GAIA - Gaiam Inc.

[thinkpad]

This is good because it means that around 25% of the global growth comes from channel !

[SnarkyPuppy]

You'll have a company with ~$60-$80mm in ebit earnings power (FY2020) before CAC related S&M.  5x current EV.  Committed and incentivized to cap CAC at 50% LTV.  Directionally trending positive metrics of CAC and LTV (inc churn).  Likely additional tailwinds in price increases (alluded to in recent CC for next year) and international (no CAC investment so far - all organic).  Subs growing 40% organically and directionally trending positive.

 

What do you mean by "subs growing 40% organically"?

 

Jirka Rysavy 18Q2 CC:

 

"Thank you, Justin and good afternoon everyone. So our second quarter results ended again ahead of our expectations. Subscribers grew 68% to 466,000 from 277,800 a year ago. This puts us ahead of the growth rate needed for us to reach our next target of one million subscribers by end of the next year.  While we invested during the quarter about $1 million less than we budgeted in our member marketing plan. This was partly helped by increasing number of members joining us by organic means. Remember, acquisition coming from organic channel was up again during the quarter and is now solidly over 40%"

 

I see.  I thought you meant "organic" growth alone would have produced 40% sub growth, rather than that 40% of new subs came from the "organic channel."

 

I take it as sub growth achieved through search (SEO).  It's certainly a cheaper (i.e. non-direct) form of advertising which is supported by lower than expected CAC costs.  Just another positive data point. 

[KJP]

If I've read the transcripts correctly, management has suggested that churn is not increasing.  Is that consistent with the numbers?

 

Q1 2017 started with 202,000 subs and ended with 247,300, for a net add of 45,300.  According to management, CAC costs were 121% of streaming revenue, which is 1.21*5.209 = $6.3 million.  During this year's call, management said Q1 2017 cost/add was in the "mid-90's".  So, if you assume cost per add was $95, that would imply 66,300 gross adds (6.3 million/95).  Subtracting 45,300 net adds from 66,300 gross adds gives an implied churn of 21,000, or ~10.4% of the original 202,000 sub base.  Annualize that and you get annual churn of about 42% (10.4*4). 

 

Q1 2018 started with 364,500 subs and ended with 421,000, for a net add of 56,500.  According to management, CAC costs were 109% of streaming revenue, which is 1.09*9.14=$9.96 million.  During the Q1 call, management said Q1 2018 cost/add was in the "mid-80's".  So, if you assume cost per add was $85, that would imply 117,207 gross adds (9.96 million/85).  Subtracting 56,500 net adds implies churn of 60,700, or ~16.65% of the original 364,500 sub base.  Annualize that and you get annual churn of about 67%, a very substantial increase from Q1 2017. 

 

I did the same exercise for Q2 2017 and 2018, assuming $95 cost/add in 2017 and $82 cost/add in 2018, and got 53% implied annual churn for 2017 and 56% implied annual churn for 2018.  Given the estimated numbers I'm using, I don't think there's any real difference between those numbers, so perhaps Q1 was just a blip. 

 

In any event, even the Q2 estimate of ~55% annual churn appears to be higher than what management was suggesting and what others have modeled.  Does anyone else have a different method for estimating churn from the disclosed financial information?  During the quarterly calls, management has been emphasizing that cost per add is falling, but churn is a critical component to the economics and the information about that is much more hazy.

[thinkpad]

« It is important to reiterate that we include all marketing expenses in these numbers including the cost of translating our existing library and blabla »

I mean the way you calculate the churn seems theorically correct but they include so many things in their « CAC » that i think it is not accurate. I have no better idea than yours to estimate churn rate, sorry :)

[KJP]

« It is important to reiterate that we include all marketing expenses in these numbers including the cost of translating our existing library and blabla »

I mean the way you calculate the churn seems theorically correct but they include so many things in their « CAC » that i think it is not accurate. I have no better idea than yours to estimate churn rate, sorry :)

 

They do claim to put alot of costs into CAC, but that shouldn't make any difference to the calculation I ran, so long as their cost per add number uses the same "all in" CAC number as the denominator.  And it would be strange for the company to emphasize the point you noted and then provide a cost per add number that did not include some of those costs.

[KJP]

If I've read the transcripts correctly, management has suggested that churn is not increasing.  Is that consistent with the numbers?

 

Q1 2017 started with 202,000 subs and ended with 247,300, for a net add of 45,300.  According to management, CAC costs were 121% of streaming revenue, which is 1.21*5.209 = $6.3 million.  During this year's call, management said Q1 2017 cost/add was in the "mid-90's".  So, if you assume cost per add was $95, that would imply 66,300 gross adds (6.3 million/95).  Subtracting 45,300 net adds from 66,300 gross adds gives an implied churn of 21,000, or ~10.4% of the original 202,000 sub base.  Annualize that and you get annual churn of about 42% (10.4*4). 

 

Q1 2018 started with 364,500 subs and ended with 421,000, for a net add of 56,500.  According to management, CAC costs were 109% of streaming revenue, which is 1.09*9.14=$9.96 million.  During the Q1 call, management said Q1 2018 cost/add was in the "mid-80's".  So, if you assume cost per add was $85, that would imply 117,207 gross adds (9.96 million/85).  Subtracting 56,500 net adds implies churn of 60,700, or ~16.65% of the original 364,500 sub base.  Annualize that and you get annual churn of about 67%, a very substantial increase from Q1 2017. 

 

I did the same exercise for Q2 2017 and 2018, assuming $95 cost/add in 2017 and $82 cost/add in 2018, and got 53% implied annual churn for 2017 and 56% implied annual churn for 2018.  Given the estimated numbers I'm using, I don't think there's any real difference between those numbers, so perhaps Q1 was just a blip. 

 

In any event, even the Q2 estimate of ~55% annual churn appears to be higher than what management was suggesting and what others have modeled.  Does anyone else have a different method for estimating churn from the disclosed financial information?  During the quarterly calls, management has been emphasizing that cost per add is falling, but churn is a critical component to the economics and the information about that is much more hazy.

 

Here's another take on cost per gross add and implied churn:  https://walnutavevalue.blogspot.com/2018/08/gaia.html

 

I believe the blogger has a data entry error in the Q4 2017 ending/Q1 2018 starting sub number, so I would correct for that when reviewing his/her analysis.  If you do that, the analysis confirms that monthly churn appears to be ~5%, or 60% annualized, and they must be spending right up to the edge of 50% LTV, if not beyond it.

[LounginMKL]

I understand that we like to use churn as a metric to represent the stickiness of the subscription. It might work well for SaaS model but might be so simple for OTT, since it's so easy to come in and out of the service. Seems like 50-60% churn is right up there with the rest of OTT providers, according to the report below.

 

As posts mentioned before, it's very difficult to pin down the economics without making a bunch of assumptions, including whether the churn is coming from "boomerang" loyal customers or permanent exiting customers. Maybe I'm just being lazy...

 

"it isn't uncommon for a churning customer to return based on the availability of desired content or a change in economic situation. In that sense, the churn metric does not paint an entirely accurate picture of the business' success." - SlingTV CEO

 

"Management looks at [net additions] which we do check every week, every day." - Reed Hasting

 

https://www.cartesian.com/wp-content/uploads/2016/07/Why-OTT-Providers-Aren%E2%80%99t-Concerned-with-Churn-%E2%80%93-and-Why-They-Should-Be_Cartesian_July2016.pdf

[thinkpad]

Munadala takes more than 5%

https://s3.amazonaws.com/content.stockpr.com/sec/0000947871-18-000793/0000947871-18-000793.pdf

[KJP]

I sold out awhile back (and thus missed most of the big run up), so I haven't been following this as closely as I once did.  Mainly I've been checking in from time to time on CAC and churn and have been somewhat skeptical of the company's economics, as I've suggested in a few prior posts. 

 

For those who have been following this closely, has there been significant news that's generated the recent substantial decline in the share price?  I'm aware of Wilcock's departure, but I have no way to know how or to what extent that will affect the business nor do I know whether other popular personalities have left.  I've seen that Youtube is full of conspiracy theories in which Gaia and Rysavy are evil doers.  Par for the course, I suppose, given the content they're selling and hard to take any of that seriously.

[SnarkyPuppy]

I sold out awhile back (and thus missed most of the big run up), so I haven't been following this as closely as I once did.  Mainly I've been checking in from time to time on CAC and churn and have been somewhat skeptical of the company's economics, as I've suggested in a few prior posts. 

 

For those who have been following this closely, has there been significant news that's generated the recent substantial decline in the share price?  I'm aware of Wilcock's departure, but I have no way to know how or to what extent that will affect the business nor do I know whether other popular personalities have left.  I've seen that Youtube is full of conspiracy theories in which Gaia and Rysavy are evil doers.  Par for the course, I suppose, given the content they're selling and hard to take any of that seriously.

 

I seriously do not like to be "on the other side of a trade" as you - but with that said I've been long since it was a special situation and I remain optimistic of the earnings power as the time horizon is expanded to FY2020/FY2021 (under the obvious assumption that unit economics are not/do not rapidly deteriorate).  I simply haven't seen anything convincing to suggest unit economics are deteriorating in such a way that this is not a very favorable risk-reward at $14.50 per share. 

 

I haven't seen any specific news other than Wilcock's departure but I haven't been actively searching. I don't consider the youtube comments material and I try to remove myself from having bias in terms of whether the product will sell - I think the incentive structure and monetary decisions made by those who have the most data are directionally positive. 

 

With respect to Wilcock/host concentration more broadly, this was said during the latest conference call: 

"About 8,000 titles are viewed every single month, there's no group of titles such as series of collection representing the primary viewing for more the 2% to 3% of our members."

 

To address an obvious follow-up re: churn.  I just opened my model and have two ways of valuing this (without digging all of the assumptions up right now):

- Annual runoff:  assumes the business is managed with no new CAC spend at the forecast date (this is a helpful proxy as mgmt has explicitly stated multiple times they wont spend more than 50% of LTV on CAC.  yes - they could be lying)

- Annual maintenance:  assumes 50% churn and that CAC ($190 per sub as a high-end assumption under this framework) is only spent on recovering for churn

 

Under the annual runoff assumption, I'm looking at ~$138mm of annualized EBIT by Q4 2020 (1.9x current MC).  Under the maintenance model, I'm looking at ~$28mm annualized ebit (9.4x EBIT) by Q4 2020. 

 

I consider both scenarios to be downside cases - any upside case with favorable economics and growth will easily take care of itself.  I realized I haven't provided all assumptions - I can do so later when I have more time.  But just to give a general framework for how I'm thinking about valuing the business. 

[SnarkyPuppy]

The above will be challenged for reasonableness - I would simply say that there is certainly reliance on managements visibility into CAC, sub growth, and churn over the next 3 years.  It seems to me that these guys have a very tight grip on the cohort data and have a strong amount of visibility into probabilities of achieving these metrics looking out a few years.  CAC has moved in a directionally positive way & they've spent $0 marketing internationally. 

[KJP]

The above will be challenged for reasonableness - I would simply say that there is certainly reliance on managements visibility into CAC, sub growth, and churn over the next 3 years.  It seems to me that these guys have a very tight grip on the cohort data and have a strong amount of visibility into probabilities of achieving these metrics looking out a few years.  CAC has moved in a directionally positive way & they've spent $0 marketing internationally.

 

Thanks for the thoughts, Snarky.  I'm definitely not on the opposite side -- more like on the sidelines.  But the recent decline has piqued my interest again, and other than the thoughts on implied churn I've previously posted, I don't have any new data that would undermine your thesis. 

 

Here are two points I've been thinking about: 

 

1) If 40+% of new adds are "organic," then what is the CAC/LTV of the adds that come from paid channels?  For example:

 

Q1 2018

Gross Adds 117207.0588

% Organic 40%

# Paid 70324.23529

Cost/Paid 141.6666667

 

If annual churn is 55%, then implied lifetime is 21 months.  At $9.50/month that's ~$200 in revenue.  At 86% gross margin, that's ~$172 in lifetime gross profit.  CAC/LTV of these "paid" subs = 142/172 = 82%. 

 

This is a very simplified analysis, but meant to illustrate that if what they're saying about "word of mouth" and "organic" adds is true, then the economics of what they're getting on paid channels seems iffy and I question why they're spending so much on it.

 

2) That thought leads to my second issue.  Are they spending simply to placate analysts and meet somewhat arbitrary subscriber goals, rather than spending to maximize returns?  This snippet from the Q2 call is concerning on that point:

 

Eric Wold

 

And then maybe for Paul, I know this is not exact figure, it's just a kind of a simple average in the quarter. But I look at kind of the simple average to get to kind of monthly revenue for sub debts in the quarter or year-over-year and quarter-to-quarter. Were you back weighted in the quarter in terms of subscriber additions maybe more in the $0.99 program [ph] meeting that was kind of the cadence of the marketing more in June than any other months?

 

Paul Tarell

 

Yeah, I mean you hit it spot on right there. So it's really - last year we were focusing on bringing in members earlier in the quarter to offset that and this year one of the tasks that we were looking at doing was, what's available in June so that we could use that for our July through August planning exercise, so that's exactly what happened this quarter. It was more back weighted than normal.

 

Eric Wold

 

Okay.

 

Jirka Rysavy

 

And also we tried to - because we kind of saw that if you kind of do it early in the quarter and you guys, analyst when you kind of analyze it then you get ahead of the revenue compared to members and we saw - when we saw people publishing that hey, this is maybe not the best way to do it. Because then the revenue - while we hit the members the revenue can stay behind because the $0.99 is a big number as a percentage of quarterly revenue, if you take it one month $0.99. So we try to right now do it such a way that the revenue and - revenue growth and member growths will be likely same percentage. So you have a good guidance how to budget the revenue, compare guidance because it did not work if you skewed it up front. So we tried to make it more predictable because we don't want to kind of get our targets and stand behind the analyst revenues.

 

Eric Wold

 

Okay.

 

Jirka Rysavy

 

And people mostly are focused and the members right now are still a lot going forward. I think revenue on earnings will be key part, so I would just - we want to establish the way how we're doing it, so it's predictable. I think the predictability it's probably the key things what is driving here.

[KJP]

Did they disclose cost per add for Q3?  I didn't see it in the release or the CC transcript. 

 

Also, there may have been some discussion of cohort churn rates, but the machine translation appears to have had problems with Rysavy's accent.  Can anyone who listened to the call shed any light on what Rysavy actually said in the following quote:

 

Steven Frankel

 

For starters, has there been any material change in the lifetime value of the subscriber, especially between the different parts of interest?

 

Jirka Rysavy

 

No, there has been no meaningful change when you look at it. The only change is obviously the number of new people that we've been bringing in as we have continued to go at this higher growth rate. So that brings the overall averages down but when you drill in and look by kind of seasons [indiscernible], no meaningful changes in the composition of likes into how you buy 10-year band.

Paul Tarell

 

Once we go obviously to the mix, remember then we kind of won that number start to increasing but with the mix, you're going to see as we kind of kicked to first quarter of 2020 and we slow down to more like 35%, 40%; then we would achieve -- the number will increase quite a bit because of percentage of new people who get obviously the lowest value and would decrease; so that's probably the first time you're going to see any meaningful difference. I expect to be pretty steady between now and then.

[BMC34]

No, they did not disclose the cost per add in Q3.  All they said was they spent 125% of streaming revs on CAC.

 

There was no specifics given on churn.  All they said was LTV has not meaningfully changed. 

[KJP]

No, they did not disclose the cost per add in Q3.  All they said was they spent 125% of streaming revs on CAC.

 

There was no specifics given on churn.  All they said was LTV has not meaningfully changed.

 

Thanks for the clarification.  Anyone have thoughts on my comment above about the implied returns on customer acquisition spending once "organic" adds are accounted for? 

 

The following response from Rysavy during the call was also surprising:

 

Eric Wold

 

And I know that you include other launch costs, I know you talked about breaking Alternative Healing and then your premium subscription; anywhere to kind of pullout, maybe you kind of highlight what the dollar amount in there was? It may not been directly geared towards subscribed acquisitions in the quarter. And then, maybe what the organic percentage contribution was this quarter?

 

Jirka Rysavy

 

I mean, I can kind of start with the organic review; organic was actually slightly up from the last time again. But we have more on this, especially launching the new channel, that's actually not simple process due some more translation, especially through Spanish which also hid their number, I don't really track it by number, I'm not sure -- we never really disclosed it that way but if you kind of -- want to dig into it more but I'm not sure that it's -- we can probably look at it but it's -- I would kind of say if you're going to look at kind of the hundred -- 105 being the average, that's where we probably going to see both, and averages where we are on next two quarters, so everything over -- a lot of it over will come from the other activities.

 

 

 

The analyst asked a sensible question:  If you take out certain items that may be more like operating costs, what are you actually spending on customer acquisition?  Can it possible be true that Rysavy doesn't know the answer and that the company doesn't even track it?

 

[iambagman]

I agree, I would have liked a more coherent answer to the question, but I am also surprised by the market reaction.  I have been a buyer as there is plenty of stock for sale with the prices off 10%+

 

On the call they discussed the launch of a new channel around alternative healing, to me the greatest risk was how many people are really watching conspiracy theory content - I think alternative healing will only increase the addressable market.  They also had a lot of positive comments about organic growth, and that they are going to experiment with raising pricing as Netflix has raised the pricing umbrella.  Similarly positive, a new offering that includes access to live streaming events for $299 per year.  Management also indicated if they dialed back marketing spend they could be profitable in about a month - historically that had been more like a quarter - so they can put the breaks on whenever they want - which is an interesting setup.  They are also seeing operating leverage as gross margins stayed elevated and the gross profit per employee increased. 

 

So growing subs 60%+, fully funded business model to profitability with a cushion in the building, adding new products and offerings which will grow the market and improve the economics - I wish I had more conference calls like that one.

[SnarkyPuppy]

Continued path towards achieving 1.5mm+ subs.  Continued commitment to stopping spend if not economically rational and a near instant ability to turn profitable.  A near term bridge to reduced spend as a % of revenue and a medium term trend to normalized FCF profitability while continuing to grow.  Continued hints towards pricing power, lack of competition, and long international runway.  Continued rise in organic growth.  Continued increase in customers with higher LTV. 

 

In fact, when asked if given the benefit of a couple years since the spin, whether the 2021 targets seemed achievable, the CEO stated that these targets will if anything be surpassed. 

 

What would one pay for a company growing low double digits doing $60mm a year in 2021?  My guess is more than the current market cap of $240 or whatever it is now. 

 

All value investors preach long termism and placing less emphasis on the vicissitudes of quarterly nuances.  Only some practice it...

[Guest roark33]

Isn't the market reaction due to the fact that at some point, people will begin to question the CAC and LTV numbers.  These aren't GAAP figures, and even if they were, there is always a possibility that the numbers are being fudged.  I don't think there should be a presumption that these CAC and LTV numbers are 100% truthful.  GAIA is raising money to hit its goals along the way and the only way to do that is to create the appearance of success.  People are quick to question the truthfulness of Telsa's numbers, but that doesn't seem to be the case here. 

[SnarkyPuppy]

Isn't the market reaction due to the fact that at some point, people will begin to question the CAC and LTV numbers.  These aren't GAAP figures, and even if they were, there is always a possibility that the numbers are being fudged.  I don't think there should be a presumption that these CAC and LTV numbers are 100% truthful.  GAIA is raising money to hit its goals along the way and the only way to do that is to create the appearance of success.  People are quick to question the truthfulness of Telsa's numbers, but that doesn't seem to be the case here.

 

Personally I think incentives and modeling this out at runoff would give some comfort on the downside.  LTV and CAC isn't that hard to calculate given public numbers.

 

I'd argue that the market is very skeptical given the current valuation.  It's priced as if the numbers are being "fudged" as you say

[KJP]

LTV for new subs can't be calculated; it's a projection based on past behavior of presumably similar people.  Part of the issue has always been whether these large new groups will act like prior subs.

 

Also, what is the average CAC of non-"organic" subs?

[Guest roark33]

Isn't the market reaction due to the fact that at some point, people will begin to question the CAC and LTV numbers.  These aren't GAAP figures, and even if they were, there is always a possibility that the numbers are being fudged.  I don't think there should be a presumption that these CAC and LTV numbers are 100% truthful.  GAIA is raising money to hit its goals along the way and the only way to do that is to create the appearance of success.  People are quick to question the truthfulness of Telsa's numbers, but that doesn't seem to be the case here.

 

Personally I think incentives and modeling this out at runoff would give some comfort on the downside.  LTV and CAC isn't that hard to calculate given public numbers.

 

I'd argue that the market is very skeptical given the current valuation.  It's priced as if the numbers are being "fudged" as you say

 

First of all, you can't calculate LTV, that is a complete myth of almost all software business, you can estimate it, but each new user may not be like the past user, therefore this isn't a calculation figure at all.  Also, CAC, no, the numbers GAIA discloses doesn't allow you to calculate this and even if they did disclose a figure, I would probably question it. 

 

 

[SnarkyPuppy]

Isn't the market reaction due to the fact that at some point, people will begin to question the CAC and LTV numbers.  These aren't GAAP figures, and even if they were, there is always a possibility that the numbers are being fudged.  I don't think there should be a presumption that these CAC and LTV numbers are 100% truthful.  GAIA is raising money to hit its goals along the way and the only way to do that is to create the appearance of success.  People are quick to question the truthfulness of Telsa's numbers, but that doesn't seem to be the case here.

 

Personally I think incentives and modeling this out at runoff would give some comfort on the downside.  LTV and CAC isn't that hard to calculate given public numbers.

 

I'd argue that the market is very skeptical given the current valuation.  It's priced as if the numbers are being "fudged" as you say

 

First of all, you can't calculate LTV, that is a complete myth of almost all software business, you can estimate it, but each new user may not be like the past user, therefore this isn't a calculation figure at all.  Also, CAC, no, the numbers GAIA discloses doesn't allow you to calculate this and even if they did disclose a figure, I would probably question it.

 

Sorry - wrong terminology (figured it was obvious that the future couldn't be predicted).  Of course you can't calculate true LTV (the future is the only relevant metric to determine ROIC) - I was simply stating that historic LTV isn't difficult to come up with given churn which is determinable given managements disclosures of CAC on every call for the past 6-8 calls.  But sure, you have to make a few assumptions and triangulate using previous disclosures/conversations which have been documented in this and other threads online.  CAC is disclosed each quarter but it is blended with some other information - but you can make a range of estimates.

 

The future is unknowable and they very well could be spending in a manner of which ROIC < WACC and killing the equity. 

 

You and KJP make fine points for sitting on the sidelines.  My personal view is that the upside/downside is attractive at current prices and the probabilities of achieving upside are higher than the probabilities of achieving downside.  Those with all of the data (insiders), which allow for a very clear picture of the past, have purchased additional material positions as recently as ~March of this year. 

 

These guys have hit their targets with tremendous precision and it wouldn't surprise me if they continue to do so.  If they don't, there is a way of managing the downside by a management with skin in the game. 

 

[Guest roark33]

Matt Levine has a very clear description of what I think a lot of software as service companies really are....and I wonder if Gaia falls into this category.

 

Pay-for-download

 

The internet age has allowed the perfection of this particular fraud:

 

I start a company to sell e-widgets over the internet.

I produce e-widgets and sell them for $10.

I pay my buddy $10 million to buy a million e-widgets from me.

My buddy pays me $10 million for a million e-widgets.

We do it again next month, but for $20 million and 2 million e-widgets.

I go to investors and say “look I have gone from nothing to $20 million of revenue per month; at 8 times annual revenue that justifies a valuation of $2 billion.”

 

I sell 5 percent of the company to investors for $100 million and spend it on yachts.

E-widget sales dry up (once I stop paying my buddy to buy them), the company shuts down, the investors lose all their money, and we all shrug and say “what can you do, most startups fail.”

This is not a brand-new idea or anything, but two aspects of modern technology and finance are particularly convenient for it. First, you can now build valuable products—iPhone apps, cryptocurrencies, newsletters, etc.—at zero marginal cost, which makes this fraud much easier and more efficient to pull off: You can just give your buddy the money to buy your product and then sell it to him for that money, shuffling money in circles without having to spend any to build more products.

 

Second, financial markets are now used to the idea of investing large sums of money in tech startups based on revenue multiples, even if they don’t have any profits, which means that the very direct schematic I laid out above—give buddy money, he uses it to buy product—can create a valuable company while running net losses. (“Once they achieve scale, their customer acquisition costs will decline and they’ll be profitable,” the investors tell themselves.) In fact, markets are now kind of used to the idea of investing large sums of money into companies based on multiples of active users—not even revenue—meaning that you can run this fraud by paying your buddy money just to look at your website a lot.

 

One other thing I should mention is that this isn’t necessarily a fraud. If you do it just right—if you fully disclose your customer acquisition costs, accurately report your net losses despite your large and growing revenue, and explain with reasonable clarity the incentives and discounts that you’re offering to acquire customers—then this, or something resembling it, is not only not fraud, it is totally ordinary startup procedure. We have talked a couple of times about what I once called “the weirdly common Silicon Valley business model of ‘rapidly growing a business by selling its products below cost, subsidized by huge venture-capital investments, in the hopes of one day flipping to profitability once you’ve achieved scale.’” I have proposed various analyses of that model. Perhaps it is correct, and many of these companies will achieve scale and become wildly profitable monopolists. Perhaps it is wrong, and the venture capitalists are confused, seduced by a few examples of success but underestimating the difficulties. Or perhaps it is a charitable redistribution of wealth in which rich venture capitalists effectively donate their money to the middle class in the form of underpriced Uber rides or free movie tickets.

 

But perhaps the analysis is even simpler: Pay someone a dollar in customer-acquisition costs, have him pay you back a dollar in revenue, sell that dollar of revenue to investors for $8, and you’re rich.

 

Anyway of course it is still possible to do it the wrong way. Here’s a Securities and Exchange Commission enforcement action from last week against Giga Entertainment Media Inc.:

 

According to the SEC’s complaint, between February and August 2016, the company bought at least 559,662 downloads from outside marketing firms to boost the profile of the company’s mobile app, SELFEO. These firms provided Giga with a shortcut to propel its app to the top of the Apple Store download rankings. But instead of disclosing the real cause of the app’s artificial meteoric rise, the company misled its shareholders into believing that this success was due to traditional marketing tactics like billboards and radio advertisements. The complaint alleges that when the company stopped paying for downloads in August 2016, the app’s rankings on the Apple Store plummeted. …

 

“Exposing Giga’s fraud should remind companies that they cannot buy a crowd and then claim to be popular,” said Melissa R. Hodgman, Associate Director of Enforcement. “Tech companies can buy clicks or employ other new marketing tools to improve their on-line image, but they have to be honest with investors when touting the fruits of such efforts.”

[iambagman]

I am curious what exactly you see in Gaia that resembles either paying for downloads and claiming they are organic - or paying vendors who then round trip the dollars so that it appears as revenue.  I get that Gaia is not as transparent as anybody would like on churn - but to my knowledge - they have direct relationships with all of their subscribers and there is nothing resembling either of the setups referenced in your post.  Do you know something specific?  They don't have anything to do with downloads that I know of - so is there anything unseemly that you are aware of on the subscriber front?

 

I have not seen anybody imply they are inflating their subscriber numbers - that would be helpful if you have connected some dots

 

Or if your post is just saying that Gaia is a tech company with revenue - other tech companies with revenue have played games - it is possible Gaia is doing something?  It would also be helpful to acknowledge that you don't really have any specifics.

[Homestead31]

Probably worth mentioning that Jirka is/was already very successful and wealthy.  It’s impossible to eliminate the “risk” you described, but I would argue 1) it is small to begin with and 2) it is smaller still when you’re talking about someone who is already established vs a college kid with a startup or whatever.  There are also no VCs here with poorly aligned interests.