The Situation

MoviePass – what happened? We should start the analysis of this by asking – how did it get funded in the first place? And, most intriguing – why is anyone still a supporter, except the public, which is (was) getting a huge subsidy for going to the movies. Who profited and who lost? Who was the least business-savvy of the bunch? Let’s find out.

The Dream

The latest news from MoviePass was that it expanded its quarterly operating loss to $126M from a more ‘modest’ $107M. Not the growth any investor wants to see, but what if it has tremendous potential to suddenly explode? What if the management suddenly finds a way to monetize the 5 million users currently on its system? Wow – imagine all the possibilities! Well, someone did imagine – I read a Seeking Alpha article that does just that – lists all the myriad ways that MoviePass management can monetize its user base (https://seekingalpha.com/article/4200720-moviepass-will-survive-also-thrive). The writer admits, on the last page of the advertiser-filled multi-page post, that he may be taking a long position on the parent company stock (HMNY).  MoviePass started its rocky relationship with theaters back in 2011, but at least their business model back then was more reasonable: $50/mo for unlimited movies in 21 theaters. Here’s the problem, though, they allegedly failed to align the theater chains with the new business model and met resistance in the form of AMC openly refusing to take part. That the theaters are part of an old business model that is ripe for a disruption, a-la the music industry, is painfully obvious, but their shortsightedness in the face of this opportunity is truly stupendous.

Industry in Decline

Ticket sales are in decline, half of the ticket revenues are owed to the film distributors (another business model that will likely change at some point very soon), and the bulk of their profits coming from concessions – the theaters should have jumped at the opportunity to boost attendance. Should have. I suspect that its those very contracts with the studios and distributors (often one and the same, for the blockbusters) is the reason why theaters remained steadfast. They have a simple deal – 50% of ticket sales is owed up the chain of distribution. How will they account for fractional fees received when John Doe pays $50 to MoviePass and attends 10 movies, while Jane Doe attends 3 movies? What about the earned revenues of MoviePass proper? This is exactly what music distributors were scared of – how do you apportion royalties? Then Apple came in and said they’ll take 99 cents for a song and … figure it out.

The Problem

According to an Uproxx article (https://uproxx.com/entertainment/moviepass-amc-history/3/) published earlier in 2018, concession sales in the theaters that were targets of the MoviePass launch went up by 125%. This is the cash cow of the theaters, so the fact was not lost on them, yet they continued to ignore MoviePass for 7 years while profiting on MoviePass’ terrible business model and the public’s will to exploit it. Except for a brief stint where AMC was playing ball with MoviePass, they’ve gone as far as threaten legal action against the insurgent, according to Variety (https://variety.com/2018/film/news/moviepass-withdraws-amc-theaters-1202677227/)  The irony of the situation is truly priceless: going to the theater is too expensive, ticket sales are in decline, price per ticket is going up, but once someone offers a subsidy to the customer, they become accustomed to it. AMC was afraid that once MoviePass went bankrupt (which their business model makes unavoidable, as it stands), the public would realize just how much they were being gouged by having to pay full retail once again. Once MoviePass user base went into the millions, that would mean that millions of people would be even more upset about retail movie pricing and would purchase fewer tickets still, and would spend less on concessions. Very reasonable fear, actually!

The Investors

Why did MoviePass last this long (2011-2018), given its unsustainable business model? There are people like the Seeking Alpha author (https://seekingalpha.com/article/4200720-moviepass-will-survive-also-thrive) that outline a myriad ways to theoretically monetize the membership, but their arguments sound like the analysis papers I heard read out loud back in my MBA program. The joke of MBA programs world-wide is that since every human breathes air, and there are 7B people out there, a company that started to sell air will have a potential market of 7B people to sell to. Clearly that is ludicrous, and just as ludicrous as charging $9.95 and offering members a chance to see up to 30 movies a month while paying retail ticket prices for them to do so. I wonder how Shark Tank would respond to that business model? I know how I responded – with laughter. How is it possible that a company that not only failed to turn a profit in 7 years, but actually having a business model that guarantees a loss, can have more and more money poured into it?

I have to admit – they gave out great ski hats at Sundance last year – I was there for the party – and the mansion they rented and food they served was great, but shouldn’t there be a viable business model in place first? Or – shouldn’t there be something more to the company’s plans beyond ‘one day we’ll figure out how to make money from this thing’? This explains the frustration felt by company founders everywhere whose only fault for failing to find investors is that their business is not a category changer or disruptor of an industry, but simply a potentially profitable company.

 

 

 

 

Title photo property of SlashGear and used here under fair use license.