Why MoviePass really failed

Theater-subscription service MoviePass officially shut down on Saturday, September 14th, ending the platform’s controversial two-year run as a would-be disruptor of the moviegoing business. Many pundits rightly pointed out that the company’s end seemed inevitable the moment the analytics firm Helios and Matheson purchased a majority share in the company, then dramatically dropped its monthly fee in August 2017. The new subscription plan offered users a movie ticket a day — access to films in any theater, in any market — for less than $10 a month, ensuring the company would spend more on its customers than they would pay to use the service.

Who can blame those early detractors? From the onset of the price drop, MoviePass’ model was literally too good to be true. The company played the middleman by buying movie tickets at list price, then giving them to subscribers. The initial hope was that most subscribers wouldn’t actually use the service regularly — like gyms, which use no-show subscribers to financially offset their heavy users. But as it turns out, people like movies more than they like going to the gym. Many MoviePass subscribers who were attracted to the new service by the lower price began using it frequently. MoviePass started losing money on virtually every subscriber, and it then went bankrupt.

But MoviePass’ ambitions were far more complex than just refashioning the gym membership for the movie theater. To better understand what exactly happened here — not just why the revamped company failed, but what set it down its comically self-destructive path — it’s best to start with Helios and Matheson.

Photo by Vjeran Pavic / The Verge

The firm, which began as a technical consulting company called TACT, takes its current name from the Indian IT corporation that acquired it in 2007, a few years after TACT’s stock fell off a cliff due to the dotcom bust. Helios and Matheson Analytics provides IT services to big companies, but it’s not clear what that means, or why it bills itself as a data analytics provider.

Instead, its biggest claim to fame prior to MoviePass was acquiring Zone Technologies, the creator of the controversial RedZone navigation mobile app, in 2016. That brought financier and founder Ted Farnsworth into the fold, and Farnsworth became Helios and Matheson’s chairman and CEO shortly thereafter. Farnsworth himself is a stranger-than-fiction businessman who’s been involved in everything from a psychic hotline service to vitamin and energy drink ventures.

He’s been sued numerous times, according to the Miami Herald, and he found his way into a chief executive role after years spent racking up legal disputes in Florida, related in some cases to real estate investments and other inscrutable financial dealings. The Herald reports that Farnsworth has registered more than 50 companies over the last 30 years, a majority of which have shuttered.

As the CEO of Helios and Matheson, however, Farnsworth set his sights on Hollywood, and he decided to acquire the six-year-old film-subscription service MoviePass in summer 2017. Together with MoviePass CEO Mitch Lowe, the duo concocted a plan to go thermonuclear on the theater business the same day as the acquisition announcement.

The plan was always suspect, and contingent on finding additional revenue streams. Farnsworth reportedly wanted to build an advertising business based on users’ movie-viewing habits. He told Bloomberg, regarding the acquisition announcement, “It’s no different than Facebook or Google. The more we understand our fans, the more we can target them.” Lowe, an early Netflix executive and former RedBox president who wanted to keep shaking up Hollywood distribution models, seemed well aware at the time that the only way MoviePass would survive the price drop was by getting a cut of ticket sales. “We’re hoping that if we can drive a meaningful increase in attendance, we can share in that success,” Lowe told Variety.

There were many ways MoviePass could have gone about becoming a bigger player in Hollywood, but Farnsworth and Lowe seized on the idea of acquiring as many new users as possible, even if that meant rapidly burning through their venture capital. Prior to the acquisition, MoviePass had been struggling since its start in 2011 to make a dent in the theater business, with founder Stacy Spikes eager to bring in new investors who might help turn it around. In most major markets, the service cost $50 a month. Under Helios and Matheson’s ownership, Farnsworth and Lowe dropped the price by more than 80 percent, despite Spikes’ best efforts to dissuade them against the idea, Business Insider reported.

It’s naive to think MoviePass simply got in over its head with a poor understanding of unit economics. The company’s new bosses understood that they would lose money on every subscriber, but they didn’t care. They wanted leverage in the form of a large, dedicated user base. The company amassed more than 1 million subscribers in the three months after introducing its new unlimited, $9.95 plan. In January 2018, the company announced that it would start financing, acquiring, and distributing new films under a separate brand, MoviePass Ventures. According to BI, that same month, Lowe fired Spikes, MoviePass’ founder, with an email.

Mitch Lowe (second left) and Ted Farnsworth (right) attending the New York premiere of Gotti, a MoviePass Ventures production starring John Travolta (second right) in June of 2018.
Photo by Dave Kotinsky / Getty Images

With those subscribers, MoviePass had access to a base of customers that were more engaged with its product than the members of small-scale moviegoer rewards programs at AMC or Cinemark. MoviePass hoped that, in an ideal world, its subscribers would move past the knee-jerk appeal of extremely cheap movie tickets and develop loyalty for the service. That would give MoviePass a bargaining chip when negotiating with theaters, which didn’t exactly have strong relationships with customers, after years of ballooning ticket prices and exorbitant concession fees.

For a little while, that philosophy worked. MoviePass played hardball with the nation’s biggest theater chain, AMC, in a public relations war designed to bring AMC to the table. MoviePass hoped to broker the type of revenue-sharing deal Lowe initially said the company would need to survive. AMC threatened to sue the company, and pledged to stop accepting the debit cards MoviePass handed out to subscribers. MoviePass experimented with blocking AMC theaters in major markets, while openly blaming the theater chain.

The MoviePass-vs.-theaters narrative got ugly, and it became easy to see a world where MoviePass might conceivably succeed if it managed to obtain its holy grails: discounted tickets, a cut of concession sales, or both. In any of those scenarios, MoviePass would have become inextricably embedded within the theater ecosystem, as a partner to the chains that could drive massive box office numbers to certain films, boosting concession sales in the process.

MoviePass could then recoup the high cost of shelling out for ticket stubs by getting those stubs at a bulk discount, while bolstering its bottom line with a cut of food and drink sales. And those concession fees could be increasingly valuable as the company’s subscriber base grew, given MoviePass’ claim that its subscribers spent more on concessions because they felt they were getting their tickets for free. (In 2018, one analytics firm claimed MoviePass increased AMC concession sales year over year by as much as 81 percent.)

Lowe even envisioned an end-to-end product where MoviePass would run deals with every link in the chain: a filmgoer’s restaurant meal before a movie, the Uber ride to the theater, and the movie experience itself, which could perhaps be a production financed by MoviePass. The company could track customers every step of the way, generating the data Farnsworth hoped would build out that ad business he envisioned when he acquired MoviePass in the first place. MoviePass would know what types of people liked which movies, when they went to see them, and how to better target them with advertising or provide other services outside the theater. For Hollywood and adjacent industries, it could become a data gold mine.

All of that came crashing down when AMC refused to play ball, and MoviePass’ ever-changing survival scheme was laid bare. By the time AMC announced its MoviePass alternative, AMC Stubs A-List, in June 2018, MoviePass’ fate was all but sealed. But the writing had been on the wall for months, and MoviePass did itself no favors when it realized in 2018, with around 3 million monthly subscribers, that it would have to start cutting costs to stay afloat.

The controversies were endless. There was Lowe boasting about MoviePass’ location tracking, then backpedaling after the understandable privacy backlash. There were the constant unpredictable, unexplained film blackouts, which varied by subscriber market. There were the app’s serious deficiencies, the occasional full-blown outage, and an experiment with Uber-style surge pricing. AMC may have made MoviePass’ model impossible, but MoviePass repeatedly shot itself in the foot with poorly planned and executed initiatives, followed by excuses or outright denials that any of it was happening. Meanwhile, Lowe made continuous public appearances claiming a new, promising business model would fix its woes.

With every new headline-grabbing catastrophe, MoviePass seemed to become less capable of functioning as a proper company. Its public relations department seemingly evaporated, and its corporate messaging tactics devolved into random replies to users on Twitter and occasional mass emails to subscribers that caused more confusion than clarity. At certain points, it wasn’t clear if MoviePass was outright lying to journalists, its members, and investors.

Customers complained about not being able to receive refunds, while others said MoviePass was opting them into new subscription plans after canceling their accounts, and even charging their credit cards without notice. The unlimited plan disappeared, then came back with severe restrictions. The stock was tanking, and the company kept hemorrhaging cash. Investors sued Helios and Matheson. Customers began congregating on Reddit to discuss suing MoviePass, too, over the company’s mercurial terms of service. Some users filed a suit, and another group filed a second one a few months later.

It was a losing battle from the start. MoviePass survived a full year from the launch of AMC Stubs A-List only by flooding the public market with shares to keep it afloat — a tactic that eventually got it kicked off the Nasdaq after its stock lost more than 99 percent of its value. Meanwhile, it curtailed subscription benefits at every opportunity, in a clear attempt to keep subscribers from costing the company money. It was clear that the company would fail unless it raised its prices far higher than $10 a month. Yet MoviePass could no longer do that and stay competitive with the theater subscription services it forced the theater chains into creating. In the end, the company shut down its entire service for weeks at a time to save money, pledging to bring it back to all subscribers. Then it finally pulled the plug for good.

Photo by Vjeran Pavic / The Verge

It’s unclear whether MoviePass ever could have succeeded as anything but the relatively niche service it originally was. Its product was easy to replicate, and AMC did just that when it realized that creating its own sustainable version of MoviePass was far more preferable than partnering with a disorganized outside company.

MoviePass’ leadership was also arrogant enough to think they could position themselves as innovators when the only thing they could offer their customers was money. MoviePass didn’t make it easier to get a ticket, or cheaper to buy concessions. It wasn’t designed to offload unused seats, or get people cheap access to end-of-run films. It was an elaborate discount service that effectively devalued the theater experience, and Lowe couldn’t figure out a way to differentiate its business model before it ran out of money.

But most importantly, MoviePass was selling another company’s product. At the end of the day, Hollywood works the way it does because distributors partner with theater chains to screen new movies at a relatively set price, and that remains the only way to see those movies for months. The revenue from those ticket sales gets split up by each participant who helps maintain that system. Production studios make a profit so they can continue funding new films. Theater chains hold exclusive rights to screen them at a price they determine.

MoviePass wanted to stand in the middle and force the industry to bend to its will. But it was crushed under the reality of the Hollywood economic machine, a force unwilling to let a brash newcomer set new terms on an uncertain deal at a time when theater industry attendance was suffering a 25-year low. But putting aside MoviePass’ unsavory business strategy and its ever-shifting goals, the company proved the immense consumer appetite for theater subscription models. After four months, AMC said it had signed up 500,000 subscribers to AMC Stubs A-List, and people were seeing so many films with it that AMC has since had to increase its price in some markets.

MoviePass is both a blessing in disguise and a cautionary tale. It was very briefly a beloved product, and it’s given rise to legitimate and fantastic subscription offerings from the theater chains. Although subscription services can’t take too much of the credit — that would go to Marvel movies — more money was spent at US movie theaters last year than any previous year on record. In other words, the theater business is doing just fine, even if MoviePass had to die to help it along.

But the saga doesn’t end there. Farnsworth, ever the savvy businessman who seems incapable of admitting defeat, is now trying to buy out MoviePass and Helios and Matheson from its Indian parent company, using funds sourced from his personal investments and an unknown group of fellow financiers. As a result, Farnsworth has removed himself from Helios’ board and stepped down from his role as CEO, after having contributed to the company losing more than half a billion dollars over the last two years.

“I believe there is great unrealized value in MoviePass and we want to rebuild and make sure it reaches its full potential,” Farnsworth said in a statement given to Variety. “I have always believed in the business model and the brand [former MoviePass CEO] Mitch Lowe and I built at MoviePass. There’s tremendous appetite for movie theater ticket subscription.”

What Farnsworth doesn’t seem to realize is that the appetite he references is already being satisfied by the very theater companies MoviePass tried to out-maneuver. “Despite the reams of pulp fiction that have been written about MoviePass, we know what went wrong along the way and the many things that went right,” Farnsworth added. “After all, we built the fastest growing subscription business in the history of merchandising and numerous copycats are out there now trying to capitalize on our model in the theater industry.”

We can only hope more companies continue to copy MoviePass’ model, minus the reckless abandon.

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