- TECHNICAL CENTER
Heading to the theater to catch a summer blockbuster or Oscar nominee is one of the most enjoyable ways to spend time with families and friends.
However, the cost of such outings has increased markedly. After travel, tickets and snacks, that trip to the cinema can leave consumers with a big tab. That cost, among other factors related to the massive entertainment industry, has depressed turnout at U.S theaters, bringing 2017 ticket sales to a quarter-century low.
And then MoviePass burst onto the scene late that year, offering customers the chance to pay a monthly subscription of almost $10 and in return see one movie a day. That equated to thirty-some movies a month, all for $10 — a sum that doesn’t even cover the price of a single ticket in many cities.
Despite rampant growth in 2018, MoviePass now faces an existential crisis and serious financial concerns. The story is a cautionary tale for subscription services looking to disrupt established markets—not because it isn’t possible, but because having a viable subscription business model is massively important.
While it’s likely many have only heard of MoviePass this year, the service was actually around way back in 2011. According to The New York Times, when it started, MoviePass wanted to be the “Netflix of movie theaters” by offering users access to a movie a day for a flat monthly charge. However, while Netflix has a direct line into consumers’ homes through the internet, MoviePass had to go through cinema groups and theater chains, which weren’t exactly thrilled with the disruptive prospect. Despite signing up nearly 20,000 for a beta, the pilot never happened due to industry resistance.
After that initial setback, MoviePass built up its service, forged alliances with the likes of AMC and others, and made general strides toward becoming a popular service. However, it wasn’t until August 2017 that Helios and Matheson Analytics (HMA) bought a majority stake in MoviePass and soon brought the monthly price to $9.95 and experienced an immediate boom. It eventually acquired 92 percent ownership.
Until that time, MoviePass charged around $35 for the movie-a-day deal, meaning the fee was reduced by more than 70 percent while still offering customers the same terms.
Unsurprisingly, consumers flocked to the service. In June 2016 MoviePass had 20,000 subscribers. In June 2018 it pushed past the 3 million mark. But even before that milestone, cracks — or, perhaps more accurately, chasms — in the business model had opened.
With a deal like that, there’s no way customers could lose—but MoviePass certainly could.
The way MoviePass works is that it pays for each ticket a subscriber uses. The math isn’t hard, or pretty: If a consumer pays $9.95 once a month and MoviePass pays for as many as 31 full-price tickets for just one customer, that’s a lot of money out the door. And thanks to the price drop, AMC severed ties with the service, meaning cinema management groups and theaters across the nation likely weren’t incentivized to offer discounts. In May, Bloomberg Businessweek reported that Helios said it lost $107 million in the first quarter of 2018, earning just $47 million from subscriptions by comparison, and burning through $21 million a month on average since cutting the price of service. According to filings with the Securities and Exchange Commission, Helios’ auditor had “substantial doubt” in its ability to remain solvent.
“They’re giving away dollars for quarters,” Michael Pachter, managing director of equity research Wedbush, told MarketWatch. “That’s just a terrible business model.”
Losing money, it seemed, was always part of the plan.
“I knew we would go through hundreds of millions of dollars,” Ted Farnsworth, CEO of HMA, told Vice News. “We never thought differently.”
In the interview, Farnsworth claimed expected losses would be offset by revenue from other areas and a massive base of users: the break-even target being 5 million by the end of 2018. For his part, Mitch Lowe, MoviePass CEO, contended to NPR that Amazon lost money for 20 years and people were underselling its ability to turn a profit.
Revenue streams beyond subscriptions, however, have been anything but a sure bet. MoviePass Ventures, the subsidiary created to acquire and distribute films, released “Gotti” as its second feature. The result? A movie so universally panned it received an ignominious 0 percent rating from film critics, as aggregated by the site Rotten Tomatoes. Lowe, too, was pressed by NPR about consumer data being packaged and sold — months after he had to walk back statements misrepresenting the company’s data policies — and how users weren’t exactly thrilled, which could impact advertising revenue the service wanted.
“Losing money, it seemed, was always part of the plan.”
What MoviePass was banking on was to replicate the scale that other subscription and streaming services had built by disrupting entrenched industries. If enough customers signed up, the most active users on which the company lost money would be but a fraction of the overall base. It had been flying on the way toward the five million goal, but soon encountered a paradoxical speed bump of sorts—people just wouldn’t stop seeing movies and using the service, which was putting the business in jeopardy.
At the end of April, Helios had some $15 million in cash on hand. The situation clearly wasn’t tenable, but nothing changed until July. During this time the company had to seek emergency loans to pay its bills, and a service disruption compounded the troubles, serving as cinema-worthy foreshadowing. Eventually, the company announced a plan to raise the price of service to $14.95.
The backlash was swift and fierce. Increasingly frustrated customers made their displeasure so known that MoviePass was forced to back down from the price hike.
Stuck between an unsustainable business model, skeptical investors and irate customers, the choices looked slim for MoviePass: change fundamentally or perish. None of the options would be easy. Eventually, after flip flopping between service price and structure, MoviePass in early August settled on keeping the same price, but limiting users to only three movies per month. About 12 months after MoviePass first made splashes, it ended up piling on further restrictions by saying it would only make six films available and at specific showtimes—a harsh comedown.
“MoviePass blew a hole in the traditional ticket-buying experience, but didn’t consider the collateral damage.”
MoviePass is now in the odd position of trying to get its subscribers to utilize the service less often. The moves have engendered some optimism among investors, but customers may not be as generous and decide to skip to any one of the growing number of competitors populating the space. While MoviePass was very much pioneering in its attempts to disrupt the industry, it might have dug its own grave by creating a hole for other businesses to then step through. The service need not look far to see how competing services can further crimp its operations. AMC, the once begrudging MoviePass ally turned nemesis, crowed about the growth of its ticket subscription ticket service Stubs A-List—$20 a month for 12 movies—compared to MoviePass’ continued issues, including a second quarter operating loss of $126.6 million and a class-action lawsuit filed by Helios shareholders who saw their shares tumble 99 percent in one month.
But AMC isn’t the only theater chain that’s fighting back. Cinemark offers the stripped-down package Movie Club that gets customers one ticket per month (that rolls over if not used) and a 20 percent discount on concessions. Sinemia, which was founded in Turkey and since expanded to the U.S., has various subscription tiers, including a classic level at $13 for one ticket per month and an elite grade at $25 for two tickets on any feature, including 3D and IMAX.
The disruption seen in movie ticket buying is emblematic of the trend across several industries and products. However, while MoviePass blew a hole in the traditional ticket-buying experience, it didn’t consider the collateral damage it could sustain from the blast. Disruption for disruption’s sake isn’t a guarantee of success. If anything, MoviePass forged an opening for its competitors to enter through and take advantage of.
The story isn’t entirely over for MoviePass, however. Its reforms have been cheered by investors — but that’s not the cohort with the company’s fate in its hands. Consumers will decide whether to abandon or save MoviePass, with much remaining to be seen.
Subscriptions are popular among customers as they continue to drive growth for startup services and companies that diversify. MoviePass, however, potentially flew a bit too close to the sun. The importance of a sound business model is clear, and for subscription companies the considerations are numerous and complex.
Vindicia, the Subscription People, can help companies understand and implement their subscription business strategies. Our 15 years of experience and wealth of Subscription Intelligence and transaction data have allowed us to accumulate strategies and best practices not available from any other subscription billing platform.