From the March 1997 issue of Entrepreneur

Russ Leatherman had a great idea. Frustrated by calling movie theaters for show times only to get a busy signal, Leatherman conceived of an interactive telephone movie guide. The caller would have access to a complete listing of theaters and show times in his or her area, and could even pre-purchase tickets.

In 1989, while developing the concept from their base in Los Angeles, Leatherman and his partners, Douglas Hoitenga and Rob Gukeisen, met up with Andrew Jarecki and Adam Slutsky, who were working on a similar idea in New York. The five men became a team, and today MovieFone, as the partners dubbed the concept, handles calls from up to 2.5 million moviegoers per week in 28 cities across the country.

Theirs is the story of a company using existing technology and consumer demand to create a new invention, then using proactive strategies to block the competition and dominate the market. Read on . . . there are plenty of lessons to be learned.

First to Market

The idea for MovieFone was not about building a better mousetrap, but rather creating the first mousetrap. Having an original idea such as this--instead of an improvement on an existing product or service--almost guarantees you will be first to market. The company's idea was to eliminate one of life's inconveniences, a premise upon which most successful ideas are based--Liquid Paper, telephone calling cards and ATMs, to name just a few examples.

What also comes with being first to market, however, is the difficulty of going where no one has gone before. Finding financing for a new idea is tough. Development tends to take longer and be plagued with stumbling blocks. Meanwhile, there is uncertainty about whether a market even exists--and if it does, whether it's big enough to profit from.

Leatherman and his two original partners mortgaged their homes and maxed out their credit cards to raise initial funds. Though they had shown their idea to potential investors, they couldn't find anyone who would put up money to help develop it.

This is a very common problem for many entrepreneurs with new product ideas--even entrepreneurs with successful track records. It's easy to get money once you have a proven concept. The old adage that banks only loan you money when you don't need it is usually true, and the same holds true when seeking most investment capital.

Fortunately, with all five partners on board, the company had the resources to develop the first BODY system in the Los Angeles area. In addition to money, a lot of time and experimenting went into creating the technology for MovieFone. It was important that customers be charged for local, not long-distance, phone calls. Therefore, Los Angeles needed five data centers to accommodate the region's five area codes.

Another difficulty was obtaining accurate show times for all the theaters. At first, the company had theaters fax them the information--but even when the theater operators remembered to do this, the information was often inaccurate. The partners knew accurate information was essential; offering a "zero defects" service was critical to MovieFone's success. A system had to be developed to electronically transfer accurate data from the theaters into the MovieFone system.

Unfortunately, the company could not afford the advertising necessary to generate enough traffic to satisfy investors. In a final desperate attempt to keep the dream alive, Leatherman persuaded the Hollywood Reporter newspaper to write a small article about MovieFone. The article not only attracted callers but a New York City investment firm as well.

Six months later, there was a proven market for MovieFone. To date, the company has serviced more than 150 million calls.

Building Barriers

When a new concept is first in a market that didn't previously exist, the opportunity to build barriers to potential competition is one that smart entrepreneurs grab. MovieFone has created many barriers to competition by following these strategies:

Exclusivity: Exclusive barriers need not cost a lot. One important barrier MovieFone created was acquiring the most desirable local phone numbers in each area code the company planned to service. MovieFone uses local numbers such as 777-FILM, which are also registered trademarks. The barrier here is that it would be tough to find another phone number as easy to remember.

MovieFone also capitalized on the distinctive voice of Russ Leatherman, who records all the voice-overs on MovieFone. His voice has been described as an "exuberant used-car-salesman bellow," and its unique sound has been heard in parodies on TV shows including "The Simpsons," "Seinfeld, and "Saturday Night Live." Not only is his voice exclusive, but it has also become MovieFone's trademark.

Expertise: By focusing on their existing service, instead of branching out into other markets such as selling tickets to concerts or sporting events, the owners of MovieFone have become industry experts. They know the hardware, software, marketing and logistics of their field better than anyone else. They know their target customer's profile intimately and can even tell you that customer's average popcorn consumption. This expertise enables MovieFone to give advertisers and promoters the detailed demographic and marketing statistics they need to make the decision to advertise.

Having expertise requires knowing that your invention is more than it appears on the surface. Most people would define MovieFone the way consumers see it--as a movie information and ticketing service. Not co-owner Jarecki. He defines MovieFone as a media vehicle that earns revenues from ticket transactions and by selling movie studios the ability to advertise to its millions of users.

Expert systems: MovieFone has developed expert systems, including its hardware, software, and electronic "will call windows" in theaters where customers can pick up tickets, that make it nearly impossible for others to compete. The company was also first to offer online movie ticketing.

The goal of all the expert systems: to provide better customer service. As Leatherman points out, "If customers have a hard time picking up the tickets, they won't think it's the theater's fault; they'll think it's MovieFone's fault."

Trade secrets: Of course, the company can't tell us what its trade secrets are; that would eliminate the protection. The ways it acquires its phone numbers, electronically transfers information from theaters, and forms alliances with other companies are all trade secrets rather than patented processes and thus don't have to be disclosed.

Strategic alliances: Forming alliances with theaters to set up electronic "will call windows" benefits both MovieFone and the theaters by providing more convenience for customers. As MovieFone grows, opportunities for strategic alliances continue to appear. For example, on the company's online MovieLink service, users can access The New York Times review for the movie they are considering. Disney movie Web sites have hyperlinks to MovieLink. Many local radio stations sponsor the MovieFone in their area. And Samsung, which was seeking a target market of popcorn consumers, is running a microwave promotion on MovieLink. These valuable alliances with industry leaders are among MovieFone's strongest weapons for protection from the competition.

So far, MovieFone's strategies seem to be working. The company's largest potential competitor, TicketMaster, recently announced it will not go into the movie ticket business. Disney has begun trying to sell advance tickets to Disney movie events via a toll-free number; however, the tickets have a higher surcharge and are mailed to the customer, which takes at least two weeks. This system doesn't bode well for selling movie tickets, which are usually an impulse purchase.

For now, at least, MovieFone still has the competitive edge, thanks to the barriers to competition its owners wisely built along the way.


Tomima Edmark is the inventor of the TopsyTail, the Kissing Machine and several other products, and author of The American Dream Fact Pack ($49.95), available by calling (800) 558-6779.