040: How Keith Walker Disrupted The Movie Theater Industry With an iPad And Raspberry Pi

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Welcome to the ‘My Wife Quit Her Job podcast. We will teach you how to create a business that suits your lifestyle so you can spend more time with your family, and focus on doing the things that you love. Here is your host, Steve Chou.

Steve: Welcome to the my wife quit her job podcast. Today I have Keith walker on the show. Now Keith is the cousin of one of my co-workers at my day job, and he’s got a great story. And I don’t know about you, but where I live, the movie theatres close by to where I live are pretty much a shell of their former selves. Now once upon a time, you had to get to a movie theatre almost two hours early on opening night for a very popular movie, but these days you can kind off just waltz right in at show time.

And what I’m trying to say here is the theatres where I live are pretty much not crowded anymore, and the movie theatre industry in my opinion in itself at least where I live is kind of slowly dying in my opinion. Now Keith actually noticed the exact same thing with the movie theatres in his area, so he started movieheroes.com, came up with a noble plan to save them all, and he invented a nice piece of technology to go along with it in the process that is now actually licensing to other movie theatres. And with that very cryptic intro, I want to welcome to the show Keith. How’s the going Keith?

Keith: It’s going great.

Steve: So give us a quick background story. I purposely didn’t reveal your technology or what you did in the intro, but tell us about your business, how you got started with movie heroes, how you turn this into both a technology and an ecommerce business on the side.

Keith: Cool, yeah absolutely. So the story– there’s definitely a couple of sides to the story, but basically what happened is I’m a software engineer. I was living in San Francisco, working at clout, and I got word from some of my friends that the theatre in my home town had closed down. And this is a theatre that I loved going to as a kid, had all these great memories, and so did my friends who had contacted me. And we realized that you know the town was in mourning that we were losing this wonderful place that everybody enjoyed, but it just wasn’t making it, like you said the attendance wasn’t up, and the owners of the theatre had just decided that it was –they need to close their doors.

They were facing the need to upgrade to digital projectors, and some other costs. And so one of my high school friends had the idea. He was living in the town of Oakhurst where I grew up at the time, had the idea like hey, you know all these other entertainment based products have moved to a subscription model, and why hasn’t the movies theatre industry moved to that model. And so he called up myself and another friend, and he was like hey what do you guys think about this. We thought it was a great idea and we sort of launched into seeing if we could generate some interest in the town to pay a flat fee and watch among other movies.

Steve: And so with that I imagine it’s a lot more complicated than you just described, right. So let’s go into a little more of a broader sense. How does a movie theatre work exactly, how does the economics work?

Keith: Yeah that’s a really good question and you know I learned– I dint know much at all about how this space worked until starting into this, and it’s pretty interesting. So if you look at– well let’s see, so the relationship between a movie theatre and a movie studio is somehow interesting. When you walk into a theatre and you buy let’s say a 10 dollar ticket, the bulk of that money goes straight to the studio that made the movie, and the theatre keeps a percent. So on a– for a really popular movie on opening weekend it might be 80%, so.

Steve: Wow, okay.

Keith: Eight dollars go straight to Sony pictures or to Warner brothers or 20 Century Fox, and then you keep a couple dollars. And you know if you look at the 10K financial reports of large theatre chains where they really separate out their revenue from their expenses, they will show that on the actual movie exhibiting side, they are operating at a loss because you can imagine what that two you know that 20% of that ticket– you really can’t afford to operate the exhibit side of the business, so most movie theatres make their money off of concessions sales.

Steve: Okay.

Keith: I would say movie theatres make– that’s where they make their money

Steve: Okay. Wow, okay so just two dollars out of the ticket. So that’s– yeah everything is concessions, and you got to make rent, and then you have got to pay the people who run the projectors, then you got to pay for the capital equipment, right?

Keith: Absolutely, yeah.

Steve: Okay, so in going to a subscription based model then, what are the some of the things that you need to take care of in order just kind of satisfy the movie studios themselves.

Keith: Yeah, so you know one thing, we thought about this you know we are like, we talked to the party owners and you know one of the issues that they saw was the business isn’t very consistent. And another really interesting thing about the movie industry you know something that really surprised me to see is you know we looked at the finances from that theatre and we– I just swatted [phonetic] their ticket revenue for the year, and it was so insanely seasonal in bulk it was just amazing. So during the summer they were doing very well you know making a pretty good amount of money, and then September was about a quarter of what July was. So we are not taking about like a 10% variability or even like 50%. We are talking a factor of four…

Steve: Wow, okay.

Keith: Between months, and so we found that this theatre particular always operated at a loss for a number of months in through the year, and they made a decent profit during December, and so two times in a year during like the holidays and during the summer. And since then you know now that we still get into this later, but we’ve spoken at a number of theatre owner conferences and talked to hundreds of theatre owners, and this is the norm. Theatres operate at a loss for– through September and then through the spring and they make their money and bank it during the summer.

And so what we really thought was like hey with a membership model, we’re going to provide a lot more consistency, and that’s kind off what we are going for. A consistent bedrock income from your membership dues that are collected monthly in auto renewing and all that, and then that’s going to help with the expenses and then that was kind of the direction we are going. We– what we thought we would do just to kind of not create too many waves is we would still pay the studios in the same way, so basically we would be buying the ticket for the studios.

Steve: Okay.

Keith: For the members to give to the studio, so we thought the studios would just be like, oh cool this, you know from the interface between the theatre and the studio from our perspective didn’t change much, and we thought they’d all be like oh cool that’s fine, and we assumed that attendance would go up and we talked to the studio representatives. So we talked to them and said, hey we’re on to this thing, we think that attendance will go up and everybody wins. So I’m sort of yeah there’s definitely two sagas to the story at least two if not three. So one is before we wanted to take over and like kind of save this theater, we wanted to– we had a certain number of members that we needed to have before we’re going to take over operating the theatre, so we had a goal.

Steve: Okay.

Keith: But then…

Steve: How did you come up with that goal?

Keith: We came up with the goal just from looking at what the finances or what the expenses were and what the…

Steve: Breaking even point kind of.

Keith: Just the breaking even point. And we are going to share a little pass at breaking even point, just so we are somewhere comfortable.

Steve: Okay.

Keith: And yeah just projecting what we thought the attendance was going to be, so there’s a lot of questions, but yeah we came for members 3000.

Steve: Okay.

Keith: You know 3000 members, populous from the town is– the area is roughly 15,000 people so…

Steve: Okay, so that’s actually a significant percentage of the town, right.

Keith: Yeah.

Steve: Okay.

Keith: Totally is.

Steve: Okay.

Keith: So you know we’ll totally– I’m sure we’ll get into you know how you went about doing that, but the second piece of it was after we signed up all those people, we didn’t realize this was going to happen, but an article ran at LA times about what we did and we hadn’t opened the doors yet, and we got a call from the senior vice president of distribution from Sony pictures and she had read about what we were doing and was like hey you know this is different than what we are used to. And anyhow they you know they were like we do ticket stuff. So basically what we found out is that the studios in general were not super happy about what we are doing, and at first they were not– they wouldn’t give us their product.

Steve: Okay. Why would they care as long as you are paying for the tickets of the people that are coming in?

Keith: They cared for a couple of reasons. One is I think that it’s just– it was very different.

Steve: Okay.

Keith: Just you know change is a little bit scary and just you know they’ve been doing the ticket mall for 100 years, and that’s what everybody has done. More specifically there also has been a long history of independent theatres misreporting the attendance since the biggest expense to a theatre is– the biggest expense to the theatre is that paying the studios you know if they’re struggling you know they kind of default or together would misreport a number. So that’s happened a lot in the past…

Steve: Okay.

Keith: There’s a history of that, and so from their perspective the incentives were different now because now you are not collecting money once someone walks in the door. So would lessen even now less incentivized to accurately track or report that information

Steve: Okay, so they were worried about fraud essentially?

Keith: That’s correct yeah.

Steve: Okay, all right and just to back up a little bit regarding the way that a movie theater actually gets the movies, do they have to pay an upfront cost and then the ticket prices, or is it just straight ticket price.

Keith: Yeah that’s a great question, so it varies a little bit between movies and between studios, it’s actually pretty complicated. You– for each movie you actually negotiate a percentage with the studios and we actually hire someone to do that for us– most of the others do. But by and large the deals are a percentage of ticket sales only, there’s not typically an upfront fee. There may be an upfront guarantee, but if you bring in like a block buster movie and only five people watch it, and let’s say your terms work out so you pay five dollars per person that views it, you’re only going to pay them 25 dollars, said and done.

Steve: Okay, all right. So there’s a strong incentive for them to get an accurate head count for people who actually buy tickets then?

Keith: Precisely, yes.

Steve: Okay, and then the other question that I had was what sort of – so I noticed that theatres always are playing some of the movies that aren’t as popular. So as a theatre can you always get the blockbusters or do you kind of have to pay the price and why would you– what’s the incentive for you to show a bad movie at your theatre?

Keith: Okay, yeah that’s a great question. Yeah you know when– before I got into this business I didn’t really realize how it works, but you know the studios do have, they have– they are the sole source of their product, and their products are– the consumers know exactly what they want and they’re going to want a product. And it’s extremely important that we can show every major block buster movie and the studios know this and they are not afraid to use that information to either actually pull products or to just require us to do certain things in order to get a blockbuster movie. So if The Hobbit– the next film of The Hobbit’s coming out and there’s– by the same studio there’s a less popular movie between now and then, they may say hey you know if you want to show The Hobbit on the opening night, we are going to need you to show this film for three weeks.

Steve: Okay.

Keith: Yeah and another thing that will happen is we often can’t necessarily– we have to for every single movie we open pretty much if it’s a blockbuster movie, we will require to keep it for a number of weeks. And even if it’s not doing as well and a brand new movie has come out by a different studio, we may be required to keep that movie for a third week or the like so.

Steve: I see, even though you know this other movie is going to make you a lot more money.

Keith: That’s correct yeah.

Steve: But you can, can’t you just move it to kind of like this little this teeny tiny theatre with like 20 seats in it?

Keith: Absolutely, yes you can do that. And so we’re– you know so we own and operate one location. We have five screens, so we’re pretty limited on the amount that we can do that, but one of our screens is definitely a lot smaller and that’s kind of– that’s where the movies go. It’s the last place that they end up showing yeah.

Steve: Okay, so okay let’s go back to what you were talking about before then. So how did you convince Sony that your business model was good, and that you weren’t going to commit fraud?

Keith: Oh yeah. So Sony was actually awesome. Sony worked with us, they weren’t– they didn’t just say hey we won’t work with you or hey this is different, we are not used to this so we don’t– we won’t just move forward with this. They were able to articulate the reasons why, and to work with us and to have ongoing conversation with us about what we were trying to do, which was amazing

Steve: Okay.

Keith: And we’re really appreciative of that. And so we added– we started adding a number of different auto mechanisms and as we did, more and more studios came on board. So well Sony was kind of the first one to say hey I don’t know about this, this is different. They were actually one of the latter studios to come on board so– but while they were kind of helping us and we were talking with the other studios, we actually had three studios come on board. So we actually opened our doors with just three studios. We have 23 now, there are seven major studios, but we opened with only a limited amount of product because we could only show from those three studios.

But the specific mechanisms are– well the biggest one that something different that hasn’t really been done before is we have infrared camera system in auditoriums that take a picture 20 minutes into the movie, and they take an infrared picture and it’s archived and associated with that exact showing and we keep it. It’s archived for 10 years and we make it accessible to the studio whose picture was playing at the time.

Steve: Okay, so that implies that at any point in time they can just do a quick audit of what’s going on in your theatre.

Keith: Absolutely yes, they can– so we set it up so they could actually see a live video feed while their picture is playing, and the industry is amazing. I mean I did not understand all this, but they– the studios all have auditors that come out, and they just travel around, they get some are local, some travel around and they go into a movie and some are anonymous, some aren’t, but they’ll just do a count. And it’s a way to really make sure and to keep the– all the theatres accountable and make sure that we are reporting properly, so we don’t know when that’s going to happen. So they do that. And so what we’re essentially doing is we’re allowing them to do that for every single show if they choose to, and they can go back in time if at some point in time you know something is suspicious, they can go back and say, okay over all time you know this…

Steve: So is this something they ask for, or did you just kind of come up with this because I would imagine most theatre owners are not tech savvy, they wouldn’t be able to come up with an infrared system, right?

Keith: Yeah, so you know it was– it definitely came about talking with Sony and we had– I don’t remember if it actually came up. If that was actually– that specific thing was brought up by Sony, but were contacted by someone who read the article in the LA times, and they said, hey I have worked in this industry for a very long time and I know how this works, and I know that this is going to be a sticking point for them. And it was actually like a gentle man who just sort of sent us an email and said hey you guys should really consider doing a camera audit system because it’s something that I know having been in the industry that the people– the studios had wanted forever, but nobody had really– no theatre wanted to do it, and so it had never been implemented. So it sort of came from an outside source, but we had internally we had the know how to kind of build out that system and so we did and that’s you know that was definitely one of the– that’s the biggest I think single block in getting the studios on board yeah.

Steve: Okay, and then so I want to get into all that in a little bit, but I just want to talk a little bit about how you got those first 3000 ticket sales. So what did it take? So this theater is out of business, you decide that you want to do kind of like a Netflix sort of model for your theatre, how do you actually convince one fifth of the population that they need to actually sign up for one of these subscriptions? How did you do that?

Keith: Okay, that’s a really good question and I do have to make a huge shout out to Matt Scorns who is my cofounder and this is really– he is the marketing genius behind all of this. So you know I definitely worked a lot on the technology side and we worked through a ton of really interesting things that we will talk about and…

Steve: Actually before you even go– talk about how you did it, can you talk about what the process is like for someone who is actually signing on first, and then let’s get into how you actually sold the tickets.

Keith: Yeah, okay so the process is, there’s a website movieheroes.com and they just go on to that website and fill out a little bit information and they sign up for the membership, basically provide their credit card information. We do require that you sign up with a credit card and it’s automatically renewing monthly, it’s 19.95 a month for an individual. For– to add another adult so do like a partner plan, it’s $15 to add someone else to the plan, and then children, 12 and under are $10. So you sign up online and then at that point we had made the promise that we weren’t going to charge anyone unless we open the doors and unless we hit the goal, so it’s a kind of zero risk thing. Now that we’re operating, someone signs up online, they can sign up in person or online, they come in and they get a membership card and that sort of thing so.

Steve: Okay, and so once they get to hear they just show the card and they can just go right in?

Keith: Yap, they swipe it over RFID sensor and they put a ticket and move on in and yeah.

Steve: So how do you, how did you come up with those prices I’m just curious. So 20 bucks the average ticket price these days is over 10 bucks right, so you just estimate that people would watch less than two times per month or this was…

Keith: Yeah, so our process was really around– it was an optimization problem where we were like really trying to look at– yeah I have an engineering background, but I’ve also done quite a bit of– I worked kind of in a finance position when I was at Lockingbird [phonetic] for a little while. I did a rotation there, so kind off in the spreadsheets too, so I built a little financial model that could take into account what our expected total costs were. So the overhead cost plus all the marginal costs at various levels of attendance.

So what we did is we had that model, but what we kind– we kind of independently did a kind of a little price elasticity estimation, so what we did is we said the three of us can work on the startup idea at the time all went off on our own and asked people, hey if it was $10 would you sign up for a month, if it was 30 dollars, if it was 40. So we built a little percentage of convergence, so we started with you know, if it was free we all want say– if it was free all the way up to I think we did $50, and then we sort of averaged all that.

Steve: How did you get the data, sorry did you send out surveys or…?

Keith: No we just– it was super simple, it’s just like our personal estimation plus like we went out and asked like 10 people or you know just like asked our family and friends who live in the town like hey what would you pay, what would you pay? How much would you pay? And then just flogged that in and really it’s like you know obviously the zero dollar won, we operate in a loss, but at you know some point less percentage of people signed up that they would pay more, so it was an optimization arrived you know all three of us separately and together we arrived at $20 was our estimation of the likely most profitable figure.

Steve: Okay and then you mentioned earlier and I’m sure this is– it varies across all movies, but you said in a blockbuster you know 80% of the ticket sales goes to the theatre, I mean not the theatre but to the movie studio.

Keith: Yeah.

Steve: And so given that a ticket price is 10, that’s like eight bucks right?

Keith: Yeah.

Steve: So 20 bucks, that’s something like two and a half tickets then?

Keith: Right.

Steve: Per person?

Keith: Yeah, so I used that number, you know that number actually it’s– it goes up to– I haven’t actually seen a movie that did this, but I hear movies that are 90% have been 90% in the past.

Steve: Okay.

Keith: Our average is a bit lower though because what happens that’s the first week and the second week is you know it might be– let’s say that a blockbuster opens at we’ll just say 70%, the next week is probably going to be 60% and then at 50% so…

Steve: I see.

Keith: As you know you can set up a contract for a movie like that or flat. We intend to do more flat, percentages one doesn’t vary week to week because we try to keep a movie for a short amount of time, so we try to keep them for two weeks, but anyhow it works out to be often closer to 60%.

Steve: Okay.

Keith: If you pick a movie a few weeks out like, three weeks out you can often get it for 35% so…

Steve: Got it, okay.

Keith: Yeah.

Steve: Okay, and so now you had this ecommerce side up where people could sign up, get their cards, how do you get the word out about that side?

Keith: Okay so there was– we had access to the theatre itself which is nice, and so what we did is we put on the mackee [phonetic] outside of the theatre and we said we really kind of taking cues from Apple and the way that they’ve got a lot of free marketing from being a little bit cryptic and letting the rumors– the rumor mill run and people just kind of, curiosity get peaked. So we posted on the side of the building– there is a way to save the theatre, you will find out soon and posted that all over Facebook, started a Facebook page called ‘save the met’ the Met is the name the name of the theatre.

Steve: Okay.

Keith: And this was Matt’s doing, Matt Scorns and so we really tried to not let anybody know what was going on, but really peak peoples curiosity. And so let that run for a while even while we were in the background kind of trying to build up all of this and…

Steve: I’m sorry, so this movie theatre is part of a plaza or a mall.

Keith: Yes it is part of a shopping centre.

Steve: Okay, so there foot traffic and then they’ll see these signs on how to save the theatre.

Keith: Yes and its right on [Inaudible] [00:25:39] little mountain town right at the entrance to Semi National Park. It’s on the corner of the two highways that come to the town, so there’s a lot of foot traffic and there’s a lot of you know it’s on the side of a building so people that drive buy can see it.

Steve: Okay, and in terms of your Facebook page, how did you actually get people to like it and become fans?

Keith: So that was really just– there was an existing Facebook page from the theatre, so..

Steve: Okay.

Keith: We put something there to direct people over to this other page to– it’s like, I think it was actually a group, a group to save the theatre.

Steve: Okay.

Keith: And also Matt’s very plugged in the community and really just spread it on through all channels. I wasn’t living in Oakers [phonetic] at the time. We all– it really spread, it’s kind of viral, people– the whole town was like in mourning. It was the cover of the newspaper that the theatre closed. You know it’s definitely one of the really big things to do up here. It’s a small town. You know the population that we marketed to is actually seven towns, they’re all around in the area. They are all pretty spread out, but…

Steve: Okay.

Keith: You know right here. Right in Oakers you know everyone was– it was the talk of the town.

Steve: Okay got it okay, so there was an active interest in these people that they were actually losing something that was very dear to them, like a major entertainment aspect of their town essentially.

Keith: Right.

Steve: Okay.

Keith: Because the closest theater is in Fresno which is like a 50 minute drive away and you know a lot of the people that live up here, they live up here because they like the mountains and they don’t really necessarily enjoy going to Fresno. So to them it was like oh! Man we’re kind of getting sort of cut off from the rest of the world in some ways by not having that content here.

Steve: Okay and so you did Facebook and then you had signs out in front of the theatre, what else did you do?

Keith: So we made a video, we recorded a video that sort of explained what we wanted to do, and pretty concisely and talked about who we were you know that we grew up in the town and that what our backgrounds were that sort of kind of as a way to educate that we were capable to pull out what we were trying to do.

Steve: Okay.

Keith: And a way to just say we were trustworthy because we are here, we are part of the community. My parents own a business in town, Matt’s dad is a teacher of a high school. We both grew up in the community and all that, so we had a nice concise video that…

Steve: Okay.

Keith: Would resonate well with people. Then the other two big things, we did a direct mail campaign.

Steve: Interesting, okay so how does that work out?

Keith: So we just did– we made a flier that we could do– we got a bulk mail permit and we just did drop mail the flier to every single household in actually all those seven towns. We did, it was 22000 homes I think that we sent that flier to.

Steve: How does that work? How much does it cost?

Keith: It was, I’m trying to remember. So it was the bulk mail and when I say a bulk mail there was no labeling. So it’s much less expensive than a stamp, I think it might be 11 cents or something for the mailing part.

Steve: Okay.

Keith: And then we had local– we had a printer here in town whose one of the friend that helped– we started this with his parents own a printing company, and so they helped us out with that. So I think all tolled was maybe $6000.

Steve: Okay, not too much actually.

Keith: Yeah.

Steve: Okay.

Keith: And what was fun is I sold the car recently, and I had cash from selling that car and so I took you know sold the car started a company kind of thing. So that– two places; one went to I kind of got the guy and had a couple of cars lining up, went to two things; one is I took some of my cash and actually start the corporation like $800 of fees to do that, and then the other rest of the cash went to print and mail ads, so something good and symbolically but it was kind of.

Steve: Did you guys do any sort of paid advertising at all like Facebook or Google or anything like that?

Keith: So we did– we definitely did promote it, so when we posted things about what was going on, we promoted those posts on Facebook.

Steve: On Facebook, okay.

Keith: Correct yeah, we got a lot of traction on Facebook for sure.

Steve: Okay, and that was probably a large drive up to the sign up to your tickets. Did you actually have the break down or…?

Keith: Of like how many people came through Facebook?

Steve: Through Facebook, versus actually buying it at the theatre, versus the direct mail campaign. How do you measure direct mail campaign actually?

Keith: Yeah you know actually I– we– there’s probably, we thought of kind of ways of doing that where you have a different URL and that versus other things. And at this early phase we didn’t kind of do the hard work to be very good scientific about measuring things, we kind of just went all out on all of us.

Steve: Okay sure.

Keith: I don’t really– I could speculate what I think came from where…

Steve: yeah, that’s fine.

Keith: But I don’t have the hard numbers on that, it was definitely as we moved along and trying to get our 3000 member we definitely started measuring things a lot more.

Steve: I’m just trying to get an idea of the effectiveness of each style of marketing, so any ball park that you have or gut feel that you have.

Keith: Okay.

Steve: Would be helpful I think.

Keith: Okay, well I will say this, so we did we did a second direct mail campaign while we’re pretty far along. So we gave ourselves 30 days to– we’d negotiate with all the parties involved and we wanted– the current owners of the theatre we basically told them “hey can you hold off on closing theater and selling off things,” and if this works we’ll take over your liabilities and we’ll operate the theatre. So we gave ourselves just 30 days, and during that time you know the day– I’m really going to have trouble picking up a good number because we had…

Steve: It’s okay.

Keith: We had the front page of the news paper plus we released some Facebook plus the direct mail, but what I will say is we did another direct mail campaign probably 20 days in because we were– we still had 1000 to go you know and we only had 10 more days and things were slowing. And we saw almost zero, it was like 50 more sign ups, then it was like a very small bump from hitting all the households a second time. So whether we were saturated or what, we really felt like we didn’t get a ton out of that, but you know having the multiple touch points I think showed that we were serious, and kind of ensured that the tech savvy versus and the non tech savvy gap.

Steve: Okay, and so did you guys do any Google stuff or Bing or anything like that, just mainly Facebook and direct mail?

Keith: Yeah, Facebook, direct mail, cover of the newspaper in town definitely helped. We did a lot of– and again this is something that really only works when you have a single geographical location be applicable. We did– the youth in the town was greatly mobilized and that organized all this, so we had a lot of junior high and high school kids dress up like super heroes, and like stand on the corners of the streets with signs that say like save the theatre and you know that got a lot of coverage too because of that, and we also set up tables at the grocery stores and we had laptops there and iPads and people could sign up as they walked in.

Steve: Okay.

Keith: Yeah.

Steve: That’s cool.

Keith: There was definitely a ground campaign.

Steve: Okay.

Keith: That went on too.

Steve: Okay, so let’s switch gears a little bit because I want to talk about what I think is really cool about your business which is everything that you put together to enable this sort of Netflix style of movie theater viewing. You’ve taken that and you’ve actually created a technology that you can actually license out to other theaters, so how did you go about doing that, and what did you get actually? How does it work?

Keith: Okay, yeah well, so from the start you know I mentioned before this kind of like two perspectives to the story, and one is definitely we really wanted to save our hometown theater and it was something that was a huge motivation. We also from the start saw as an opportunity to test out a new business model and we didn’t really know how successful this new business model would be or not. And it was– it’s been very successful in ways we didn’t anticipate and just to expand on that a little bit, our members watch movies at a rate six times of national average.

Steve: Wow.

Keith: And the attendance to this theatre is three times what it used to be.

Steve: Okay and then I would imagine that the concessions have gone up three Xs as a result of this too, right? Which is the bread and butter of the theatre.

Keith: Exactly and…

Steve: Okay.

Keith: Sort of this is something– it’s so interesting because the– it seems like a fairly trivial change, changing the nature the way I which a consumer pays for a product and so a change from pay per view to unlimited flap payment seems very trivial, but there’s so many things that follow from it. So one is that six times attendance, but also there’s people buy a lot more concessions. So not only are we selling three times as much, we are selling more than three times as much because people buy– each individual person that comes in buys more than they used to, and we believe that that’s because people are used to spending a decent amount of money when they come to the theater, and they didn’t pay for the ticket at that time you know it’s a suncky kind as it cost in the past, and so they feel like they didn’t buy anything so they might as well buy something. So the people that used to buy popcorn now buy popcorn and a soda, and the people that used to not buy anything now buy popcorn.

Steve: I can see that because you’ve already– you’re not paying any money at some cash, you probably forgot about it.

Keith: Yeah.

Steve: And it’s like you’re going for free, you may as well buy something.

Keith: Yeah.

Steve: Okay, cool.

Keith: And so you know the end and total version of the six times the national average is people tell us that they used to have this conversation in their head and say, okay what are the movies I’m going to actually experience properly in the movie theatre and right when it comes out, and what are those three movies for the summer? Or two movies for the summer, or four movies for the year, and the rest they just have this assumption that “oh I’m just going to wait and I’m just going to watch it on my small screen at home,” and they tell us that they now no longer ask themselves that question. And now every single movie that comes out if they think it might be interesting, they think they might like it, they come and try it, and if they don’t like it they can walk out and they don’t feel guilty because they didn’t spend any money.

Steve: I would think the same way. I always wait for stuff to go out on video actually, but if I had this membership I would probably go to the movies a lot more. Yeah totally, I can totally relate to that.

Keith: Yeah, so it’s been pretty profound, the benefits have definitely been profound.

Steve: Okay, so let’s talk about the stuff that you’re licensing to other theatres. How do you reach out to other theatres, and how do you advertise that part of your business?

Keith: Yeah, so I said that because what we realize is it’s such a benefit. So it worked out so well that we realized that this is definitely something that could work well at other locations.

Steve: Okay.

Keith: And so we were– we got noticed a bit because there’s this service called the rain track which is this site that theatres report their ticket revenues– their ticket revenue to, and other theatres have access to this. So this is somewhat public knowledge how well a theatre is doing, and our theatre tripling its attendance is a really big deal for theatres in the California, in this region, we’re the highest growth.

Steve: Wow, okay in all of California?

Keith: Yeah in the region, it’s called– we’re not actually considering the San Francisco region all of the way over so if somebody, so yeah…

Steve: Okay.

Keith: But it’s a vast region.

Steve: Wow, awesome.

Keith: Yeah, and so we got noticed by you know studios were very happy about that, but we were asked to speak at a conference, National Association of Theatre Owners Conference about what we were doing because we were doing something different and it has proven to be successful. And that was a regional conference and then later we were– we spoke at a much larger conference, which is the same association’s national, actually it’s an international conference. So we’ve been speaking about what we’re doing, and that’s the main way that we’ve gotten in contact with other theatres. And so what we have is we have packaged basically a complete system from what we’ve learned that we’ll convert a theater from a ticket theatre to a membership model theatre.

Steve: Okay.

Keith: And that system includes the technology we have, so there’s a new point of sale system supports all of RFID cards and has the system we talked about before.

Steve: Is that a piece of hardware then?

Keith: Yeah, so there’s….

Steve: Okay.

Keith: There’s– it’s actually come to two components to each point of sales station, there’s an iPad the employee operates, and then there’s– we do still take cash so everybody’s credit card is linked to their little nifty movie heroes RFID card, so they can just you know just buy the concessions, and if they have friends with them they can buy tickets for their friends, that’s another privilege of being a member. But that’s…

Steve: Very clever.

Keith: Yeah.

Steve: Okay.

Keith: It’s kind of like you’re in a cruise or something where you sort of you know.

Steve: Yes.

Keith: That payment method just go up and get more popcorn, walk up there, you don’t have to bring out– you actually don’t have to get your wallet– get the card out of your wallet because it’s RFID, so we can actually read it by proximity if you’re within.

Steve: That’s dangerous.

Keith: Yeah, it is.

Steve: Nice, clever okay.

Keith: Yeah so that is how that we also– so it’s a complete like just point of sale station or cash draw and all that, so we have actually developed that sort of from the ground up, we have a piece of hardware that, that hardware plugs in to an iPad, comes together and makes a specific station.

Steve: So basically it’s just an iPad with a sensor and you probably coded something, an app to handle all this stuff, is that accurate?

Keith: That’s correct.

Steve: Okay and then did they get the website component also?

Keith: Yeah, so they get sort of a theatre management tool that has a lot of back office stuff for doing reporting for your– it reports to all these, the studios and to the screen track service I talked about. So just some of the things that theatre need to maintain, to manage a theatre and also the financial side, so reports to go to your book keeping software, that sort of thing.

Steve: Was that written from the ground up, or is it based on a platform?

Keith: That was actually for better or worse all this has been written from the ground up.

Steve: Okay.

Keith: And the reasons behind that are really because we wanted something very specific and sort of it’s kind of funny because looking back it’s like because of the software background– because of my software background it was something that we could do. And so that’s the approach that we did, and we sort of looked briefly into other systems and they didn’t have the membership component, they didn’t have the RFID component and some of the things we had, so instead of trying to modify– getting and modifying one of those platforms, we sort of…

Steve: Okay.

Keith: Started from the ground up, but so we also get that camera auto system that I talked about and they get some really awesome marketing material that they run on screen that helps them through the transition from a ticket model to a membership model because it is a rather large conceptual shift.

Steve: Yes.

Keith: That you need to get people warmed up to a little bit.

Steve: So do you actually sell the hardware or do you tell them to buy the hardware component and you supply the software that runs.

Keith: So we actually, we provide the hardware.

Steve: Okay you provide the hardware, okay.

Keith: And so it’s a revenue share because what we’re doing would typically be classified as a franchise, so learned a lot about franchise law and all that, but we actually didn’t want to be classified as a franchise. So you know for various reasons, but– so what we are is– it’s kind of a franchise, so we do programming. So the theatres that are operating with our systems, it’s they maintain their name, but they’re powered by movie heroes is sort of the co-branding.

Steve: Nice, okay.

Keith: And it’s like a– basically it’s kind of like a credit card processing feed. So we actually– the membership dues and actually all the concession sales– that money flows kind of through us, so we orchestrate that and we take a fee off the top of their gross revenue for the theatre and we remit to them the remainder.

Steve: Wow.

Keith: So there’s no like accounts receivable and they just get you know after we take our fee off the top which is in the same way that a lot of credit card processing companies work.

Steve: Okay.

Keith: That’s how we operate, and we charge nothing upfront and we don’t charge them for the hardware. So they are basically licensing the entire system from us including the hardware.

Steve: I see, okay wait, so all the money flows through you and then you pay them?

Keith: Yeah.

Steve: That’s how– wow that’s incredible, okay.

Keith: The reason why– that’s actually the reason why I’m missing some technicalities, but so in order to be classified as a franchise you need just like a three prompt test, and one is that there is a trade mark involved that either is required to be used or can be used if you offer a system and that system is super easy to find and lastly if you charge a fee. If you do all three of those things and you are a franchise and you have to go through a pretty lengthy registration process with the federal government and with each state to be registered as a franchise.

Steve: Okay.

Keith: So we actually don’t charge a fee because it’s not technically a fee because there’s never the payment never flows from the theatre operator to us.

Steve: I see, okay.

Keith: The bureau collects money from the customers, and then remits a portion to the theatre operator.

Steve: Okay.

Keith: And so their money never flows in the direction towards us, it flows from customers to them.

Steve: Well that’s kind of dangerous. If I were to own a theatre and then all the money from all concessions– I imagine you don’t pay out right away either, right? Maybe at the end of the month or something?

Keith: We pay– it’s a rolling– we pay every day. It’s like a two day loaning window.

Steve: Okay, that’s not too bad.

Keith: So they’re getting it right away, yeah.

Steve: Okay, I was going to say because then you could actually invest that money on the float also.

Keith: Oh yeah, it’s actually so we use stripe as…

Steve: Okay.

Keith: Our processor and they allow us– we’re using them as a clearing house, so the money basically goes to stripe, it never hits our bank accounts either. The bulk of money because we actually orchestrate through stripe. The software says, oh go charge the member this much, oh take this portion of that money and give it to the theatre operator or take this portion and give it to media heroes. So it never lands on our books, it never lands on– the whole doesn’t land on their books, it’s actually kind of split payment from the customer.

Steve: Right, this is all very cool and what I really like about it is it’s all from like off the shelf component so to speak, right?

Keith: Yeah.

Steve: Straight to handle all the pre-payment processing, you have iPads and then sensors and that sort of thing to handle the RFID. Everything is much more doable today, like if this is like 10 years ago, this was a lot harder.

Keith: Oh man if it was 10 years ago this would be so much harder. The other amazing piece of technology that we’re using, and we’re using actually all over the place, I know I could rave about this forever, but we use Raspberry Pis.

Steve: Really, that’s incre– yes I am, that’s incredible. I’m sure my audience isn’t, but Raspberry Pi is– how much is it, like 25 bucks, 35 bucks?

Keith: 35, yeah.

Steve: 35 bucks and it’s essentially like a computer on this tiny board that has an arm on it, right? I think.

Keith: Yeah.

Steve: And it just– you can do a lot of stuff with it, program it, tell it to do whatever you want.

Keith: Right.

Steve: So what do you do with Raspberry Pis?

Keith: So, yeah I like to think of Raspberry Pi as being– it’s kind of like an iPhone with a similar process with an iPhone. It’s a complete computer for $35, and so it’s almost standalone entity. And so all of our register stations have a Raspberry Pi, and that’s the piece that all the sensors plug into. So there’s a credit card reader that plugs into it, there’s RFID reader that plugs into it, the cash drawer plugs into it, ticket printer, receipt printer, all these plug in to Raspberry Pi and that what services that little hardware that’s right there. And then the Raspberry Pi and iPad talk to each other.

Steve: That’s awesome.

Keith: And it’s $35, I mean it’s amazing. So the original version of the software that I wrote when we first opened was written on a PC, and so we had this big clunky PC sitting at each register station, and this was like expensive for on one, two it was hard to maintain because windows– we were running on windows and we were constantly having some issues with that and updating it and all that.

So it was like hey an iPad plus a Raspberry Pi is an extremely inexpensive solution and it is way more maintainable because it was Linux, I mean I can update all these Raspberry Pis, we have all these locations from my laptop sitting at a coffee shop you know in a second, it’s amazing. So absolutely love the Raspberry Pi, and it is such an important component and you know you mentioned that all these are kind off the shelve things and so true, and I was thinking about that before we got a call here, it’s about like there is– so many things are accessible to the individual person that didn’t use to be including like yeah stripe and all of our stuff runs on Amazon servers, and it’s like stuff that there was no upfront investment, it’s like all pay you go kind of stuff.

Steve: That is awesome, that yeah. I’ve always wanted to play with one of those Raspberry Pis, I don’t want to bore the listeners, but may be afterwards I…

Keith: I’ll say one of the places we are using them, we are also using them for the cameras. So the cameras are actually a Raspberry Pi, it’s sitting up there in the auditorium and we have– there’s a Raspberry Pi, [Inaudible] [00:47:11] camera allows you to pick up infrared light, there’s no infrared filter on any of them. So our cameras as well– our original version again wasn’t Raspberry Pi, but we have a second version of our audit system that runs on Raspberry Pi. So we run the theatre basically show up like you know the last theatre we did there’s– it’s a six range, so we show up with 12 Raspberry Pis.

Steve: That’s awesome.

Keith: We just start installing.

Steve: I imagine you built a case for them too; it’s just a bare board when it comes, right?

Keith: Yeah.

Steve: Okay.

Keith: So we had a couple off the shelve cases, but even that it’s like we found a case that you know for the ones that’s register station ones we don’t need the camera. So there’s a case for without camera, it’s five dollars I think, and then one with the camera there’s a different case that supports the pi and the camera in one enclosure, so pick those up. So it’s been amazing how we just piece together these components and it’s like hey we have something important.

Steve: That’s awesome and it’s really super cheap too, that’s amazing.

Keith: Yeah.

Steve: So how do you guys plan on expanding, is this going to go nationwide or are you just focusing on California at the present time?

Keith: This is actually we– Monday, just this week we launched a campaign to save a theatre that’s in Maryland.

Steve: That’s my hometown.

Keith: Oh no way, this is…

Steve: My homestead actually, yeah.

Keith: Frostburg, Maryland.

Steve: Okay yeah, I’m not from there.

Keith: That’d be cool.

Steve: Okay.

Keith: So we’re in the process right now, we just launched the campaign and there in the same exact situation that we were in– that Matt was in, so we have, we only operate the Max cinema, the other locations we have three other locations that are using our system. They– we don’t own and operate those, we have licensing our systems to them.

Steve: Okay.

Keith: But this one, it closed and the owners walked away. So if this campaign is successful we’re trying to get 2000 people to sign up in a town of 10,000, in a county of 70,000 trying to get 2000 people to sign up. If they do we’re going to take over, we’re going to actually own and operate. So the second location that we own and operate, so from expansion perspective there’s really a kind of too prompt approach here. One is by licensing the system; two is by owning and operating.

Steve: That’s incredible and then since you’re taking over distressed theatres, there’s really no upfront cost, right. You just kind of assume the liabilities and then run it.

Keith: That’s correct, yep.

Steve: Awesome, hey so how did you get into all this entrepreneurship, are you really into like business, do you read a lot of business books, did you have a favorite book or anything like that or…?

Keith: Oh man, let’s see. So I worked in aerospace for a long time, I loved the product, it was awesome. There was a couple of things that I sort of got frustrated with working in that industry, one is sort of the rigidity of it and the bureaucracy, and it’s like systems are just complicated such that they required that. And I just sort of realized that I really wanted to do something a little more free and where my individual contribution had a more significance on the outcome. And so I really started looking at hey I think I would be happier and enjoy doing entrepreneurial things more, and so I started sort of developing a skill set that I thought would help me out with that, and started learning web stuff because I was doing more scientific computing at the time.

And then I thought that it would be kind of good to go experience the startup world a little bit and I joined Clout, and that was an amazing experience, I had a great-great time there and learned a lot and was able to contribute a lot there, it was really fun. But yeah I definitely, I do read a number of books. I was thinking about business books, The Lean Startup is one that I think was quite influential in this space here because we really wanted– you know before we actually assumed any liabilities at all, we were able to just– you know I spent a few nights building up this little website where people could sign up, and it was super low risk initially.

Steve: Were you just gathering emails at this point, or there was money exchanging hands at that point?

Keith: At that point it was– we wanted to make sure that it was a real offering and not just a yeah. So it was more the real offering, no– we were getting credit cards, but we weren’t getting any– we weren’t charging anyone, because we were pretty…

Steve: Got it, so you were just collecting them on– customers on stripe essentially, right?

Keith: Precisely. We promised that if we reached our goal we would charge everyone, so in some ways this is like a variant of like an Indiegogo or you know a site like that works like hey if we reach this goal…

Steve: Yeah, like a kick starter.

Keith: It’s a kick starter, but with a brick and mortar component and with a– you’re signing up for a recurring monthly charge not a one time charge variant.

Steve: Got it. Okay, awesome Keith, I don’t want to take up too much of your time. We’ve been talking for like 50 minutes already. Where can people find you online if they have questions, and how can people get a hold of you if they own a theatre or they want to figure out or learn more about movie heroes and what you guys are all about.

Keith: Yeah, you can definitely go check us out at movieheroes.com and you can email me directly at kieth@movieheroes.com.

Steve: Well, awesome Keith. I for one learned a lot, I had no idea how movie theatres worked and the economics behind it all. So I sincerely thank you for coming on the show, and I think the listeners will find this very interesting.

Keith: Cool, well thank you.

Steve: All right, then thanks.

Keith: All right.

Steve: Here are my key take away points in this episode. The cost of building hardware and software these days is practically zero, and with just an iPad and a $35 board called a Raspberry Pi, Keith and his partner Matt have truly disrupted an entire industry. Now granted Keith and Matt are exceptionally intelligent people, but this just goes to show that starting a business today is really about initiative and drive, and there’s real no excuse not to try. It doesn’t cost a whole lot of money to get started, and you can begin immediately.

For more information about this episode go to mywifequitherjob.com/episode40 and once again I just want to thank 99designs for sponsoring this episode. I know a lot of you listening are waiting on the sidelines and trying to get the courage to start your own online business. And I also know a lot of you guys out there are already running your business and know that your website design could be better. Now designing a website or getting any sort of graphical design help is not intimidating anymore thanks to 99 designs, where you can get over 300,000 designers to compete for your design. All you’ve got to do is list your design on their site, and within 48 hours you will get dozens of design submissions to choose from and from there you can ask for slight tweaks and changes until you are a 100% satisfied with the results. And the best part is that the price is very reasonable and there’s a 100% satisfaction guarantee.

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Thanks for listening to the My Wife Quit Her Job podcast, where we are giving the courage people need to start their own online business. For more information visit Steve’s blog at www.mywifequitherjob.com.