The Great Disruptor: MoviePass Upends the Movie Business, but Can It Survive?

Andrew Hansen recently did something he hasn’t done since high school. He went to see “Love, Simon” at the movie theater — twice.

Since buying a MoviePass subscription in January, Hansen, a 43-year-old transcriber for college classes, has seen roughly a dozen movies, including all of the recent best picture Oscar nominees. For just under $10 a month, the New York City native can check out a movie a day at a cinema. That’s less than the cost of a single ticket at any Manhattan multiplex.

“I’m seeing movies I wouldn’t normally spend $16 or $17 on, and I don’t feel guilty about it,” says Hansen. “I’d never see a movie in theaters twice before MoviePass. I could never have justified the expense.”

As he’s saved money, Hansen has been busy evangelizing, urging friends and family to sign up for the service. He’s not alone. Since MoviePass slashed its monthly subscription costs last August from $50 to $9.95, its user base has exploded from roughly 20,000 to more than 2 million. In the process, it’s become the fastest-growing paid-entertainment subscription service in history, signing people at a greater clip than Netflix or Spotify. All that disruption in the movie theater business has created enemies and fueled skeptics, but whether MoviePass survives or dies, it has undeniably shaken up an industry that hasn’t changed much since the silent era.

“I knew we had to be a low price to attract a mass market,” says Mitch Lowe, MoviePass’ CEO, during a recent interview at Variety’s New York headquarters. “People were only going to see ‘Star Wars’ or Marvel or ‘Spider-Man’ films. They’d stopped going to ‘King’s Speech’-type movies. They wanted to go to the movies more often, but the business model wasn’t working for them.”

In just a few months, MoviePass proved that moviegoers want a Netflix-like monthly subscription model and they’re looking to save money. Even if the company goes belly up — answering the prayers of the world’s largest exhibitor, AMC — its way of doing business is probably here to stay. Already, MoviePass has rivals. Cinemark, the country’s third-largest theater chain, has unveiled a subscription-like service, and Sinemia, another start-up, offers a higher-cost subscription model that lets users see 3D and Imax movies, something MoviePass does not do.

“Movie ticket subscriptions are the future,” says Rifat Oğuz, founder and CEO of Sinemia. “It’s like what happened with the music industry a few years ago, where people moved from buying individual songs on iTunes to signing up for Spotify and Pandora.”

MoviePass, launched in 2011, is driving more people to theaters — many of them consumers who were steering clear because it was too costly to buy tickets. You’d think that would be great news for cinemas, which earn most of their money hawking popcorn and thus live or die on foot traffic. But you’d be wrong.

“Our critics don’t think our model is sustainable, and if it’s not sustainable, they’re worried we’re going to condition consumers to a different way of going to the movies and then leave them holding the bag,” says Lowe.

When MoviePass unveiled its new pricing, AMC dismissed it as a “fringe player,” threatened legal action and predicted its imminent demise. Regal and Cinemark were more guarded, but they made it clear they wouldn’t be working with the service. Some studios are also wary of letting a third party determine pricing — a studio distribution executive, for instance, privately described the company as “a cancer on the industry.” Other critics aren’t much kinder about Lowe, dismissing the mild-mannered executive as the Elmer Gantry of exhibition, a flimflam man who is more interested in generating headlines than improving the business.

“Everyone is happy to take their money right now, but I don’t see that as something that’s going to continue,” says Tom Bernard, co-founder of Sony Pictures Classics. “I’m concerned that to recoup their cash they’re going to try to work some type of deal with the theaters where my [cut of the] box office is going to be diminished.”

The movie industry is worried that the result will be the devaluation of content, and there are plenty of historical precedents, most notably Blockbuster. In the 1990s and early aughts, the video rental chain loomed over the home entertainment market. Its rows of new releases and thousands of locations made it unrivaled, and its profit margins grew fat thanks to the exorbitant late fees it charged. But Blockbuster became complacent. Redbox and Netflix upended the business by offering cheaper, more convenient alternatives, allowing people to rent films at kiosks or have them delivered to their homes via mail or, eventually, streaming. In the process, consumers grew accustomed to paying only 99 cents a night for a movie (Redbox) or shelling out a flat monthly fee (Netflix). In a few short years, Blockbuster was a bankrupt anachronism.

“Our customers were demanding MoviePass, and we were listening to them. We’re a small family-run business … so we’re always looking for a competitive advantage.”
Michael Barstow, Main Street Theatres

MoviePass is bucking trends in another way. It offers customers a value-based proposition at a time when the exhibition business is becoming more of a premium experience — one replete with plush seating, alcoholic beverages, Imax and 3D screens and, of course, higher ticket prices. Fewer people are showing up to theaters. Domestic attendance fell to a 25-year low in 2017. Yet box office revenues have stayed relatively flat because exhibitors have found a way to justify charging more money. Since 2002, ticket prices have increased by 54%, while ticket sales have fallen 22%. In this climate, theaters don’t want to have to cut their prices or offer low-cost monthly subscriptions to compete.

MoviePass isn’t just using the cudgel. It has been actively reaching out to theater chains, establishing partnerships with 24 independent cinema companies including Studio Movie Grill and Landmark. So far, the reaction has been mixed, with a divide growing between those exhibitors that view the service as a friend and those that consider it an existential threat.

Michael Barstow, who runs business development and sales analytics for Main Street Theatres, an eight-location chain based out of Nebraska, has been partnering with MoviePass since December. He cuts the service in on ticket sales in exchange for having the company promote Main Street on its app and drive people to its cinemas. “Our customers were demanding MoviePass, and we were listening to them,” says Barstow. “We’re a small family-run business, and we compete with the titans of the industry, with your Regals and your AMCs, so we’re always looking for a competitive advantage.”

Others feel MoviePass’ strategy isn’t well thought out.

“It’s a chain-saw approach when a surgical scalpel is needed,” says Jeff Logan, president and CEO of Logan Luxury Theatres, a South Dakota-based chain with three locations.

Logan hasn’t had any talks with MoviePass and says he’s not interested in working with the company. He thinks it’s lunacy to cut prices on moviegoing in such a comprehensive manner.

“Our critics don’t think our model is sustainable,” says Lowe, “and … they’re worried we’re going to condition consumers to a different way of going to the movies and then leave them holding the bag.”
Chris Buck for Variety

“Smart businesspeople offer discounts when it’s advantageous for them to discount,” says Logan. “I’m not above discounting on midweek nights or on matinees. But MoviePass is offering an across-the-board discount even to movies that are popular and on nights when the theater is full. It makes no sense at all. This takes power away from exhibitors to control their own prices.”

John Fithian, head of the National Assn. of Theatre Owners, an exhibition industry trade group, would not comment directly on MoviePass. However, he does have concerns about the execution of subscription models. “Business models have to be sustainable in the long run,” says Fithian. “If a subscription service provider has an unsustainable business and there’s a risk they go out of business, that will leave our customers very unhappy.”

The problem is that critics of the service can’t do much about it. MoviePass pays full price for the tickets its users buy and is essentially subsidizing their cinemagoing. Right now, its losses are estimated to be substantial, but MoviePass believes the data it collects on consumers can help it turn a profit. It also has begun selling ads to two of the six major studios and a handful of indie distributors. The company says each campaign can yield revenue in the six figures. Because of these ancillary revenues, MoviePass claims it will be cash flow-positive by 2019. The studios are keeping their business dealings with the company quiet for fear of alienating exhibitors. And while theater operators privately grouse about MoviePass, most are reluctant to go on the record with their criticism.

To fund all this ticket buying, MoviePass sold a controlling stake in the company last summer to the data firm Helios and Matheson Analytics. Together, Lowe and Helios chief Ted Farns-worth have raised an additional $280 million and secured a $375 million line of credit. They say that’s plenty of money to tide them over, even as summer movie season dawns and cinemagoing intensifies with the launch of blockbusters such as “Avengers: Infinity War” and “Jurassic World: Fallen Kingdom.”

“Since day one, people have been saying we’ll run out of money,” says Farnsworth. “I assure you that capital is not an issue. I’m sitting on hundreds of millions of dollars of dry powder, and I’ve got bankers and debt-financing companies calling me all the time. They know they’re looking at an Uber or an Airbnb. This is a unicorn company.”

Farnsworth rules out spinning off MoviePass from Helios and orchestrating an initial public offering. “We’re so busy doing what we’re doing that we don’t have time to do that,” he says. However, he is considering rebranding Helios’ public listing to reflect its ownership of MoviePass because he believes the subscription service is a better known brand.

It’s also not clear that Wall Street would be receptive to a MoviePass IPO. Helios’ stock has been on a wild ride since it bought MoviePass and began signing up subscribers at a record pace. At one point shares approached $39, but they’ve fallen back down to Earth as fears have mounted about the high costs associated with each customer. The stock now trades at less than $3.

There’s reason for skepticism. MoviePass acknowledges that for its business model to work, it needs to attract customers in Midwestern and Southern states where ticket prices are cheaper. The bulk of its users are in major cities such as New York and Los Angeles where the cost of a single movie is greater than a monthly membership. At the same time, the company wants to drive down usage. To be profitable, it wants the bulk of its subscribers to see an average of just over a movie a month. Lowe estimates that the company can produce $6 of additional monthly revenue per customer on top of the subscription fee by selling ads and getting a cut of ticket sales and concessions from partners.

“[Lowe is] like a savant who’s done it all and seen it all for so long that nothing gets him rattled.”
Ted Farnsworth

At the same time, MoviePass claims it’s responsible for an ever greater share of box office revenues. By year’s end, it says it will have 5 million customers and account for 9% of all tickets sold in the U.S. If so, the company will be responsible for hundreds of millions of dollars of box office revenues, giving it a great deal of influence over exhibitors but requiring a massive capital outlay.

The company has also struggled to absorb its swelling ranks of users. Social media is rife with customers complaining about being billed incorrectly or not receiving their subscription cards; they say their complaints seemed to vanish into a black hole. MoviePass has staffed up and hired a new head of customer experience. It says that the problems have started to dissipate, but the dodgy user experience clearly has left scars.

“It’s been the biggest disappointment of this whole thing,” admits Lowe. “The majority of our customers really do love the service, but it is true for the first couple of months we couldn’t get cards out fast enough. We couldn’t manufacture them quickly. We had no shipping facilities that could keep up with demand. That created a mountain of issues that was hard to come down from.”

MoviePass’ business operations are also facing questions. MoviePass provides its subscribers with a Mastercard-enabled card to buy tickets. The card is not usable for transactions at any location other than those listed on the MoviePass site. Because of that, AMC has asked Mastercard to determine if the ticketer has violated the credit card company’s terms of service, according to two knowledgeable sources. It argues that MoviePass cannot specify what goods a customer can purchase at a business that accepts Mastercard, nor can it prevent people from using their card at any Mastercard-compliant company. AMC declined to comment.

Shout for Variety

With stints at Netflix and Redbox, Lowe is the Forrest Gump of media disruption, popping up as businesses are being upturned. A high school dropout, he got his start selling black-light posters in Europe. That business died after Disney, upset at seeing cartoon depictions such as Snow White being lewdly serviced by all seven dwarves, sued and the company went bankrupt. From there, he did a stint in finance, bought some video stores in the 1980s, became a co-founding executive of Netflix and headed up Redbox when the kiosk giant was feuding with studios for access to their films.

“He’s like a savant who’s done it all and seen it all for so long that nothing gets him rattled,” says Farnsworth.

MoviePass wasn’t Lowe’s idea. It was the brainchild of Stacy Spikes and Hamet Watt and was launched five years before Lowe joined the team. The company was originally conceived as being exclusively for avid movie fans who attend the cinema multiple times a month. However, it never got traction, and when a lead investor grew frustrated losing what Lowe describes as a “Tesla a week,” he was brought in to advise the team in 2012. He advocated slashing prices, but his advice was ignored. Two years ago, the company was desperate. It was bringing in about $9 million in revenue but losing $400,000 a month, and bills were coming due. Lowe bought a stake in MoviePass, Spikes and Watt were moved into adviser roles and Helios began funding the new bargain pricing.

With his hands on the wheel, Lowe envisions great things for the company, and he predicts that it will grow so big that AMC, Regal and other exhibition giants won’t be able to ignore it. He has yet to meet with Adam Aron, the head of AMC and his most caustic critic, but they have exchanged what he describes as “not the friendliest” emails.

“It’s like, ‘Hey Adam, why are you saying you’re going to sue us?’” Lowe says of their missives. “And he’ll say, ‘Hey Mitch, why are you saying horrible stuff about us?’”

Aron declined to be interviewed for this story.

Their feud has manifested in other forms. In January, MoviePass took 10 of AMC’s most popular locations off its service. It said it was part of a test to see if users would go to a different theater if they couldn’t access their local AMC, but it was also sending a pointed message. Work with us — or else.

Ultimately, that’s what MoviePass is banking on. Like Amazon or Netflix, it wants to build market share, believing that establishing a passionate user base is more important than short-term profits. It’s willing to lose money, lots of it, to get that kind of leverage.

“I’m absolutely convinced that we will eventually be working with [AMC] and that we will be working with not just them but with others who claim they will never work with us,” says Lowe. “It really is going to come down to who is going to be the first, who is looking to the future and who is not afraid of being innovative. None of them will make that move until they are convinced that we are going to be around for a long time.”

MoviePass users say they’re not sure the company has what it takes to survive. David Baker, a 39-year-old software marketing consultant in New York, has been seeing a movie a week since signing up for the service in November. He’s heard all the noise about its shaky business model and admits he doesn’t know how the company makes money. But Baker has a message for all his fellow movie lovers.

“Get it while it lasts,” he says.

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