Yet Another Value Podcast - The Bear Cave is Watching $YOU

Episode Date: September 24, 2021

Edwin Dorsey, founder of The Bear Cave, discusses his bearish note on Clear Secure (YOU). Bulls think Clear is a product members love with a clear moat and a long growth runway; Edwin sees a company with lots of consumer complaints that has been around for almost two decades and is still losing money while losing economics to key partners like airports. The Bear Cave's YOU note: https://thebearcave.substack.com/p/pr...My Clear tweet thread: https://twitter.com/AndrewRangeley/st...Edwin's first podcast appearance: https://twitter.com/AndrewRangeley/st...Chapters0:00 Intro1:20 Clear Overview3:25 What is the crux of the bear thesis?4:55 What's wrong with Clear's business model?9:20 Why won't American partner with Clear?11:45 Discussing the San Jose concession13:55 Clear's NPS score vs. their BBB rating21:10 How Clear calculates their member count23:15 Are Clear's churn numbers as good as they look?27:00 Clear's strategic fit in bundles29:55 Clear's growth opportunities33:20 Why wouldn't Apple or Google win the "entry" game versus Clear?34:15 Is Clear a COVID beneficiary?36:30 Can clear become a 12x/day product?41:20 Clear's history of retaining key partners43:30 Will Clear run afoul of airlines in the long term?48:30 Closing thoughts

all right hello and welcome to the yet another value podcast i'm your host andrew walker and with me today i'm excited to have my friend and the founder of the bear cave newsletter edwin dorsey edwin how's it going uh andrew i'm doing great always excited to go on with you thank you well i really appreciate you coming on this is your second appearance well i'll get to that in a second but let me start the podcast the way i do every podcast first i just want to remind everyone nothing on here is investing advice that applies to every podcast, but particularly today, Edwin is not short the company we're talking about, but he published a bearish piece. Everyone should have just remembered, you know, especially bearish pieces. If you're doing anything bearish, shorting anything, there's extra risk there. So everyone just remember, do your own work, nothing investment advice. And then the second way I start this podcast is talk about is to pitch my guest. That's you. People can go listen to the first podcast to hear the full pitch. But, you know, I've just got to say, I talk to a lot of people. And every now and then your name came up. I told you this before the podcast. But you're just having incredible success. Clearly, the Bear Caves blowing up, going on CNBC at 23, moving multi, multi-billion dollar stocks. I think Twitter was up 5% the day you came out with them as your

biggest position. So I'm just really happy for your success. And you're a grinder, man. I know you're a grinder. So congratulations. But I learned from the best, Andrew. But look, all that out the way, the company, we want to talk about you today. That's the ticker of the company we want to talk about Clear. Y-O-U is the ticker. So I'll just toss it over to you. What is clear and why are you a little bit bearish on them? So Clear, Tickr-U is a $6 billion company that IPOed like three months ago. They're a secure identity platform and they really have two businesses. First, and the biggest business right now is an airport concession where for $180 a year, they'll in essence add you to a line-cutting service. So right now,

you go into an airport, there's a normal ID checking line, which is long. There's TSA-free, which is short, and then there's Clear, which usually is super short. So if you're a frequent flyer, you can get clear and you can go, in essence, right up to the front of the line where they'll check your ID. They say they use biomet, Clear says they use biometric data like eye scans and fingerprints to verify your identity and bring you to the front of the line. But that's the essence of the business. Last year's revenue was roughly $200 million. The company was founded in 2003. It went bankrupt in 2010. And then it was revamped by the current management who's been running it since 2010. So the big business right now is the airport concession.

$180 a year. You cut to the front of the line, ID check line. Then the kind of newer side of the business is Health Pass, which allows you to upload vaccine cards and other information. to like verify your identity if you're a restaurant worker checking in for work or you know upload your identity to the clear out and get into venues like concerts and basketball games faster perfect perfect now I've got a lot of questions there you know I'm sure I'm sure anyone who's traveled has had that thing I don't have a clear membership but they've had that thing where they're sitting in line they've been waiting there five or ten minutes and then some some jerk just goes right through the clear line and you look at that. And that's great marketing. So I'm going to ask

you about that in a second. But I just want to focus. You publish a bearish point. And I think most bear pieces is, you know, they've got some combination of the three, but there's really three bear thesis you can make. One would just be overvalued. Hey, this business is trading for 30 times price earnings and I think it's worth 15. One is a broken business model. Yeah, maybe it looks fairly valued on trailing numbers, but you know, this is blockbuster right before Netflix came along would be the second. And then the third is just outright shenanigans, right? This is an accounting fraud. There's some really freaky stuff going on here. And again, things can have all three. When you think about Valiant at $250 per share, it was overvalued. It was a broken business model and

they had accounting shenanigans. But when you look at clear, which one of the three is kind of the key point of your bearish thesis? I want to cheat a little and say it's a combination of two. It is overvalued, in my opinion. It trades at roughly 30 times revenue. So it's got this really rich valuation. The bigger part to me, though, would be a broken business model. I think the market is viewing it as this really attractive business. When I view at least the airport side of it is a really unattractive business and we can get into why.

I think another point is that, in my view, customers aren't happy and they're doing a lot of aggressive billing with customers. That's another part of why I think it's broken. but bigger part broken business model not as attractive as the market thinks it is and that leads into the overvaluation with the market giving it 30x times revenue when yeah i don't think it should be there cool okay that's perfect so let's talk i think the most interesting piece of actually there were two that really jumped out to me i think we can talk the the consumer complaints in a second because that flow from the first but you say broken business model right and their business model right now

as you said the main thing is the clear pass and i in my head you know when i i just kind of thought about this externally having been a consumer and seeing like, oh, God damn, it, somebody's cutting me in line again. I thought that had the potential to be a really good one, because there's two things. A, that marketing of having people waiting in line and seeing people go to the front, I mean, that is such good marketing. And no one else has that, right? And then B, it's kind of a network effect business where if you've got one clear in Austin, like, that's great for Austin, but it's not that great. But if you put a clear in Austin, New York, L.A., like, that's a real network effect, right? Where consumers can get, when they travel, they'll be able to use Clear

both humming and going, and you can kind of start building up that big moat. So why do you think this is a broken business model? Sure. So let's, first, not everyone thinks that Clear is going to be the future of travel. So you look at American Airlines, they've blocked here from being in all their airports because they don't think Clear is the right solution to have a subset who can pay more just cutting lines. They want to, you know, just fix the problem at the root level. Find a way for TSA-free to get more members enrolled so you can go faster or find a way for, you know, the ID checking to be faster.

I think that, you know, something along those lines is going to be the like the real long-term solution. And if you look at travel blogs and other people in the industry, people are a little skeptical that you want 10% of the population just paying more to cut to the front of the line essentially. That's part of it. The other part, and this is really important to understand, you know, if you look kind of on like the Porter's Five Forces or like who has the leverage in the clear relationship, it's not clear. So in most cases, Clear is paying the airports a lot to be in the airports because they're an airport concession essentially.

And if you look, you know, they might start paying like an airport 8% of all revenue from selling clear passes. From the little data I was able to gather, that take rate of the airport tends to go up over time. So the specific example I cited was the San Jose Airport. They added Clear. I believe it was originally an 8.5% take rate. Over time, that's gone up to an 11.5% take rate, I think, starting like 20, 23. So over time, airports are able to extract more and more out of Clear as Clear starts to give a benefit of advertising to Flyers.

Also, Clear needs to pay airlines. So Clear is sending like 10, 15% of revenue back to Delta, belt back to United, partly to be in their terminals, partly for Delta and United to promote them to their users. And then Delta and United are also able to ask for discounts, sometimes even retroactive discounts for their users. This all comes down to the fact that, you know, Clear needs the airports and airlines a lot more than they need. It's totally fine if an airline doesn't want clear in its terminals. It's totally fine if an airport doesn't want to add clear. No one's going to complain.

No one's going to buy it. And I, TSA-Free is a perfectly fine program. The last thing I've mentioned is TSA-Pree is one-fifth the cost, less than one-fifth the cost. I believe it's like $100 for five years, give or take. And, you know, at least for me, it's worked beautifully every time I've flown. So, you know, maybe if you're a really frequent flyer, you might want Clear instead of TSA-Pree. By the way, they can go together where some people who have TSA-Pree also have Clear, because Clear gets you through the ID check, but then TSA Priest still gets you in the faster

line for like not taking off your shoes and the security, like baggage security, which everybody still needs to go through. But the essence of it is Clear needs the airlines a lot, so Clear is given airlines equity. They give airlines retroactive discounts and future discounts. They need airports and the airports can increase their take rate over time. And, you know, no one needs clear. It just from that perspective, it's not that attractive. So let me push back on both those points there. And again, I don't have a position in the stock. I'm a curious outsider trying to learn more because I know you've done huge diligence. You know, you did the FOIA request, which I didn't see anyone talk about the San Jose Metro and stuff. But let me push back on two pieces. I guess the simplest to push back is you mentioned American. And American says, hey, we don't think it's good for 10% of the population to be cutting the line. And, you know, I kind of don't disagree. But I hear them say that and I think, oh, well, they're fine with, you. people who pay first class cutting the line, you know, boarding first, they're fine. They're obviously fine with TSA pre people getting a much shorter line.

You know, if you were, these are the super elite, but if you're one of the super, super elites, like I've heard stories of if your plane is late, if you're late for a flight, they'll delay your whole plane or they'll send a car to pick you up on the tarmac and bring you straight to your next thing so you can skip gates and stuff. So when American says that, I kind of look at it and say, is that just negotiation? Is that just negotiating like trying to get clear to make. their number? Or are they really, like, morally convicted on that? My guess this is a little bit of both. There probably is a certain price at which a clear set American will give you a billion dollars a year.

I'm sure American would be all okay with that. I think it's a very nuanced and complicated issue that I probably don't have an excellent response to. And I don't think many people in the market do. But the bottom line is, you know, clear could be replaced with another line cutting service that may come in. offer better incentives. I forgot to mention the network effect, part of your first question. Perfect, yeah. Well, why don't I go there? So people like to say, okay, clear, as they add more airports, you're going to get a ton of more sign-ups, because, you know, it makes it more valuable for everyone in the existing network, and it's a better selling proposition once you get more airports in the network. First, clear is U.S. only, and it's staying that way.

Second, clear is already in nine of the ten top airports. And it's in like 50 of the hundred most, 35 of the biggest. Like, you know, it's already in the biggest marketplaces and has been for a really long time. This service has been around since 2003 and then in its current incarnation since 2010. This is not like some rapidly growing thing that, you know, is adding airports left and right. It's been in the top ten and has been there for a very long. long time. So to me, people like to think this is a fast-growing network effect business. No, this is a really old sleepy business that's been around for a while and is now adding airports

up the fringes. I'm going to come back to that, but I do want to finish on the airport concession thing, right? Because you said, hey, I found the San Jose document, which says it went from, I think you said it was 9% to 11.5%. I could be a little bit wrong. But that's a big step up, right? Going from 9% of revenues to 11.5% of revenues, that's a royalty cut. You know, you're increasing by 25% that that's huge. But when I look at that, I'm just thinking like, you know, I remember when Google was paying for the, I think it was the rights to sponsor Yahoo search, or maybe it was Apple search or something. And they could actually pay more. And people would look at that and, you know, they would, they'd increase their rate from, hey, we'll pay you 5% of our

advertising rates on anything searched through Apple to 7% or whatever. And outsiders might have looked at that and said, bearish. And I think Bing and a couple other people looked in and said, oh, shit, this is a business, they figured out, right? The more search volume that goes through them, the more profitable they get, the more data they get. And they can afford to pay more as they get more because it's getting to be a better and better model. Now, Clear isn't quite like that, but I do look at it and wonder like, oh, have they figured out the bigger our network gets, the more people who come in, the more we can sell, we can actually afford to pay airports more in concession. And like the second thing is you're turning kind of airport dead space, right?

the airports aren't making any money out of their check-in lines, you're turning that into an actual revenue generator. So the combination of the two, I look at that and I say, oh, that's pretty interesting. I really like your last point of that the airports aren't making any money on that space and now they could. That's a really interesting one. The pushback, I would say, it's clear, it's already in the most parts of the most important parts of the network. And fine, you know, they're losing money right now. So they can't afford to pay it. And they're continuing to do it subsidized by the capital markets. It would be one thing, if you, if you're a wildly profitable business and you can just be the highest bidder on all these things and,

you know, the money keeps coming in, but you're losing, they lost $40 million last quarter. You can't do it sustainably. At some point, either the airports are going to need to lower their rates or that you're going to need to get fewer concessions from the airlines, neither of those seem to be happening, or you're going to dramatically need to grow your user base. And that also doesn't seem to be happening. Perfect. Yeah. No, that does make sense. I probably will come back to this at some point, but I want to go to the second part and the part that I thought was the most interesting of what you were saying, and that was Clear's bad user experience, right? And you found through your FOIA request, you found some stuff. I think you said they have a F rating on the BBB, and obviously

you found lots of Twitter accounts that said, hey, we hate this product, all this type of stuff, right? And that was interesting because in my mind, you know, the people I've talked to with Clear have generally enjoyed it and Clear cites this NPS score of 75. And I think investors have come to view NPS scores in two ways, right? Like, we all know if you find a company with a super high MPS score, a Tesla, a Porsche or something, that can be a really interesting thing for compounding, all sorts of optionality. But the other point is we've all seen, you know, I've been obsessed with SPACs. We've all seen SPACs that say, hey, our MPS is 95. And you're like, wait, your NPS, is higher than apples and you sell commodity steel? Like, really? Because NPS scores, right? They're very,

you can game them, right? They go and tell you, but there's no firm data or anything. So do you think this is a case of annex data where you found some unhappy customers? Or do you think clear is like really gaming the NPS system? Or I'll give you that. Do you think it's a little bit of a combination of the two? Well, Andrew, as you know, companies usually need to disclose how they come up with their NPS scores. And I had a feeling you're going to ask this question. So I opened the S-1, and I looked at how Clear found their NPS score of 75. And this is what they say.

We use NPS to help measure our member experience and satisfaction. NPS scores are measured with a single question survey asking, quote, how likely are you to recommend clear to a colleague or friend on a scale of 1 to 10? The high ratings are counted as a positive. The lows are counted as a negative. So, you know, I don't even know what the gold standard is for getting, you know, NPS scores, you know, but the fact that the company is, you know, emailing a select number of users, hey, how likely are you to recommend here? They're probably not asking the people who cancel for their NPS score count. I don't know.

So I'm not an expert of this. I don't know how many companies calculated that way. But if it's a company generated figure with the company, you know, emailing a survey to a few people, that makes me more skeptical. As you mentioned, you know, all these businesses that are going public now, they come up with NPS scores. I wrote about a high interest lender lending on average interest rates over 100% that claimed to have an NPS score of 85, higher than Apple and the Ritz Carlton and Tesla. And so I'm just skeptical when it's just, you know, if it was rigorous, we ask all members, you know, after three days on the app to give us a rating, then, you know, I might give it more credibility. Finally, now on the consumer complaints, you know, just look anywhere. You know, it's all over Twitter, all over Facebook, all over the Business Bureau.

People are upset at Clear, specifically with regard to cancellation. You know, it might be an anecdote if you seal it a little, but if you get an F rating from the Better Business Bureau, that's not anecdotal. That's the Better Business Bureau saying this is problematic. you know, one thing I wish I did was call our customer service and see how long it takes the answer. I didn't. I probably should have. But a lot of it is just, you know, you get told, hey, we have a 45-day free trial. You sign up for that trial and you forget to cancel and then it starts renewing and then it becomes difficult to cancel. A lot of it is sometimes you see people who went out of line and were told they could use clear and then they're told like, oh, it's

going to be a week for your application to be processed. I'll get back in the normal line or, you know, you can't use it unless you buy it right now. There's a, there's a lot of like bad frustration. And I, at least when I've been in airports in the past, I was always a little unsure of what clear is. I thought it was a government program. It's not. I did too. Yeah. And, you know, I think all that adds to kind of the murkiness of it. Bottom line, I don't think, you know, these are isolated incidents. And just for your readers, maybe I should read like two of the recent complaints. One person said, I used Clear at the airport and they said I could cancel at no charge. And I did. But the end subscription function just switched to another type of membership and

they still took my money. Another person wrote, I enrolled in Clear for a free trial at the airport. They said it would be a two-week free trial upon realizing I wouldn't need the service. I went to cancel it over the phone. Automatic voice confirmed I was able to cancel. Yet I was still charged $180 after the fact. you know, that's a lot of money and people are rightfully frustrated. And what I found in businesses with a lot of these types of complaints, churn might look low initially, but in the long run, people end up finding a way to cancel. People end up churning and it bites the company in the buck. You're not in New York, are you? I am in New York. Oh, we should meet up for a coffee sometime. But for New York people, their New York Sports Club, which has now gone under, but they were classic for you would sign up. And then, you know, it was, it took four seconds to sign up. But it was, it took four seconds to sign up. If you wanted to cancel, you needed to, like, send a certified letter by mail and had to reach the desk of the right person at, like, Tuesday between 4 and 5 o'clock or otherwise, you know, my, I spent more time trying to cancel that. I go to the gym a lot, and I probably spent more time trying to cancel my membership than I spent at the gym. But let me just to wrap the loop on MPS, you know, I'm just, when they say 75, it just does surprise me because when you say 75, you mentioned a lot of the companies who are in that air, right? I think Apple's last MPS was 70.

Peloton is in the 80s to 90s, I think. But when you talk about a 75 MPS, that's the type of thing where you should have people who are real evangelists for your products who are going out and saying, like, I love this thing. You need to get it. And it can be weird products, right? Like, if you thought about the original iPhone for people on the podcast, I'm holding my iPhone up, like, before an iPhone, you wouldn't have thought people would go and be like, you've got

to get this cell phone, right? Like, this flipflone is amazing. But the iPhone was so good. people were evangelists. And I just, I know a lot of travelers. I used to work at McKinsey. I know a lot of consultants. Still, a lot of frequent flyers. I've never heard of anyone who's just like evangelizing for Clear. So the NPS score kind of strikes me a strange. Andrew, I want to give a weird pushback to that. One of the strongest pushbacks from my article was I actually got like a dozen people reaching out saying, dude, I love Clear. Like, it's so much time. To be intellectually

honest here, I actually do think there's people who really love it, you know, especially especially frequent flyers are like, oh my God, it saves me so much time. It's so good. It breathes fast the line. There are people who love it. I think two things can be true that there are a subset of frequent flyers who really love clear. And then they're really aggressive with making it tough to cancel. And then those people aren't included in their NBS score calculation. Those are two very two things that can both be true. That's great. And that's why whenever somebody says, oh, like I have cable and the cable service, in Michigan stocks.

I go, well, you know, that's just you. I'm always hesitant of anecdotata. And my inact data was, I didn't know anyone who loves clear, but there are people out there. And that's good to hear. Just on the MPS score, one thing, I tweeted this out, their total cumulative enrollments. Like, they've talked about this. I feel like they talked about this as members. But when I read the definition, you know, I didn't go through it with the fine

two for comb, but I read it a couple times. I was very confused. Are you clear on what they're defining as members or what total cumulative enrollments are or anything? No. But I think another question you'd said in the same thread was how many active paying clients do they have? My estimate there was like around $2 million because they had $200 million in annual revenue last year. And if you're charging $179, that's what the list price is. Most people end up paying $100 to $110 because that's what the airlines give them as a discount if you're a Delta Flyer, United Flyer.

And then if you were referred through like a friends and family program, you end up paying $50. So you put those together, you know, on average, you're closer to $100. So $100 per user per year and you have $200 million in revenue. You've got about $2 million playing clients. Yeah. It's probably over that just because they seem to be growing quickly. So you probably get into a little bit of average and everything. But yeah, that makes sense.

But still, you know, their KPI they report is total cumulative enrollments, which is $7 million. So call it $2 million, $2 million paying members call it $3 million. I mean, like, it's weird for your KPI to be total cumulative enrollment when it's double kind of what really matters, which is how many people are actually paying for this. I think it's strange, too. You know, they also don't disclose the amount of revenue coming from their health pass segment in the stadium and like kind of the new, clear identity verification outside airports. I think it's really weird they don't dispose the revenue from that and it's probably because it's minuscule. Can we talk about the retention numbers for a second? That's actually where I was about to go.

So let me set the stage. So the retention numbers, this is, I believe it's pulled from the S1. In 2019, retention was 86.2%, which is pretty damn good for a subscription, a physical subscription service that people probably, you know, you need to travel to use it. It's not like you just put it on your phone. In 2020, it was 78.8%, which I look at that number and I say, oh my gosh, in a year where basically your clear membership was worthless because you couldn't travel and you couldn't go to big stadiums. They managed, like, retention only dipped by about 7%. That's incredible.

So that's the background. I'll turn it over to you. Absolutely. So clear as roughly 80% retention, it's got to be a valuable product then. Well, my pushbacks would be, you know, it could be a very valuable product or it could be very difficult to cancel, you know, and be making it difficult to cancel, increase retention. Another point that's important to note on their retention figure, a lot of the clear users, get it for free.

Like certain people on the Delta Medallion status, United Jamilage Plus, just get it for free. They're considered in that retention number two, even though they're paying nothing or paying a significant discount for it. So you've got to keep in mind that. A lot of members are paying a discount. So the retention number for people paying $180 a year

is probably a lot lower than the retention number for people who are getting it for free or for $50 here. Finally, on that number, you know, there's a grace period of, I believe, 45 days for if it's a billing failure, if like your credit card stops working, it's not considered churn until 45 days after the fact. I think there's also a two-month extension beyond that, you know, just for anybody you cancel. So it's not even like, did you cancel your annual membership? Did you cancel your annual membership and then not renew within the last two months? And then that counts as like

churn. So I think there's some gamesmanship going on in addition to make it difficult to cancel, which again, you start putting this all together and you're like, maybe this company is misleading them. The most interesting thing you said there is the the churn on the people they gave for free. I mean, you said plenty of interesting things, but I hadn't even thought about that. So if I'm getting it for free through my Delta frequent flyer or something and you know, I got it in 2020, I got it again in 2020, I'm paying nothing for it, even if I'm not using it, right? Maybe I didn't travel or something. I'm still counting as a non-churn member to clear. Exactly. You're not going to churn off that. Once you sign up for clear, you just use your Delafel frequent flyer number. You get it for free. You're an active clear member who doesn't turn.

But that is strange. So what would you, you don't, if you haven't done the work, just say, I don't know, because what would you estimate the churn of people who actually pay for a clear is? I'm going to say, I don't know and estimate it's roughly 50%. I would say people who are paying $180 a year probably turn 50%. percent lead within a year. That's my gut estimate. Okay. So if you're, if I'm just kind of doing the math in the back ahead, that would mean you think roughly half of their member bases paying them 180 per year and half is coming from the free services? Well, sorry. I think that, so I think a lot of people get a discounted, okay, like a hundred, a hundred, a hundred ten or fifty dollars through Delta United and friends and family. Those people probably turn out a lot lower. rate than the 180s. That's what I would say. But I think that the headline number, people who sign up for $180 a year, 50% probably turn within a year. That's my year. Let me give

a kind of different pushback. One of the things I've looked at it is we're getting these weirder bundles, right? Like the old thing in the 90s was there was the cable bundle, right? And they just bundled a bunch of channels together. And you had to pay for it. It's good entertainment. But now, like, the bundles are expanding. You're getting weirded bundles, right? Like, if you get T-Mobile, you get Netflix for free, or you might get an Apple Music subscription or a Spotify subscription. And I do wonder, like, here's got such a unique offering where you get through a checkout

line faster, right? And that's going to really attract a very high spend consumer who does a lot of traveling, makes a lot of money, right? So when I look at that, I almost wonder, like, oh, you know, an Amazon member. Could somebody get an Amazon membership and then get clear? And it really creates value that no one else can get really interesting strategic optionality. I don't know where I'm going with that, but I just wanted to toss over to you to comment

on that. You know, I think that's really an interesting point. I haven't thought too deeply about it. But the biggest thing is like, you know, active frequent flyers who like would really benefit from this service, I don't know what your gut estimation would be, Andrew. But like, if you said how many people could like use a service that goes above and beyond TSA-free to really cut to the front of the line. My gut estimate would be like two or three million. One percent of the U.S. population is like really active frequent flyers.

A lot of people have never flown or too old or too young. It's like, and then they basically caught that from being in airports for 10 years and advertising and heavily and having people come up to you all. You know, maybe it's four million and not three. Maybe it's five million, but it's probably not 20 million. So then it really becomes what about menus outside of airports. Could this be used in stadiums and restaurants and that sort of thing? And that's where I've become more skeptical. Let's go there in one second. I just want to comment on one thing because I'm looking at my notes that I pull from the S1. And again, it just, because you were saying, hey, two to three million. And I kind of agree with you, the number of frequent flyers who are doing it

that much is low. But I'm looking at their notes. And in the S1, they said, hey, it took seven years to get our first million members. And then one year to get the two million, one year to get three million, one million and get four million. And you know, I just talked about they don't have, it says one one more year to get four or five. They don't have five million paying members. And when I look at that and when I look at that and they're bragging about their network effects, it's like, yeah, but you don't have five million paying members and you're bragging how quick you got to five million. It's just, it's weird. It's weird. It's misleading. And Andrew, I didn't even know that. That's a great fine. But yeah, it's it's, it just doesn't. Your understanding when I was first hearing about

this looking completely on the outside, like, is so different. Your understanding, if you haven't heard it, you think it's a government service, there's just all this chicanery that makes you think, oh, this is just a beautiful, beautiful network business that's going to, like, grow off into the sunset, and every frequent flyer is going to have it. And, oh, now they're doing identity verification for stadiums. But then when you drill down into it, it's like, no, they need to pay the airlines a ton. They need to play the airports a ton.

They have all the leverage. People don't actually, like, love it. Some people do, but most don't. They've been around for 17 years. So before I distracted on the 5 million members, you were about to go to, I think there's two big growth things for Claire. Like one, the first, the most basic part is they say, hey, you know, there's still airports to penetrate.

When we get into airports, you know, we penetrate 4% of the metro service area in the first year. They say in Denver, we're, I think they're approaching 12% in Denver. And they say, we think every other curve, every other metro is going to follow that curve. So you get to 12% in all the big metro areas. That's a lot of members, if you could do that. So that's their base thing. But then there are two areas of expansion.

Medium term, you mentioned they want to say, hey, you go to a sporting game. You don't need to check in with the ticket. You just go, you scan your clear face. And not only with the clear face, you can go up to buy a hot dog or a hamburger or something, and they'll just scan your face and it'll pay for it. And everything's touchless. It's fast. It's easy.

It's convenient. That's number one. And then number two, they've kind of said, hey, right now people use clear 12 times a year, you know, when they travel and hopefully when they go to stadiums. We want to change the product into something that people use 12 times a day. So the two big growth areas are stadiums and then 12 times a day. Let's start with the stadiums. Why do you think that might not be a great strategy or what do you think about that?

This is where I got to be careful because I don't think anyone truly understands the segment super well and the extent of it. One thing I'll note is the CFO was asked, like what percent of your revenue are you getting from stadiums? How much is it? And the response was, we're not breaking out specific lines of business within revenue, but as noted, we're gaining some significant traction within these different lines of business. Okay, so you're not going to tell us how much revenue is, but you're gaining a lot of traction in there.

Thank you. So that's what makes you skeptical right off the bat. It's not like concrete, how much you're getting paid for anything. My understanding, and I want to, like, put an asterisk on this because I'm not 100% confident, it is that it's still essentially a line-cutting service at stadiums, at concerts, at baseball games, whatever, where if you have clear, you can, you're paying more and you can just go through a different line to get in faster. In the long run, like, how is virtual identification going to be done? The thing I highlighted in my articles, Apple has it, where they made agreements

with 13 states where you can have your ID just on your iPhone. And what I think is just going to happen is you go up places, you know, people will know who owns the ticket. If you just scan your iPhone, like put your iPhone somewhere and it's like, okay, this person is who they say they are because their IDs linked to it and they own the ticket. It's like Apple's the natural winner here, to the best of my knowledge, Clear doesn't have like a super proprietary eye scan or fingerprint scan. Those are everywhere. It just doesn't make like much sense like why Clear would be like the one for that. Now, Clear is a line-cutting service, maybe. If Clear's paying the venues, it's an extra revenue line for them. But it's just a little icky where I don't fully understand the value

clear is adding. Let me push back on two things. One, you said Apple is natural winner. And, you know, I do think there is an argument, hey, he's clear the winner versus a big tech person. But, you know, Apple operates a closed system, which let's say half the people in America have an iPhone. It's probably a little under that. But let's say half. If Apple is going to win, then every Android person is an Android person is not going to be able to use this thing, right? Doesn't the winner have to be kind of an independent third party? I like that point. Why can't, you know, Apple iPhones are the first to adopt it where your ID is linked to your iPhone.

Then Android phones add that later. I can still see it being both. Do you want your biometric data, your eye scan, and do you think hundreds of millions, of Americans want to give their fingerprints and eye scans to a company called Clear that emerged out of bankruptcy in 2010. One of the things that helped drive them into bankruptcy is they lost personally identify data on like 30,000 users when a laptop went missing. It's like it's just not it's not with the like social themes of today. I don't see it happening. It's going to be through people's phones. You walk in, you scan your phone somewhere, the light comes up green and

you go through. I'm laughing. because saying, do you think millions of Americans are going to trust some random company with their biometric information? It transitions weirdly but nicely to my next question, which, you know, I think clear is saying, hey, we're actually kind of a COVID beneficiary because people, you know, people can go get that negative COVID test or have on their clear profile, this person is vaccinated. And then that's really great for facilities, right? Because they can come in and biometrically check you. And then when they come in, they can report to the health authority to something. something, hey, this is a crowd where 100% vaccinated or and or tested negative for COVID within 24

hours, right? Because it links to the profile. So they're arguing that they would be a kind of COVID beneficiary in that way. I'm guessing you would take issue with that. It just, again, what's talked versus what is substance? My understanding is you can upload your vaccine card to clear it. And like basically the clear app will confirm, hey, this is a vaccinated person. and we have a virtual thing for their vaccine card. And then if you're like a restaurant worker or something, you can fill out a survey before going into the office, like, here's my vaccine card, check that I had, like,

I've done my temperature scan and checked for that. Like I washed my hands. And then the clear apple light up is green and you can show that to your boss. Like you're good to work for the day. Beyond that, I'm not sure how much substance there is to like all this other stuff. Like, you know, fine, you know, you have it so people can upload their vaccine card so if they go to a venue, they can show virtually that they have their vaccine cards.

But you can also just take a, like, I have just a photo of my vaccine card and my photo is smaller that I show people here in New York. And post-COVID, which, you know, it's going to be a year from now. I don't think this is going to be as big of a thing. It's just going to go away. Yeah, I've been showing people my vaccine card from my photos as well. It works perfectly fine. So I just, it's just so that what you sell people on and then what the actual substance is, it's tough to tell.

And then when you're being, you know, misleading or coy around the disclosures and how much revenue have, it gets more confusing. And, you know, I've got this a few times where you go in and just as you learn more and more, it always is slanting negatively for the business. And it's just a very different thing than you anticipated. And it never works well. Let me, so let's turn to the longer term growth picture, right? Like, clear, I was reading the transcripts. And one of the things they said was, hey, in the long term, we want to, we want to, we want. clear to go from a product used 12 times a year to our product to use 12 times a day.

And some of the other stuff they said in there, it was basically, it was equivalent to how Amazon talks about Amazon Prime. I was kind of finding where they want a prime membership to be so valuable that it's irresponsible not to happen. Right. And Clear was talking, we want you to just use it so much. And if you're using something 12 times a day and you're paying $180 a year for it, you're probably getting great value for it no matter what it's doing, right? It's saving time, all the sort of stuff. What is on the horizon? You know, you know, going to the airport, that's probably four times a year, 12 times year, whatever, going to stadiums, even movie theaters, you know, at most you're getting to once a week or something.

What is on the horizon that would take you to using the clear product 12 times a day? Well, I think their idea would be everywhere you go, clear is your virtual identification. So you either do a face scan, fingerprint, or have the app. And that's how you're identified at a movie theater, at a grocery store, a restaurant, just everywhere. And yeah, you can want it, but you can want it. And then you're spending $30 million in R&D versus Apple's billions and billions.

Apple has, you know, tons of trust. You can want it and you can sell investors. We'd like it. But I don't see a clear roadmap there. I don't understand why their technology is better than everyone else. Is it you have a user base of like 2 million frequent flyers and that's going to allow you to win but then, like, you know, that's not big enough. You know, this is the, outside of the airport,

which is like their entire business right now, I am less confident about all these things and less just aware. But I just, it's the pitch to investors, but I don't see the substance there. Yeah. You know, I guess the other big growth area where you could talk about it going from 12 times a year is I believe their stadium offering, I mentioned before, it's not just get into the stadium,

but it's also you go to the front of the line, when you're getting a hamburger, you get the hamburger, and they just scan your face and instantly put it, put the bill onto your clear account where, you know, you don't have to pull out a credit card. It's really fast. If you ever checked anything out at a stadium, it can take some time, sometimes.

So that's a convenience and a speed thing. And if they could get that into not just their, not just at stadiums, but, you know, all across, you could just scan your face and pay for something. Like, yeah, it sounds interesting when you frame it like that, but Apple's already doing it with their phone. And there's so many. And it just, it's, that sounds like the gross story that gets pitched so often, but it just,

it never turns out. And if it does, like, it's, it's not clear who's going to capture it. I don't know where I'm going with that. What do you think? Well, we, like, we have, like, even if Clear did get to all of this, it would seem right to be disrupted because you could just use your phone. Like, you know, it would make sense that I just pay by scanning my face and then, like, tapping my phone down.

Or Apple just has that you tap your phone down now. That's going to be the future of adoption. And like, you know, is the benefit here? you're going to be able to pay for stuff without having your phone and people will want to adopt that. It just, I understand the vision they're selling. I don't understand like the substance behind it. Why don't you just, you know, it's tough to get people to upload their. I recently signed up for Apple Pay where now my Discover card is linked on my phone and I can just tap somewhere. It's really tough for people to adopt that, even though Apple's huge and like, you know, has like all the

breadth in the world. And now like people will slowly adopt it and that will be, the future. The idea, all, everyone's just going to sign up for retina scans and fingerprints and like, we're going to use that as the checkout place everywhere. It just doesn't make sense. Yeah. And Apple Pay is finally getting some traction, but people forget, I mean, the chip companies tried it with first the, it was the card companies tried it with first the chip in the card and that took forever to adopt and it never really got right. They tried it with RFID on the cards. And I think that's finally starting to stop, but mainly because Apple Pay has the RFID. So finally people started getting it. Like, it took time.

to get those, to roll it out to pavement things. And remember, things have to be pretty ubiquitous to get a thing rolled out where people really want to try it. Like, if you just get in all stadiums, yeah, maybe a couple people tried, but you really needed it like every gas station, every restaurant, everything for this to work out. But Andrew, they have $30 million in R&D. Come on. Get this some credit. Like, it's just, yeah, I agree.

I'm skeptical. Let me ask one more question. So when we talked churn, we were mainly focusing on the consumer term, right? because ultimately the consumers are on the page. But it does strike me that, I mean, I do think they have an interesting moat in that we've talked about how if you get into 30 MSAs, then, you know, if you're one MSA, people only benefit from clear when they're flying. But if you're in 30, they benefit when they're flying and coming back, right?

And you get some other things. But we talked about how the consumer trend works, but I do wonder, have they lost people on the other side, right? Have there been any airports that had a clear and ultimately decided to kick clear out for whatever reason. Or did they have, obviously, the airlines have to set them into the gate. So I think Delta and United, you said it. Have they had an airline that was taking clear and then rejected clear? Great question. And no, I don't know if any airports have started with Clear and then stop. I don't know of any airlines that started with Clear and then stop. I do know that the airlines push Clear for discounts

for their members or retroactive discounts for the members. And, you know, so it's not like they just haven't stopped using Clear. They've asked for more from Clear and Clear has been willing to give that to them. But no, which probably goes to your earlier point. Airports, this is unmonetized space and you can get some money for it for the city. Every politician would love a free way to get some extra money. Yeah, I think it could work. But let's just like have some fun with like back of the envelope math here. It's like, let's say they get into the top 100 airports in the US, right? And right now they're not really profitable. But you get two million more users at an average of a hundred dollars a user that's 200 million dollars in revenue but a lot of that's going to the

city and delta and you know if you after that they're going to be paying taxes all that 200 million in recurring revenue from your two million new users like 30 million 50 million flows to the bottom line and you're like you know and now take you to break even slightly positive so now you're at a hundred times earnings in the case you like rapidly expand the tam like I just don't get it Does that make sense? Is that like fair thinking? Oh, it makes tons of sense. I guess, you know, the other, the bull case would be, hey, the debt, I mentioned Denver. I think their penetration is like 11 or 14 percent for memory. But that's, I, Denver's a small town with a huge airport. And does that count? Like, I don't even know how they come up with that metric. I don't like that. I don't disagree with you. I was just saying, I think the bull case would be they do it in the 50 biggest MSAs that probably covers 180 million people. You can get, you know, that's 18 to 20 million members. $100 per year on average. That gets you to $2 billion revenue. I guess that would be the bull case, but I'm hearing you. Yeah, you know, I just, I think the other bullcase is, hey, they have, let's say, 5 million paying members who are super frequent flyers, lots of high

income. You know, these are really attractive customers. We've seen with the frequent flyer programs how much people want to partner with them to get them credit cards, to get them all that sort of stuff. I just wonder, like, yes, it sounds nice having these people, but if you really started if you really started marketing them in the ways that make a lot of money for the frequent flyer programs, and I'm thinking specifically credit card partnerships, right? If you really started doing that, wouldn't Delta turn around be like, wait, what? You just took 500,000 of our frequent flyers who come through you and you gave them a credit card. Like, that's where we make all. That's actually where the airlines make their money, right? They run the airlines at a loss basically to make money on the frequent flyers and the

credit card partnerships and stuff. If they started doing that, I do wonder if the airlines would look really long and hard and say, do we really need this money for Clear? Or are we kind of pulling the, you know, what Disney and Stars did for Netflix 10 or 15 years ago where we gave them the money, we gave them our content in the short term. We counted the money and said it's free profit, but in the long term, we gave away our most valuable asset. I think, you know, I'm just thinking out loud here, Andrew, and I'm, you know, maybe the way you could really articulate a full thesis sign clear is you use the airport to get all these high income frequent flyers to get your app they start using it a little outside and it almost becomes like an afterpay type situation

where after pay first signs up merchants then you have tons of people checking your app and then your app becomes the go-to place to find deals and clear will say we got two million high-income people checking our app then we like highlight events and stores that enable clear and we advertise stuff to them through the app and then once you get the ball rolling even at the airlock say no more discounts for you, no more referrals from us. Like there's no like, you know, the balls rolling. I don't know. But it's just a little too like out there.

It's funny you said after pay because I can't remember if it was after pay or a firm that Shopify partnered with and Shopify took a big equity stake when they did the partnership. But I was thinking about in the back of my mind when I was asking a lot of these questions, I was thinking about that where, you know, kind of clear is the afterpayer or a firm and the airlines or the Shopify where they took equity. they made money, but eventually, actually kind of everybody's happy in the afterpay affirmed Shopify relationship, right? Everybody made money. The stocks all went up, all that sort of stuff. But I was wondering if that was a parallel there. You know, maybe the airlines, as we mentioned, have an

equity staking clear. But I think it's an airport concession. This is an airport concession. It might be a good idea. It might get into 50 airports. It might start earning money and become profitable. Frequent flyers might love it. But that doesn't mean it's a $5 billion, $6 billion business. And, you know, just over 10 years from now, what could Clear be to me? Clear is going to be a more popular airport service. You know, people are paying $100 to $180 a year for it and it might be earning $100 million. They've also got some real existential risk where if TSA pre got overhauled in any way, where, you know, if you thought about bringing security requirements down in some form and TSA pre,

or just TSA lines in general kind of move smoother, that's a disaster for Clear, right? They're almost a bet against the government bureaucracy, which actually betting against government, betting that government's slow and inefficient has generally been a good bet, but they are a bet against that kind of, right? I think that's a good point.

So one thing we didn't mention is another revenue line for Clear that hasn't started, is there one of three partners who are being paid by the TSA Pre program to sign people up for pre? So a lot of Clear members also have TSA Pre. got to be clear about that. Clear will only get you to the front of the ID checkline. They don't do anything on the baggage side. So you still want to be in TSA pre, so you don't need to take your

phone out of your pocket of your laptops out and keep your belt and shoes on. That you only get with TSA pre. So there's overlap there. And now the government has gone with three firms, clear, tellios, and I think someone else, and said, hey, you know, you can charge people $75, $85 to sign them up for pre. You have physical centers where you're going to like vet people. You need to run a background check on them and do this other stuff. You need to refer them to the government to get them approved. But for every person you add to free, you can like charge the users and then make money off that. That's another small revenue addition for them. But yeah, my view is over time pre, you'll become more and more popular. I've had a fantastic experience with TSA pre anytime I've

used it. And some people will still want clear, but the majority of common flyers will be okay with TSA-free. And then for like the executive frequent flyer, you probably want clear. But it's, it's an airport concession. This is an airport concession that doesn't have like, you know, the economic leverage in the longer. Perfect. Hey, Edwin, I want to give you the last word here. Any last thoughts? You're right. Oh, anyone, everyone should obviously go read his write-up. I believe the clear write-up is behind the paywall, but the bare substack is X. So people should certainly consider subscribing and listen to that. But any last thoughts, any, anything that we kind of didn't hit on with Clear,

that you wish we had hit on, anything like that? No, I really enjoyed this interview. Andrew, I think of it a little differently now. You're always good at bringing out thoughts and people. Everyone should love this podcast. Check out the Bear Cave Newsletter, which is the newsletter I write. And I really enjoyed this, and I hope people enjoy it. Hey, this was a really fun one.

Again, as soon as you wrote up, Clear, I think within 10 minutes, I'd sent you a message. I just thought it was such an interesting company. the way you came at it and it was uh i enjoyed having you on and talking about this again so we'll have to have you on sometime in the near future for our third conversation absolutely Andrew thank you edwin dorisie from the bear cave thanks so much for coming on