ad earnings from being a YouTube Partner or Twitch streamer!

Hmm you laugh, but if you could sell dollar bills at $0.75 but you limited the amount any person could buy. And you made them look at advertising, and collected all sorts of personal info on them. You could easily quite a bit of money off them. More then what you lose in selling the dollar bills at a loss.

They did this in the 90s. I remember I had the All Advantage tool bar running at all times and made like $20 a month.

My economics professor auctioned $1. Someone bought it above par.

The lesson your class was supposed to learn is that people aren't always rational. Did they?

(And did your economics class then go on to assume everyone is perfectly rational and understands their own utility functions, anyway?)

Rational doesn't mean valuing every dollar exactly the same. Buying a $1 for more than $1 from an economics professor is funny, maybe a good story, maybe a good keepsake, and plausibly worth more in utility than what they paid.

Was it a Dollar Auction? Because if so there is a little more nuance than you're implying.


"players are compelled to make an ultimately irrational decision based completely on a sequence of apparently rational choices made throughout the game."

The entire economy.... Talk about an extreme click-bait headline.

Their fraudulent premise is extracted from this single setup:

"Over all, 76 percent of the companies that went public last year were unprofitable on a per-share basis in the year leading up to their initial offerings"

There were a whopping 30 tech IPOs in 2017 (tech & biotech IPOs substantially tilt the percentage of unprofitable listings; there has been no change in the number of unprofitable biotech listings, they overwhelmingly tend to be unprofitable across all years). You see, that's the entire economy. By comparison there were 370 tech IPOs in 1999, 12x more.

Meanwhile, back in reality, the S&P 500's profits are at record highs.

Small business profitability is also booming per the National Federation of Independent Business survey (a survey going back to 1973), which is registering sales & profit growth levels rarely seen in the last five decades.

"NFIB: A ‘record level’ of small businesses are growing their profits"


"Small business profits are at a 45-year high: NFIB survey"



> The entire economy.... Talk about an extreme click-bait headline.

I don't think the headline meant to imply that literally the entire economy is MoviePass.

One thing I found interesting is that MoviePass Ventures has started acquiring rights to movies. From an article on IndieWire:

Just five days after MoviePass declared that it would acquire films through a new subsidiary, MoviePass Ventures, the company has made good on the promise. Partnering with The Orchard, MPV will share the reported $3 million bill for North American rights to “American Animals,” the first narrative feature from BAFTA and Sundance Grand Jury Prize-winning documentarian Bart Layton (“The Imposter”). A U.S. Dramatic Competition contender at Sundance, “American Animals” premiered there January 19, hours after the MoviePass announcement.

Full article: http://www.indiewire.com/2018/01/moviepass-the-orchard-acqui...

Trailer: https://www.youtube.com/watch?v=SKvPVvy2Kn8

I saw the trailer for that movie and had to pause it to make sure it said MoviePass. The movie looks like something I'd like and I'm looking forward to seeing it in the theater with MoviePass. I like to see MoviePass movies with MoviePass, dawg.

I think the $10/month thing is a marketing stunt. Don't forget they hired Mitch Lowe who was an executive at Netflix and Redbox as CEO in 2016. I would say there's some method to the madness here. They're gaining a lot of insights and a lot of users. I would still pay $10/month even if they limited it to 4-5 movies per month.

Also, don't forget about the tech. MoviePass has built out a system that I am still fascinated by where you can check in for a movie and your pre-paid debit card is instantly funded for enough to cover the price of a ticket. I know it's nothing earth shattering but as a nerd I get a little giddy thinking about it whenever I use it.

It will be interesting to see how it all plays out. I think they're playing a long game.

It's kind of too obvious to even point out, but why act surprised that a company, each of whose customers causes a net loss, gets poorer, faster, as it grows?

Spotify, the popular music streaming service based in Sweden, lost $1.5 billion last year, even as [because] it continued to add millions of users.

On Tuesday, Helios reported that MoviePass lost $98.3 million in the first quarter," despite adding [because it added] more than a million net subscribers.


It's called "predatory pricing", and it's illegal in many places.


Central banks are pumping out new money in form debt of close to zero interest rates. This is below market rate interest rates if the market would freely choose the interest rate would be higher. The new money flows to automation in startups that makes processes cheaper. Thus the central banks are not creating inflation through salary inflation they are creating deflation through automation. Robots on average replace 5.7 humans. Software is also a form of automation.

Thus the central banks keep printing new money in hope for inflation but the process where the money flows are creating deflation.


I've long thought that the ZIRP policies of the last ten years had the exact OPPOSITE effect of what was intended. The idea of ZIRP was that the Fed would inflate house prices, and this would keep homeowners from defaulting on their mortgages.

But the truth was that many homeowners only "owned" a tiny fraction of their home. Often as little as 5-10% of what they paid for it. So if their home price dropped by even 15%, they were underwater.

This created a cascade of defaults. Then gasoline was added to the fire, when the government began to forgive the capital gains of walking away from a home that was underwater.

This created a scenario where thousands of people walked away from their homes, and then large hedge funds scooped up thousands of properties for pennies on the dollar.

Naturally, prices recovered eventually, but then the former homeowners were now renters, and the rent was prohibitively expensive. To a large degre because the value of the dollar had been devalued to prop up prices in the first place.

This dude stole my startup idea: https://news.ycombinator.com/item?id=16945451

'MoviePass inspired me to start my $20 bill club where you send me $10/mo and I send you a $20 bill in the mail.'

Hey - that just might work - once you've shown enough traction and proven demand for DollarPass monthly membership subscriptions, then you should be able to go to USA.gov and negotiate a bulk pricing on $20 bills at a sig-ni-fi-cant discount. Plus if you had a payment app so the end user could pay for stuff with the $20, you could show the user ads and charge a fee of every transaction. You could also track their GPS location 24/7 and sell that.

It's all about leveraging and fully monetizing your captive user base!

I think he got the idea from bernie madoff. Probably not going to end well. But, maybe you'll break even with the proceeds from the TV movie and mini-series. Try to get that money first though.

Or the old, put an ad in the paper telling you to send me $20 to tell you how to make money. Then I just send you a note that says, "put an ad in the paper telling people to send you $20 and send them this note".

So how can I invest in this incredible journey?

"The fact that Google and Facebook were able to generate such enormous profits and growth does give hope to some companies," Mr. Ritter said. If start-ups can figure out to convert a large user base into paying customers, he added, "it can be enormously profitable."

Did Google or Facebook "convert a large user base into paying customers"?

Is that what enabled them to "generate such enormous profits"?

Yeah, I am a bit sad to see those Ofo, limebike, Bird going all out in the streets, they are trying to outspend each other for the winner to raise the price. I just want a sustainable shared transportation system.

Ofo has been free to use for many months now, at least in Dallas. Are they counting on the competitors to all fold and leave them the sole market owner? Such weird economics!

1. Yep, they're funded by Alibaba and they've been buying out bankrupted bikeshare companies.

2. Alibaba and Tencent both own competing bikeshare services, so it's a cash-burning contest.

Yeah, here in Scottsdale too, I think they are way bigger and way older than all the others, I guess they have more killing power.

This is why I think we don't have inflation. Very low loans, and for managers personal careers it is actually beneficial to do this. The more of this is done, the more others are forced to do the same. This then results in lower interest rates, which ironically make it cheaper to do this, and results in more below-cost and more capacity, making the problems worse.

But in reality many companies are producing/exporting under cost, because it results in cashflow. To "conquer market-share".

It also means that at some point interest rates will rise ever-so-slightly and boom the whole thing will stop in a matter of a few months and we'll see 10% inflation in quite a few products and an absolute disaster in the stock and bond markets.

But in reality inflation is already here. The money has been printed. Governments have given it to their favorite banks, and financed their own careers ahem I meant government programs with it. Banks have given this in loans to everyone (because governments demanded they do this), and those managers have "invested" it in growth.

In reality of course, the vast majority of those managers and governments have no idea how to grow the economy (in fact, according to secular stagnation theory it hasn't really grown, for individuals, since ~1980-1990 depending on where you are in the world). So it's just been invested in unnecessary capacity expansion, making products they have no hope in hell of selling at the normal price, or just outright into financial constructions.

These things will have to be paid, and they will have to be paid by the customers. So the cause for price increases has occurred in the past, but people have used loans to stave off the consequences of their decisions on a large scale. So inflation is already here, and done, it's just suddenly it will need to explode.

How do startups that don't network well with VCs survive in this kind of an ecosystem? Doesn't this make VC money the kingmaker to penetrating a market? I'm not sure having to be well-connected enough to be favored by VCs is a good thing in the long run for the economy, but maybe this isn't such a different situation from the pre-VC status quo.

Positive cash flow is actually way more important than profit, although you should have both ideally. If you are running a positive cash flow business with good growth and accurate depreciation numbers on fixed assets, you are in a better position than a profitable microbusiness in a small market. Amazon's breakthrough wasn't realizing this, it was realizing how big the ecommerce market was and how to grow to be able to address the whole market using cash flow to invest. They also used a large pile of investment to get there along the way too. (Four negative cash flow years in their history according to this)): https://realmoney.thestreet.com/articles/08/12/2016/comparin...

I'm curios the impact VC subsiding goods happens on traditional players in industries -- they can't compete because they don't have the luxury of operating at a loss.

Consumers are wising up to this and just turning the tables on companies, exploiting them for the first reduced month or whatever the unit of service is and then jumping ship immediately.

Hey if you want to lose money on the transaction I'm happy to help you out.

> So, back to the 75 Cent Dollar Store. Are you in?

Anyone care to share great examples of these MoviePass-like businesses right now so we can enjoy the savings?

It’s just basic economics. Let’s say you are CEO of a company. Your CFO informs you that you are going to make $1B in profit this quarter. You will be a fool to leave the money on table and give it back to shareholders. That doesn’t buy you anything. You don’t gain any competitive advantage or significant stock price boost (because market keeps going up anyway). From the eyes of CEO, you are simply throwing away your profit money in to a garbedge bin. Instead, you would take out another billion dollar in credit at tiny interest rates based on your growth. Use all that up in expansions, building moat, acquisitions, long term projects and then show $1B in loss to get full tax credits. Market would love you even more because you are building up expectations for even bigger things to come as well as becoming safer bet by gaining bigger moat.

Taking losses and burning cash to aquire customers also makes sense when mountain of cheap investment money and credit lines are easily available. Remember, IPO is the major event for cashing out for most investors. Balance sheets before or after don’t matter too much as long as you can cross that proverbial finish line called IPO. Once that event happens, you take a dip in so-called “river of money” fueled by massive trillion dollar funds like Blackrock (which are in turn fueled by our 401Ks) and all your sins are washed away over night.

Current economy and business models wouldn’t make sense to people who are still living in past when money wasn’t cheap and companies were valued for dividends they returned. In a way, new way is actually all good. This is what allows taking on high risk bets. Without these models, we wouldn’t have massive cloud infrastructure built up so fast without worrying about chicken-and-egg problem. We wouldn’t have app based taxies available so fast virtually all of the world without worrying about establishment. We also wouldn’t have such massive investments in AI research without worrying about actual impact. All these stuff simply wouldn’t be possible in 60s and 70s because companies would be reluctant to do investments on such massive scale without being extremely confident and diligent. Most likely these stuff would have gotten killed right away. Hype is good. Cheap money is great.

I do not accept putting Amazon and places like Moviepass in the same comparison. I would not even accept Moviepass is comparable to Airbnb/Uber/etc.

I never understood the allure of Moviepass to the investor. So basically you want to buy another companies product and resell it to another party and expect the source company to cave to your demands of partnership? What service are you providing and to who? It is similar to all those attempts to deliver groceries but they mostly failed because they were buying from a source who could care less who bought their product at full price as long as they were paid.

Joel Spolsky addressed this, much more insightfully, in one of his early strategy letters:


There are real reasons why companies like MoviePass exist, why companies like Snap lose money, and why investors back them. It's just a land grab where you have to move fast to establish dominance.

Snap I can understand, but MoviePass not. People can easily switch to another subscription.

People can easily switch, maybe so, but generally they don't. That is one of the reasons subscription revenue is highly prized. Many businesses are sustained on long forgotten subscriptions landing on credit card bills every month.

This is so true. Less true for me since I have my credit card email me about every transaction, and every time I get one I must decide if I wish to keep that subscription.

Here's an idea for a business. Monitor customers credit card transactions for subscriptions, and do bulk negotiation with the service provider to knock down the price based upon how much service the customer is actually using. Take 10% of the savings.

Each time one of these subscription payment emails arrives, the user would be shown a few extra buttons: 1. cancel my subscription, 2. Offer service $X/month to keep me as a customer, 3. No change.

Just the "one click cancel" would be useful, but the "get me a better price" should be real popular.

What would the incentive be for the service provider to participate in this? Most of these customers aren't going to cancel anyway.

There are lots of business that are in the business of negotiating better prices. It's arbitrage - assuming that a service provider with list price of $25/mo would still be happy to get $20 as opposed to losing the customer.

People can easily switch to another social video app, too. Instagram Stories stunted Snap pretty heavily.

Buy HNMY @ $0.65 if you have the cajones. If there was ever a case of "be greedy when others are fearful" this is it. There's a good chance you'll lose it all but the potential is there if they can get it right. I like that they're adding more services like a premium for 3D/IMAX and front-row seats.

What exactly happens the entertainment industry when MoviePass fails? When Netflix stop deciding to lose colossal sums of money each year and their competitors get to scale back as a result? When a large number of people don't have enough disposable money to justify paying $10 a month on Patreon to a podcast they can get for free?

I do feel like the free movie ticket business in general is a bit of a mad bubble that's gonna burst in a big way. A huge number of people currently going to the cinema seem to be going on things like this instead of directly paying the huge ticket prices themselves. I get free tickets weekly from my health insurance to a cinema that shows stuff I'd never dream of paying to see, you'd have to imagine the chain and distributor are getting some reasonable kind of kickback from each time I go though.

It's not really all straight forward though. Whilst it's true that it's cheaper to get a MoviePass for a month than to buy 2 tickets in that month I can't remember the last time I paid full price for a movie ticket anyway. The cinema industry is basically a chaotic experiment in price discrimination. The most successful Cinema is the one that can get the 50 people willing to pay full price to pay it whilst also giving heavy discounts to the other 200 people to make sure the cinema is full.

I think of MoviePass as very similar to Groupon. Their business model eventually eats itself and the growth in unsustainable, but at the end of the day they are still ok.

Sure Groupon's stock went from $30 to $5, but the company still exists, and is a solid part of the marketplace.

> Over all, 76 percent of the companies that went public last year were unprofitable on a per-share basis

How is this the entire economy? I bet if you added the revenues (or market caps) of all those companies together, they would pale in comparison to Apple.

I misread the author as Kevin Rose, which would have been fitting. https://en.wikipedia.org/wiki/Kevin_Rose#Startups

thank goodness so many people are smarter than those darn goofy VCs. Businesses competing for customers! It's flagrant hubris. Those Silicon Valley guys who became billionaires doing this still have no idea what they are doing. I am pretty sure they have a big comeuppance due to them.

The number of internet only SV companies that regularly pull in 100+ million in actual profit each year and are thus stable billion dollar companies is surprisingly small. The companies that shoot past that into 50+ billion dollar territory are a large part of why SV has so many billionaires.

The number of people who became billionaires through venture capital– as opposed to becoming a VC after you were already independently wealthy through family or another business– is also quite small.

Making big money through unsustainable business models is not a sign of healthy capitalism. Remember CDOs?

Not every one of the half dozen "MoviePasses" in a given market category can come out on top to dominate (by definition, one -- at most two -- can) but every one is funded/priced like it will. This thing will come crashing down, it's just a matter of time.

I wonder if this is a bubble that's going to burst eventually. With so many ships sinking and so much optimism being for naught, investors might grow tired of the game and stop investing so aggressively, perhaps shifting things too far to the other side of the spectrum.

The article implodes when you actually start comparing the scale of what the article is basing itself on to anything else.

The US economy will hit $20 trillion in GDP this year. The article is built heavily upon a few dozen IPO listings for just one year.

With US business profitability at essentially record highs for all sizes of business, the article is going to comical lengths to present a false headline.

If we had 500 unprofitable tech companies pulling an IPO in 2017, that would mean something. 30? That's not even a rounding error in the US economy and it obviously says nothing about the ability of those companies to reach profitability.

One year also does not make a trend. The number of unprofitable tech listings in 2015 and 2016 was similar to: 2001, 2005, 2007, 2011, 2013.

Looking at the original analysis, it looks like 108 IPOs, where did you get 30?


In that PDF it breaks out the number of tech and biotech IPOs.

66% of the "other" category (ie everything else) reported being profitable. Something the article goes out of its way to not mention.

The 30 tech IPOs and the 32 biotech IPOs dramatically tilt the number of unprofitable listings as a percentage.

If you only have 108 IPOs and 32 are biotechs, which are almost always unprofitable, you start with an extreme tilt.

Page 15 shows it’s 30 tech IPOs last year. With 17% being profitable. So 5 or so are actually profitable.

Comparing MoviePass to Amazon is like comparing Michael Scott Paper company and Dunder Mifflin.

so i guess the first thing i think is: where does the money go? i think it mostly goes to employees and contractors of the company, who get paid a lot usually. it doesnt go to the consumers of the product, they just get a better deal on things- not the same as getting money. in movie pass' case, i guess it goes to the theaters? i guess its just interesting to try and pin down where the money ends up going in lots of the these vc backed money losing endeavors. seems like the kind of article pricenomics would do a really good job on- taking 10 or so big money losers that ultimately kicked the bucket, and seeing where the cash all ultimately went.

> So, back to the 75 Cent Dollar Store. Are you in?

Yes, of course. (And thinking: «only as a customer»).

DELETED as a misreading of the OP.

The author's thesis is that all unprofitable business are the same.

This is not the author's thesis. The author's thesis appears to be:

"An economy full of unprofitable companies has risks." and we should be concerned about the rise of so many unprofitable companies.

Non-paywalled: http://outline.com/ctYCuP

Perhaps this is the redistribution of wealth we’ve been waiting for.

Can I look forward to the AptPass Startup that will pay my rent in Park Slope so they can study my consumption patterns?

This is such a stupid and uninsightful analysis. You can tell just by the terms they use.

A company that isn't profitable isn't necessarily "losing money". Sure the amount of cash on hand can be declining, but if the business is building long-term assets such as a consumer brand, recurring transactions, differentiating IP, etc., that's hardly bad business management.

In order to really understand this you have to look company-by-company at what's really going on with the financials. If someone wants to give away for 75 cents something that costs a dollar, sure, that's a fast lane to bankruptcy. But there are tons of other cases, including aggressive new customer expansion, trying to create winner-take-all network effects, development of core IP, etc. that really will create long-term benefits for their owners.

Using "profit" as a metric is such bullshit. Ask Amazon. They focused on creating as much free cash flow as they could for two decades, and look where they are now. Why someone would insist a company earn an accounting profit, or even worse, pay cash dividends, in an environment with a sub-2% fed funds rate and near-zero returns on cash to investors is silly. I would much rather have a company with 10-15% return on equity "lose my money" than hand it back as relatively useless cash.

tl;dr read Ks and Qs, this stuff isn't amenable to sound bites.

This business model makes sense for some products, like Snapchat. Get as many users as possible and maybe eventually the advertising revenue will pay off.

Focusing on monetization early makes for successful businesses, but good products happen because they fix or solve a problem --not because they make money.

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