(Bloomberg) -- Hannah Wolfe became a MoviePass Inc. member, hit the pricey theaters of New York, and began doing her part to drive the company out of business.
Since paying the $9.95 monthly fee for the movie-a-day service in January, Wolfe has seen Black Panther and most of the Academy of Motion Picture Arts and Sciences’ Best Picture nominees. Twelve films in total, at no additional cost to her. “It seemed a little too good to be true, especially in New York where movies cost like $16 each,” she says. “It feels like I haven’t paid for the ticket.”
In a way, she hasn’t. Wolfe has paid MoviePass about $50, and in turn the company would have likely shelled out almost $200 to theaters to cover the full ticket prices. To make matters worse, Wolfe has been recruiting everyone she knows—and some are getting even more out of the service. Her roommate rarely went to movies before and recently saw five in a week. Her father, a retired teacher, is on pace to see 40 films this year.
Eight months after slashing its price and expanding membership past 2 million users, MoviePass is now at risk of going bust. The parent company, Helios & Matheson Analytics Inc., which now owns 92 percent of MoviePass, said last week that it had just $15.5 million in cash at the end of April and $27.9 million on deposit with merchant processors. MoviePass has been burning through $21.7 million per month. A U.S. Securities and Exchange Commission filing last month revealed that the company’s auditor has “substantial doubt” about its ability to stay solvent. Michael Pachter, an analyst at Wedbush Securities Inc., warns that MoviePass may not survive the summertime run of blockbusters.
On Tuesday, Helios reported the performance of MoviePass for the three months ending on March 31. The company lost $107 million, earning just over $1 million from marketing deals and $47 million from subscriptions. Helios shares have fallen to decade lows of less than $1 after peaking at $32.90 in October, alongside the MoviePass hype.
To critics such as AMC Entertainment Holdings Inc., the largest theater chain in the world, this looks like a comeuppance for a business strategy that always required either suspension of disbelief or faith in Silicon Valley-style magic. “What we objected to was their price point, which we believed would cause them to hemorrhage cash and have an unsustainable business model,” says AMC Chief Executive Officer Adam Aron. That “doesn’t mean that the subscription model is a bad idea,” he adds.
Even rivals with subscriptions have been left puzzled by what MoviePass is doing. London-based Cineworld Group Plc offers an all-you-can-watch subscription in the U.K. that costs nearly three times as much. Cinemark Holdings Inc., the third-largest U.S. theater chain, has a $9 monthly subscription plan that affords just 12 films in a year.
Executives at Sinemia Inc., a service from Europe that charges its U.S. members $15 per month for a maximum of three films and is being sued by MoviePass, can’t figure out how the model makes sense. “Every investor asked me if I’m going to do the same pricing,” says Sinemia CEO Rifat Oguz. “Honestly, we thought it was a promotion,” he says. “It turned out, it wasn’t.”
Unlike a superhero prequel, the third act for MoviePass remains unpredictable even though the story looks familiar: an upstart willing to burn a pile of money to fuel rapid growth and disrupt an entrenched industry. The $10-per-month unlimited deal will likely prove temporary in the end, either because the company runs out of money or else decides to change the offer for the sake of its survival. But whatever happens, the big-screen subscription model MoviePass has popularized could end up changing the economics of the multiplex.
MoviePass CEO Mitch Lowe, 65, knows the audience of investors and multiplex owners doesn’t believe the script he’s been shopping around for months. Some of the dialogue can ring false.
“Who’s profitable out there?” Lowe asks in an interview. “Spotify isn’t profitable. Netflix isn’t profitable. God knows, AMC isn’t profitable.” The only problem with this view of the competitive landscape is that it’s not entirely accurate: In the most recent quarter, both Netflix Inc. and AMC reported profits.
Lowe should be familiar with Netflix. He worked there until 2003, guiding the company’s position in the video-rental era and forging partnerships with companies such as Best Buy Co. From there, he jumped to the DVD vending-machine empire Redbox Automated Retail LLC and tried to outmaneuver and undercut his former employer.
MoviePass had just 20,000 members when Lowe joined in June 2016 with an undisclosed stake, a fresh hypothesis about disruption, and a techie wardrobe topped off with the facial hair configuration known as a soul patch. The multiplex, as he saw it, was the only entertainment venue that hadn’t been transformed since the advent of software special effects.
A little more than a year after taking the top job, Lowe linked up with an investor named Ted Farnsworth, the onetime owner of a psychic hotline, to make a dramatic move. Farnsworth’s penny-stock firm, Helios & Matheson, bought 51 percent of MoviePass for $27 million and provided the financing to slash the membership price from about $35 a month to $10.
It’s pure Silicon Valley logic. As long as MoviePass can capture enough users, Lowe and Fansworth believe, money will roll in from Hollywood marketing budgets, retail advertisers, and even theater owners themselves. Right now, MoviePass claims to buy one of every 17 cinema tickets sold in the U.S. On this theory, the company’s mounting losses won’t matter if it can put millions of butts into those new recliners.
The reason MoviePass’s plan sounds plausible is that startups with similar all-you-can-eat pricing models have already reshaped the music and movie-rental business. But Spotify Technology SA and Netflix didn’t just offer low prices to consumers—they also acquired content cheaply, whether by buying DVDs that could be rented many times or paying low royalties to musicians.
Movie theaters have little incentive to offer discounts to MoviePass. In fact, theater owners have been raising box-office prices, pushing revenue to near all-time highs, as a way to offset lower attendance. The average multiplex ticket price in the U.S. and Canada increased 26 percent from 2007 to 2016, according to the Motion Picture Association of America, while the number of tickets sold slipped 6 percent.
This downward trend in turnout has persuaded theater owners to focus on quality, not quantity. A widespread industry vogue called reseating has removed rows of stadium-style chairs in favor of fewer, larger seats. Giants such as AMC and boutiques like Alamo Drafthouse Cinema LLC would rather sell dinner and cocktails to a couple than five tickets and a tub of popcorn to a family.
To theater owners, MoviePass pitches itself as a way to boost attendance again. “We want to prove that we can be a positive member of the ecosystem,” Lowe says.
Investors were keen on the idea at first. In the weeks after MoviePass slashed prices in August, Helios shares spiked tenfold. Farnsworth has seen this kind of pop before. Three of his penny-stock ventures—two drink makers and a vitamin company with a tiered sales structure—enjoyed bursts of investor enthusiasm. Then shares dropped to near zero.
Here’s how MoviePass explains its model, using cocktail-napkin math.
Assume that 20 percent of members see about two movies every month, at an average cost to the company of $22. From this group, filled with people like Hannah Wolfe, MoviePass expects to lose about $12 a month per member. The other 80 percent of members will see about 10 movies per year, generating about $1 per month in profit each.
If you look at MoviePass as a business that sells movie tickets, this is a rather dismal situation. The company would spend roughly $1.16 for every $1 in revenue it collects.
Joe Spiegel, whose hedge fund, Dalek Capital Management LLC, has made money shorting Helios shares, lampoons the strategy. “It works if enough people sign up and literally forget they have the subscription,” he says. “You have a ridiculous business plan, and the holes you poke through it are answered with an even more ridiculous plan.”
But Lowe and company see movie tickets as a loss leader to round up consumers—particularly young consumers. The most profitable side of the MoviePass model is supposed be sales of ads to studios and distributors. Retailers and services adjacent to the moviegoing experience—restaurants, ride-hailing apps, maybe even babysitters—would also become MoviePass advertisers.
MoviePass is supposed to be more like a film-obsessed Facebook than a ticket-selling service like Fandango Inc. Lowe can sketch an expansive vision of monetizing his data trove with targeted ads, reaching users with a demonstrated preference for body-horror films or female superheroes or poke restaurants.
But marketers are skeptical. Mark Douglas, CEO of digital ad platform SteelHouse, says companies would pay no more than a few thousand dollars for access to MoviePass’s customer database and about $25,000 to show a trailer to its subscribers. “They don’t have significant scale,” Douglas says. Movie studios advertise on YouTube, he points out, and the video platform has far more viewers and data on which kinds of movies they like.
The final chunk of anticipated MoviePass revenue is supposed to come from a share of ticket and concession sales. Lowe says something on the order of 20 percent would be a fair reflection of the increased traffic his service generates. To date, there’s been no sign large theater owners are rushing to offer money. “AMC has absolutely no intention, I repeat no intention, of sharing any, I repeat any, of our admissions revenue or our concessions revenue with MoviePass,” AMC’s Aron said in November.
Some studios, including 20th Century Fox, have had one-off arrangements to test the advertising power of MoviePass, according to people familiar with the arrangements. Fox didn’t pay MoviePass, one of the people said. But Lowe says the deals are real, and the studios won’t discuss them out of fear of running afoul of AMC.
Lowe sees these nonmembership revenue streams amounting to somewhere between $5 to $7 per user each month. In the first three months of the year, however, the company managed to bring in only $1.4 million from marketing and promotions, according to Tuesday’s SEC filing. That's far short of Lowe’s goal.
“I’m much more optimistic now than I was at the beginning of the year,” Lowe says.
Another way to keep MoviePass from teetering into insolvency is to get members to love the service less. The company switched to a sign-up deal on April 13 that restricted new members to four movies a month. Two weeks later, after social media backlash, the old terms returned. But the company is still advertising a $7.95 plan capped at three movies per month, alongside its movie-a-day deal.
Other moves to take some sting out of the heaviest users appear to be staying in place. Farnsworth recently cited efforts to reduce fraudulent use of cards, prevent repeat viewing of movies, and stop the sharing of memberships and passwords. Some MoviePass members now must upload a photo of their ticket stub to ensure they aren’t gaming the system.
The challenge of using MoviePass to actually see a movie has already been a hallmark of the MoviePass experience. The deal only applies to single tickets purchased on the same day as the showing, and customers must be standing near the theater before the app will transfer the price of a ticket to their debit cards. Imax and 3D films are out of bounds, as is buying a pair of seats (although MoviePass says it has a couples plan in the works). Using the app to secure coveted screenings at peak times is a bit like trying to book a flight with airline miles.
The other obvious problem is that the drive to increase membership ends up creating more moviegoers, burning through more of MoviePass’s dwindling cash. Last week, in a promotion, MoviePass sent members an email offering free one-month memberships that can be given to three friends. The company has blitzed the Midwest with radio ads, in some of its only marketing so far, as a way to increase membership in places where movie tickets are sold relatively cheap.
Eventually, MoviePass expects members to curb their own screen time. Lowe likens it to grazing a breakfast buffet during a weeklong hotel stay. On Day 7, he says, you don’t pile the bacon on your plate quite as high. So MoviePass is feverishly trying to attract film gluttons—and then waiting for them to get bored with going to the movies. In the meantime, Lowe says the company has “very committed” investors who have agreed to pour in more money.
The failure of MoviePass would knock out some chunk of box-office revenue—theater owners say it accounts for less than 5 percent of traffic—but the prospect of MoviePass somehow surviving could be even worse for big multiplex companies. If it stays solvent long enough, the sheer size of its millions-strong membership may begin to move the market.
“At some point, the numbers do make sense,” says Brian Schultz, co-founder of Studio Movie Grill, a chain of 30 theaters mostly in the Southwest. Schultz, who has invested in MoviePass, believes the company is creating a whole new class of cinema customers. “You’ve got to give some credit to a concept that people actually fanatically love,” he says.
Studio Movie Grill is also one of two dozen smaller theater chains that has bowed to MoviePass by entering into a marketing agreement. On average, Farnsworth says, these deals shave about 20 percent off ticket prices. At almost all of the 5,000 or so theaters where MoviePass is accepted, the company pays in full.
“I don’t look at it as a discount, or a bulk sale, or a revenue share,” Schultz says of the money lost to MoviePass users. “I look at it as a marketing acquisition cost.”
Lowe said he closed similar contracts at the CinemaCon conference last month with scores of theater chains, comprising thousands of screens. Most of the operations are small and speckled through less populated regions, including Main Street Theatres in Omaha, Neb., and Detroit’s MJR Digital Cinemas.
If MoviePass gets close to its yearend goal of 5 million members, marketing messages offered on the MoviePass app may start subtly—or not so subtly—shifting customers to the theaters and films the company prefers. Such as those playing at Studio Movie Grill.
“We can’t control what everybody does,” Lowe says. “But there’s definitely a lot of theaters with a competitor around them.”
The moment that came closest to this dream of MoviePass moguldom happened in late January in Park City, Utah. As the Sundance Film Festival kicked off, Lowe rented a giant house on a mountain outside of town and spread the word that he wanted to finance a film. There was a party with a dance floor, four bars—one on each floor—and plenty of MoviePass stocking hats. Filmmakers came with pitches.
Lowe gets giddy talking about it. “People were just showing up at the house,” he says. “And they were bringing their lawyers, they weren’t just exploratory conversations.”
The company cut a deal with undisclosed terms to back a buzzy film called American Animals. At the end of April, the company also backed a biopic with John Travolta cast as mob boss John Gotti. When the two films hit theaters in June, MoviePass will try to deploy its members and perhaps more theaters will screen them as a result.
Paul Davidson, executive vice president at The Orchard, which is distributing American Animals, is keen on seeing proof of MoviePass’s ability to fill seats. “I can spend $1 million on TV advertising and billboards,” he says, “and nobody can tell me if it drove a single person to the movie.”
During that snowy week at Sundance, Lowe and his team had their pick of films: comedies, buddy flicks, action fare. Ultimately they picked a movie about a group of outsiders who cook up a heist. The trailer starts with a voiceover: “You ever feel like you’re waiting for something to happen, but you don’t know what it is?”
That worked for Lowe. He was all in.
©2018 Bloomberg L.P.