Threadlines: How MoviePass Crashed and Burned

MoviePass seemed too good to be true

MoviePass offered customers the opportunity to pay a monthly fee of $10 in exchange for the chance to go to an unlimited amount of movies.
And with movie tickets being $12 for an average ticket... It’s easy to see that this business model doesn't make a ton of sense.

MoviePass didn't get discounts or affiliations of any kind with movie theater chains, they didn't receive a discount, and they didn't conduct any sort of financial engineering to get tickets at a lower price. They just bought movie tickets at $12 and allowed subscribers unlimited access to those tickets for $10/month.

This was an incredible proposition for the customer and a terrible one for the business.

Everyone kind of intuited that there was an unofficial time limit on their MoviePasses.
They couldn't keep this going forever, and they didn't.

This is the story of that ticking time bomb

MoviePass’ Origins

It all started when the company MoviePass was founded in 2011 as a monthly subscription movie service, but at a much higher price than it eventually became infamous for. Between 2012 and 2015, MoviePass charged between $30 and $45 for its subscription service, depending on the customer's location.

However, this pricing model was updated in 2016 to offer two options: a monthly plan that allowed customers to see up to six movies for $50, or an annual plan that offered unlimited movies for $99.
This business model was decently successful.
By the end of 2016, MoviePass boasted 20,000 subscribers and healthy margins. However, it was a niche product - appealing to the more hardcore movie-goer - not the average American who saw maybe 1-2 movies a month.

At this rate, MoviePass was not going to become a household name. As reported in 2017, "Despite its ambitions to disrupt the industry, MoviePass remains little known."

MoviePass evolves

Throughout the decade of the 2010s, movie attendance trends looked dismal. Publications declared the death of movie theaters as digital entertainment disrupted the industry and movie attendance continued to decline.

It was in this challenging market that Ted Farnsworth saw an opportunity. Farnsworth was the CEO of the analytics company, Helios and Matheson. This firm provided data analytics services to big companies, to try and help them optimize and make more informed decisions. In 2017, Helios and Matheson purchased a majority stake in MoviePass and began to renovate.

The most substantive change was to take the tiered pricing models from the old MoviePass and condense them down into one, radically cheaper, subscription price of $10/month which gave customers the ability to see one movie a day.

In the press release that announced the purchase, newly hired CEO Mitch Lowe - formerly Netflix and Redbox - explained that "after years of studying and analysis we found that people want to go to the movies more often, but the pricing keeps going up, and that prevents them from going more. We’re making it more affordable for people.”

Moreover, this service was now available in more than 90% of the theaters across the country, meaning customers in almost any location could sign up for MoviePass, and begin attending near-unlimited movies.

This was a massive hit.
Within a month, MoviePass had shot from 20,000 subscribers to 400,000. Within a year, they had 3 million and had their sights set on 5 million.

But then in the summer of 2018... it started to fall apart at the seams.

From the initial release, it was baffling to customers how this service could tread water. With movie tickets often costing more than $10, it wouldn't take a MoviePass customer much effort to quickly have their pass pay for itself. Just one night at the movie theater a month meant that you were paying off your pass (again, assuming a ~$12 movie ticket), and multiple visits a month meant that MoviePass was losing a lot of money on you.

Compound that with millions of Americans taking advantage of the services and turning their monthly movie night into weekly visits... and the question on everyone's mind was "How is this possible?"

Well... as Matt Levine, author of Money Stuff quipped, "The most important point about MoviePass is that it never made sense."

The “plan” to turn it around

The new MoviePass executive team had a plan in mind - one that might sound familiar in the modern world of venture-backed startups.

In the initial years of the business, they would use investors' funds to create an obviously attractive, almost undeniable product.
This product would then recruit hordes of customers who would become loyal to the business and in turn, provide their customer data.

As often reported throughout the late 2010s, "Data was the new oil."
Many companies believed that if they just managed to collect masses of data, that asset would just have to be somehow valuable and somehow able to be turned into profit.

This belief quickly became a key tenet of the MoviePass team. Notably, Helios and Matheson, the majority owner of MoviePass, was a firm that made their money off data, so this was not an uncommon play for them.

While losing money with each customer. Then... armed with a massive, loyal customer base, they would somehow find a way to turn all these millions of money-losing-customers into profitable ones.

From the outside looking in, this may sound like an alarmingly poor business model that no one would buy into.

But at the time, this was a popular proposition. Matt Levine explained that “there was a period in the late 2010s when it was fashionable to think that the way to build a successful company was by losing money on every transaction. You would create a desirable product, offer it at an uneconomically discounted price, and get lots and lots of customers very quickly. This growth in customers — even money-losing customers — was the point. That growth would, for one thing, attract lots of venture-capital investment, because VCs seemed to care more about rapid customer growth than they did about unit economics."

The business model of hope

When looking at this side by side with MoviePass, it looks like Mitch Lowe and the rest of the executive team were simply following that proven business model of grow-then-earn, even if that growth came at a financial loss.
Use venture capital funds to develop and market a product and gain loyal subscribers, then use that foundation to create a profitable and sustainable business.

However, there are two key differences between MoviePass and the actually successful business model dubbed “blitzscaling.”

First, MoviePass was not venture-funded, they were a subsidiary of a public company (the aforementioned Helios and Matheson).
If you’re a private startup and a venture capital firm wants to give you money and they're well aware that your plan is just to grow as fast as possible and figure it out as you go... well, they have every right to do that, and you have every right to keep doing your thing.
But if you're a public company, funded by shareholders, you have a different set of duties. Now, the SEC can get involved and start asking questions about your business, ones which you may not be able to answer. More on that later.

Second, MoviePass only had concrete plans to achieve one-half of the equation. They clearly knew how to grow (14900% in a year is an eye-watering proof of that), but had no idea how to turn growth into a sustainable business.

CEO Mitch Lowe declared "We’re hoping that if we can drive a meaningful increase in attendance we can share in that success." Note the language of hope he uses, not exactly inspiring confidence that there is a clear plan.

Moreover, Lowe reportedly described their business plan saying that: MoviePass is operating at a loss and subsidizing its users with the hope that at some point it will successfully demonstrate to studios and theater owners that it is growing its customer base. After demonstrating its value, he hopes MoviePass will be cut in on the profits.

Again, lots of hope.

Hoping that they don't lose so much money that they go under, hoping that they can figure out how to drive a profit, sooner, rather than later, and hoping that they can capitalize on their customer base, somehow.

MoviePass wasn’t working (financially)

This was ill-advised for a couple of reasons. First, people love going to the movies. This wasn't akin to a gym membership where you can expect half of your subscribers to sign up for the membership and then just not show up. Most, if not all, MoviePass subscribers were using their pass regularly, and many were using it multiple times a month. Remember, MoviePass' margins were far from sustainable. MoviePass was losing sizable chunks of money every single time their users used their pass. Wedbush Securities analyst Michael Pachter described it as “selling other people’s services at a discount while paying full price for those services themselves. It was like a bank giving you a dollar for every 25 cents you deposit... Don’t delude yourself into thinking that a business that loses money on each customer can make it up with volume."

Moreover, when you look at the other businesses following this sort of lose-money-then-scale model - Netflix, Spotify, etc. - they are more convenient than alternatives. The price you pay for the service is justified by the convenience of the service, whereas MoviePass was purely a question of unit economics. It was no more convenient than buying a movie ticket at the theater - customers only used the pass because it was cheaper, way cheaper. So, if the subscription price raised, it would quickly price out customers who now lost the only real reason to use MoviePass.

When asked about their business plan, Farnsworth and Lowe acted baffled that there could be any confusion about what they were doing and why they were burning money at such a rate.

In early 2018, months after launching, they hired a Chief Product Officer with the sole purpose of transforming their product model and turning around their tragic unit economics. Months later, this CPO left the company, announcing that it was an "exhilarating and very challenging" experience.

The man tasked with looking under the hood of the company and overhauling it found an engine about to blow up. And blow up it did.

MoviePass wasn’t working (literally)

By the middle of 2018, MoviePass was reeling and burning cash at an unprecedented rate. The executive team was looking for ways to slow down their losses and eventually implemented a number of changes that ranged from unpopular to unethical to highly illegal.

One of the first changes was that MoviePass silently restricted the number of movies that users could see a month, dropping from the 30+ a month, nearly unlimited pass, to restricting users to 3 movies a month. This change was not announced and was instead presented to the user as technical difficulties. If you hit your (secret) movie allotment of 3 movies a month, you would then start seeing error screens in the app. And then when you naturally tried to contact MoviePass customer service, you would get the run-around and get nowhere helpful.

As reported by Variety, "Rikki Greenspan, a 25-year-old New Yorker who works in advertising, arrived at a theater with her grandmother over the weekend only to discover she couldn’t buy a ticket with her MoviePass card... The person behind her in line was also having issues buying a ticket with the service."

“They didn’t answer the phone,” said Greenspan. “There was an automated chat on the app, but that didn’t do anything. It seems like the company is pretty much over.”

Most dramatically, Lowe and Farnsworth developed a plan to change the passwords of users, ensuring they would become locked out of their app and be unable to use it, while also not canceling their subscriptions. When other executives questioned this plan with concerns about Consumer Protection laws and the legality of the idea, Lowe responded that he understood the concerns... "So let[’]s try this with a small group. Let[’]s say 2% of our highest volume users.”

And just like that, MoviePass had crossed the line from a crummy business to an illegal operation. With the changing of thousands of users' passwords and the subsequent scamming them out of being able to access their accounts, overnight MoviePass became a shady business - on top of the terrible, losing business it was already.

As the parent company, Helios and Matheson consistently reported massive losses of hundreds of millions, shareholders responded with massive sell-offs. By mid-August, the HMNY stock had dropped to a mere 5 cents/share, down from ~$33/share the previous February.

From bad to worse

At this point, the mania surrounding the original MoviePass would never return.

Gradually, MoviePass became more and more restricted, the company more and more made fun of, and the situation more and more dire. MoviePass was eventually forced into bankruptcy in 2020.

To make matters worse, the SEC brought charges of securities fraud to Lowe and Farnsworth for misleading shareholders by essentially... convincing them that they had a legitimate business plan to make money. They never did.

See this message from Lowe around October 2017, “So now that we have gotten into month 2 of our new pricing model we will need to create a plan on how we get from the usage level now to the desired profitable model in the future.”

As the MoviePass team desperately tried to figure out how to stop losing money, customers continued to flock to the movies, and as each customer paid $9.95 for their monthly subscription, these customers cost MoviePass about $22/month.

Mitch Lowe was asked:
"You are operating at a loss and subsidizing the tickets your customers buy. AMC claims that at some point you will have to raise your prices or you'll go out of business. Are they correct?" He responded simply...
"The answer is no. They don't understand our business model."

Well, it seems that no one was misunderstanding the MoviePass business model.
Every time customers were using MoviePass they lost the company money, and customers loved using their pass.

So, MoviePass was burning through funds, and they didn't have anywhere to pivot. Publically, MoviePass execs snidely claimed that they were totally fine, customers weren't seeing that many movies and the company was just a few simple decisions away from profitability.

None of those claims panned out and the result was bankruptcy, public humiliation, and an SEC indictment.

MoviePass now

MoviePass recently made headlines as one of the company's original owners² , Stacy Spikes, has purchased the company from bankruptcy and plans to relaunch the service - albeit with a significantly altered proposition.
The new MoviePass features a higher-price and tiered subscription service and a credit system where customers can receive credits to use towards movie tickets.

Moreover, Spikes announced that MoviePass is negotiating partnerships with movie theater chains to receive discounts on the tickets they are offering customers.

Gone are the days of unlimited movies and flat $10/monthly fees.

When asked what MoviePass’s biggest mistake was, analyst Michael Pachter quips that “Their biggest mistake was launching.”

The market is ruthless. If your business cannot sustain itself financially, it will inevitably fall, even if it's a wonderful product that is in high demand. MoviePass was doomed from the beginning and now serves as a striking cautionary tale to the need for a sustainable business plan and the dangers of blind hope when it comes to launching a public business.

Movie Pass seemed too good to be true, and it was. But what a glorious run it had.

¹ See this tweet comparing Mitch Lowe to Michael Scott... brutal

² You have to feel bad for this guy, who originally launched MoviePass as a sustainable, sensical product to help avid movie-goers go see more movies, then watched it turn into a deluded, ill-advised business, and now is trying to resurrect his business from the depths of ridicule and bankruptcy. I truly wish him the best.