Subscriptions

Is There Still A Happy Ending For MoviePass?

For the team at MoviePass, it’s been an interesting few weeks – or few months, depending on how one looks at it.

MoviePass and its parent, Helios & Matheson, entered 2018 full of confidence about disrupting the movie theater model, talking up its plan to expand, acquire and gather a critical mass of users sufficient to change how Americans go to the movies. Instead of paying $9, $10 or even $13 or $14 to go to a movie, the theater customer of the future would instead subscribe for $9 a month – and be able to see a new movie every day of the week if they so desire.

Basically, the all-you-can-eat buffet concept comes to movies with a lot of the same underlying principles. Some people will go back for thirds, but most people won’t eat any more than they otherwise would if it wasn’t marketed that way. The economics work thanks to the law of averages.

But by spring, the bloom was starting to come a little bit off that rose. Reports began to emerge that the firm was cash-strapped and at risk of running out of money soon – accusations that Ted Farnsworth, head of Helios and Matheson Analytics, vehemently denied.

In an interview with Variety at that time, Farnsworth said MoviePass has roughly $300 million in a line of credit. “There’s been a feeding frenzy of negativity, but it’s not going to slow us down,” said Farnsworth in the interview. “I’m not worried at all. You’re going to see. We’re doing more acquisitions of movies and companies.”

Those affirmations came sandwiched in between news that MoviePass subscribers would be in for a change in its terms of use. First, it was that the $9.99 “all-you-can-eat buffet” was going away, and a few days later that was retracted. Shortly thereafter, a new high-demand pricing tier was announced, where users could pay an extra $2 for movies that are popular with subscribers.

Then, last week MoviePass announced they were raising prices to $14.95 a month and that going forward, new releases on more than 1,000 screens nationwide (i.e., every blockbuster) would no longer be available through the app until two weeks after the movie was released and showing in theaters.

The announcement was not popular – particularly since it coincided with widespread outages for app users. Reportedly, MoviePass ran out of money and needed to take a short-term, high-interest loan just to fund member purchasing cards.

As of today, the MoviePass offer is as follows: For $15 per month, a customer can see one movie per day – but that doesn’t include 3D or IMAX movies, and users can’t see the same movie twice. Some films may require an extra fee if MoviePass’ internal algorithm calculates that the film is in high demand, and not every screening at a theater will be available through the app. Blockbusters are out for their first two weeks as well, unless they are “made available on a promotional basis.”

And apparently, the economics of the all-you-can-eat buffet cafeterias are quite a bit different than all-you-can-watch at the movie theaters.

The Curse of Adverse Selection

It costs, on average, about $8.73 to see a movie. But movie prices swing wildly depending on the local market. That $8.73 swells to $14.30 in New York City or $12.59 for matinees.

Those swings matter greatly.

On paper, the MoviePass model made some sense. Most Americans go out to the movie theater to see a movie four to five times a year. If a subscription changes that dynamic to 10 to 12 times a year – twice as much as the average consumer goes today – MoviePass says they are in the black.

“Here’s the trick: 89 percent of American moviegoers only go to four or five movies a year. When they join MoviePass, they double their consumption and go to about 10 a year. That’s a little bit less than one a month. They balance out the 11 percent of the population that go 18 times before joining MoviePass, and then after that go three times a month. It works out. Over time, it actually works out to be about one movie per month per subscriber.”

The problem is the most important two-word combination in the above quote from MoviePass CEO Mitch Lowe and an industry event last year is “over time” – because, as it turned out, MoviePass didn’t have nearly as much time as it thought.

And it’s because of something call adverse selection. MoviePass customers skewed urban, young and childless – and they were disproportionately made up of that 11 percent of consumers who go to the movies an awful lot. Because for them, MoviePass represented an amazing deal: The subscription was less than the cost of a single ticket, and urban areas have many accessible theaters.

Suburban married people – the majority of the 89 percent of the public who only go to the movies four times a year – joined far less. For suburban rural consumers, MoviePass doesn’t solve the main problems of going to the movies quite as well, because the problem isn’t cost – (movie tickets are cheaper on average – it’s finding childcare and a theater in proximity.

MoviePass offered a service that was most attractive to its most expensive potential users, who joined in droves. Those cheaper users? Not so much.

It Ain’t Over

It does bear at least mentioning that MoviePass is not the first startup to have blown up, needed to pivot and then struggled to stick the landing appropriately.

Today, Netflix has a market cap of $150 billion, and just beat out HBO for the most Emmy nominations in 2018. In 2011 – seeing that streaming was its future and mailing out DVDs was it past – Netflix abruptly announced they were separating the services, which customers had previously been able to access for a single $10 monthly fee.

Customers revolted and Reed Hastings, Netflix CEO, responded.

“I messed up. I owe everyone an explanation.”

He then proceeded, at the time, to make it worse by announcing they were not re-integrating the two services, but instead calling the DVD business Qwikster, which would have a wholly separate log-in and interface. People hated that so, so much more – and the idea was quietly shelved. Netflix DVD remained a separate service, with about 3.4 million subscribers.

“There is a difference between moving quickly — which Netflix has done very well for years — and moving too fast, which is what we did in this case,” Hastings said in a statement. The whole ordeal cost the company about 800,000 U.S. subscribers in the third quarter of 2011.

Obviously, Netflix has recovered to become the content mega-player they are today, with Emmy and Oscar nominations to its name. The Netflix brand has long since stopped being associated with DVDs in the mail.

But it made that pivot on top of a successful business with cash flow.

MoviePass is facing the worst kind of perfect storm.

They are running out of money, despite claims of having the ability to tap “deep-pocketed” investors. Those investors can run out of patience well before they run out of money.

They are also facing competition from the distribution channels that are core to their product – theater chains and movie studios – and that can set the rules of play.

Competitors like Atom tickets and AMC smell blood in the water. AMC is offering up its own movie subscriptions, while Atom is currently offering a “break-up with MoviePass” promotion that offers customers a chance at a year of free movies through a sweepstakes if they unsubscribe from MoviePass.

And their platform business model is at risk. They need theaters that accept MoviePass subscribers, and they need customers who are MoviePass members. And critical masses of each.

Consumers don’t like being given something and then having it taken away, even if they’ve never used it. Perceived value is as important as real value, and for MoviePass customers, a lot of real value has been taken away – in the form of restrictions on movie times and frequency – at the same time that the price of a MoviePass has increased almost 50 percent.

That undoubtedly will lead to fewer customers, as competitors, especially chains like AMC, have a leg up on the economics of a subscription business, and can use that to create more attractively priced bundles.

Of course, the goal of MoviePass isn’t to run on subscription revenue alone. MoviePass hopes to develop a large enough subscriber base that movie studios – the content producers – will treat them as a valid advertising and promotion channel.

The blackout restrictions, even the “available on a promotional basis” clause to its blockbuster blackout, could be enough to deal a fatal blow to movie buffs who don’t want to see a movie two weeks after it opened.

For now, MoviePass says they will push through it. Whether this movie ends happily remains to be seen.

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