MoviePass: A True Hollywood Tragedy

The abrupt rise and fall of one of the most promising and innovative startups in the movie industry sounds like, well, a movie. MoviePass, an American movie ticketing company founded in 2011, initially garnered attention from both investors and consumers by offering a relatively cheap subscription service ($9.95/month) that would allow moviegoers to visit the cinema as many times as they wished in a given month with one limitation - a movie could be watched only once. Touted as one of the most disruptive apps on the market by financial news websites such as Business Insider, which remarked that “MoviePass is like Netflix for going to actual theaters”, MoviePass succeeded in establishing a reputable brand image very early on. Frequent comparisons to major players in related industries such as Netflix and Redbox helped MoviePass attract over 20,000 paying clients in the first few years of operation as well as the interest of larger companies looking to invest in Moviepass’s seemingly profitable future. 

In August 2017, the data analytics firm Helios and Matheson Analytics Inc. (HMNY) saw an opportunity to combine its big data and artificial platforms with MoviePass’ customer-oriented business model and purchased a majority ownership stake in the company. The market initially praised the deal and HMNY saw its stock rise by 5% to $2.95 following the announcement. A mere two months later, the persistent media coverage accorded to MoviePass contributed to a record-breaking stock price for HMNY, which closed at $38.86 on October 11, an astounding 92.4% increase from August. However, uncertainty loomed on the horizon, with skeptical investors beginning to express doubt on the financial sustainability of MoviePass’ subscription-driven business model and fearful that profligacy concerns could overshadow the company’s success.  

Until that point, MoviePass had been gradually losing money, accumulating a deficit of approximately $55 million, but had convinced the media that profits were just around the corner and that the service would become profitable once it reached 5 million subscribers. Banking on the assumption that customers would not take full advantage of the pass, MoviePass was paying $12-14 per movie ticket while only charging its clients $9.95 a month. Similar to gym memberships, MoviePass created its business model on the idea that a large number of people would sign up but would rarely open the doors to a movie theater. However, in contrast to a gym, which simply gets more crowded if there are more members than expected, MoviePass had to pay the full ticket cost for every movie its members went to see, creating financial problems if the company experienced higher usage than originally predicted. 

MoviePass CEO Mitch Lowe and HMNY CEO Ted Farnsworth tried to calm worried investors by stressing the firm’s second revenue stream, which collected valuable data regarding consumer habits and sold it to several businesses (production companies and movie theaters) who were interested in better understanding the behavior and watching habits of their customers. They also insisted that 5 million subscribers was the magic number for profitability and that volume would be able to help cover costs. 

Continued attempts to attract more customers, such as lowering the monthly subscription price to $6.95 for customers who committed to a one-year plan, provided an ephemeral boost for MoviePass, but the increased presence of competitive services such as Cinemark Holding’s MovieClub and AMC’s Stubs A-List threatened MoviePass’ ability to maintain an almost monopolistic market majority. Although more expensive than MoviePass, the two alternative services were praised by investors who noted their potential to turn a profit and their more sustainable business models focused on long-term effectiveness. 

On February 8, 2018, MoviePass surpassed 2 million subscribers, but it was far too late to recover from its losses. In April of that same year, HMNY disclosed that it had been losing an average of $20 million per month since it acquired MoviePass, a figure that scared away investors and placed serious doubt on the firm’s ability to maintain operations for another year. In addition, due to having a closing share price below the Nasdaq minimum, parent company HMNY was forced to undergo a 250-to-1 reverse stock split on July 25, 2018 to maintain its listing on the exchange, meaning that all HMNY investors would receive 1 share for every 250 shares they owned. For example, if you owned 1000 shares and the stock price was 50 cents before the reverse split, you would own 4 shares at a price of $2 each afterwards. 

 Continued attempts to attract more customers, such as lowering the monthly subscription price to $6.95 for customers who committed to a one-year plan, provided an ephemeral boost for MoviePass, but the increased presence of competitive services such as Cinemark Holding’s MovieClub and AMC’s Stubs A-List threatened MoviePass’ ability to maintain an almost monopolistic market majority. Although more expensive than MoviePass, the two alternative services were praised by investors who noted their potential to turn a profit and their more sustainable business models focused on long-term effectiveness. 

On February 8, 2018, MoviePass surpassed 2 million subscribers, but it was far too late to recover from its losses. In April of that same year, HMNY disclosed that it had been losing an average of $20 million per month since it acquired MoviePass, a figure that scared away investors and placed serious doubt on the firm’s ability to maintain operations for another year. In addition, due to having a closing share price below the Nasdaq minimum, parent company HMNY was forced to undergo a 250-to-1 reverse stock split on July 25, 2018 to maintain its listing on the exchange, meaning that all HMNY investors would receive 1 share for every 250 shares they owned. For example, if you owned 1000 shares and the stock price was 50 cents before the reverse split, you would own 4 shares at a price of $2 each afterwards.