MoviePass Cannonballs the Movie Industry

It’s a lot more fun to be riding a wild bronco than to be trying to tame a mare” — Mitch Lowe, MoviePass CEO

There couldn’t be a better quote to sum up MoviePass’ wild ride across the movie industry thus far. The recently-gone-viral movie theater subscription service exemplifies the boldest and riskiest business strategy of all: buying leverage.

Porter’s Five Forces, a business strategy framework, is used to evaluate a company’s strategic position in the market. One of those forces examines a business’ relationship with its suppliers. The nexus of the analysis is: how much control can suppliers exert over a company, or vice versa? As a potential investor to a company, the latter is obviously preferable. When a company can exert control, they can use their position to enrich themselves by demanding favorable pricing and/or terms.

We call this leverage, a concept we’re familiar with across various aspects of our lives. Consider apartment hunting: shopping in February yields discounts versus June. Now consider any good mafia movie. They are stories of maintaining and leveraging power, the “pay the fee, or we’ll break your knee” kinda-story. This one is not quite as, shall we say, dire. However, it is about as bravado of a business story as we’ve seen in a long time, and it’s unfolding right before our eyes.

What is this thing called MoviePass?

MoviePass is a movie theater subscription company that lived in irrelevance up until six months ago. For over 5 years, their best deal offered unlimited access to the big screen for $50 per month, a deal just lukewarm enough to never make you look twice. With the average US ticket price around $9, they catered to the .01% of us bored enough to see more than five movies per month — not exactly a thrilling market. Movie theaters didn’t exactly appreciate their business either, but let it fly considering the venture’s lack of success. As long as it stayed small, it could do little harm.

Last summer, MoviePass went rogue and blew up their business model. Mitch Lowe, their freshly appointed CEO, cannonballed off the high dive and sunk prices to $10 per month for unlimited movie trips. Two days after slashing prices, sign ups grew from 20,000 to 170,000. At the start of February, they surpassed 2 million and by this summer, they expect 3.1 million. That’s more than 15,000% annual growth (and they didn’t even have to mention blockchain).

The company solved the problem Rotten Tomatoes and Netflix helped create. If a movie wasn’t mind blowing, people just let it roll to their home screens. Mitch Lowe sums up their solution perfectly: “Subscribers kind of use MoviePass like insurance where a film that we tell them about might not have had sufficient marketing or they might not have heard of it, but they’re going to take a chance because they have no incremental cost of going.

People now don’t have to take the high cost, both monetarily or emotionally, out of seeing a potentially bad movie.

The popcorn’s gone stale

Everyone knows the movie theater experience is outdated. Heck, Fandango is still around. But movie theaters really have no incentive to change.

The industry is “mature.” Growth in sales and attendance are under 2% per year, if not stagnant.

Total Ticket and Revenue for Domestic Cinemas Over Time, The Numbers

Despite the slow growth, movie theaters continue to drive prices higher.

Ticket Prices in USD Over Time, Statista

Theater foot traffic is essentially stuck in the mud, yet ticket prices continue to rise. This is partly due to industry concentration.

Think of a movie theater. Was it AMC? How about Regal? Cineplex?

Kudos to you if it was outside of those, considering they represent well over 50% of the domestic market. Movie theaters are fat on profits with little reason to change. The popcorn has gone stale.

Making waves

MoviePass has a bold strategy to reinvigorate the theater experience and it involves a healthy dose of technology. They want to be the Spotify / Netflix / Amazon of the industry, using “big data,” algorithms, a subscription model, and a mobile interface to rethink the movie experience. They’re forcefully wedging the technology between users and cinema, whether the theaters are willing or not.

The big dogs are not happy. AMC sees the pricing as a suicide strategy: “That price level is unsustainable and only sets up consumers for ultimate disappointment down the road if or when the product can no longer be fulfilled.” They think MoviePass will fail and AMC will be left holding the bag when people expect cheap tickets. They have their own plans to drive growth and aren’t willing to disrupt their march to higher prices.

Weathering the storm

To be clear, MoviePass does not make money right now.

In fact, they’re bleeding cash to the tune of millions per month. This is because MoviePass ultimately pays the full ticket price to the theater on behalf of the customer. There’s no magic to that part. As the number of users creep into the mid-millions, they will continue to lose more and more from their subscription model. This makes for an intriguing (and time sensitive) showdown.

MoviePass funds their cash hemorrhage with investment from their majority owner, Helios and Matheson, a public big-data analytics firm (hint, hint) that bought a stake in them last summer. MoviePass’ continued growth has forced Helios to go back to the public for more money. They had to issue an additional $105 million in stock just last month. The market was not pleased, and punished the stock (NASDAQ:HMNY) with a 30% drop. At this point, Helios is trading as a proxy for MoviePass, and they’re going all-in on their success or failure.

MoviePass’ ultimate dream is to break even on subscription prices, which they take a long-term statistical approach towards:

“When you do a subscription, especially an all-you-can-eat, the first subscribers you get, about 11% of the total, are going to be in high cost markets and they’re going be people who see a lot of movies. It’s like health insurance: The first sign ups are the people that are going go to the hospital. You have to weather the storm to get to the profitable subscribers. You’ve got to get enough breakeven customers to off-set the expensive ones”

and further,

“Like any unlimited service, when subscribers first start, they gorge on movies in the first three or four months. Then they slowly but surely settle into a pattern which is still double what they used to do,” CEO Lowe explained. “Our target is someone who only spent $50 last year going to the movie theaters — and now at $9.95, they’re spending $120 at movie theaters a year.

Ultimately, MoviePass won’t make a profit off their core subscription model. They just need it to be good enough for the long enough.

The sun will come out, tomorrow

MoviePass will make its money off “cross-sell,” but unlike Wells Fargo, it won’t be illegal. The movie subscription is a loss-leader. This means that their core business strategy is to sell a product at a loss in order to bring customers into the door. It’s like dollar beer night — get a bunch of people in the door, then try to sell your high-margin chicken wings. The path to monetization is dynamic, and there are several interesting ways to eventually turn a profit.

Below, we explore those paths:

Data. As Wired puts it: “Besides, for MoviePass, more users means more data, which in turn means more leverage. And leverage is key to Lowe’s goals; sure, he’s trying to turn a profit, but he’s also fundamentally rethinking the business of going to the movies,” and further: “If you get a trailer right now for Spiderman on Facebook, Facebook can’t tell if you ever actually go to the movie. We can,” says Ted Farnsworth, Helios and Matheson CEO. “We can tell if you look at Spiderman and look at Wonder Woman and Mission: Impossible, we can tell you exactly what movie you went to out of all three trailers.” MoviePass can share that knowledge and competitive position for partners looking to pay the piper. They’re Moneyball-ing the movie industry.

Original Content. MoviePass announced they would begin acquiring and distributing films a la Netflix. Armed with data on what users like, they’re seeking under-loved and undervalued diamonds in the rough. The group traveled to Sundance to buy their first film, a heist pic called “American Animals,” which follows a gang’s audacious art theft.

Promoted Content. MoviePass has shown that pushing movies through their app results in more attendance. “Currently we’re buying about 5% of all the movie tickets in the U.S. every week. But when we promote a film, we are buying about 10–11% of all the movie tickets,” Lowe explained, “so we’re able to lift films — and this isn’t ‘Star Wars’ or ‘Thor’ — these are ‘Ladybird,’ ‘Three Billboards,’ ‘I, Tonya.’ We’re able to add up to 8% of sales to their bottom line.” Basically, MoviePass influences a wide swath of eyeballs. So if you pay enough for it, maybe they’ll push your content. Remember that mafia reference?

There is a new boss in town

Popcorn n’ Butter. MoviePass is also banking on splitting concession stand revenue with the big chains. It’s no secret that us weak-willed sheeple have been conditioned to pay $15 for popcorn and ICEEs. Theaters profit big-time off it. Concession sales literally represent the majority of a theater’s income. Again, MoviePass has the data to make their case: “We’re spending millions and millions of dollars every week at those top three. Those customers are spending on average $13 on popcorn and soda, which is more than double the norm, because they’re not shelling out money for their ticket.” In fact, MoviePass claims it can drive an additional $17.1 million in concession sales to AMC alone, and they’re looking to take a 20% cut. They’re not being cryptic about what might happen if they refuse to play ball: “The minute we start to not show every theater in the AMC brand, or every movie, that’s when that will start to turn around.” With millions of viewers at their disposal, that’s a serious threat, especially if they are anywhere close to their claim that they contribute 62% to AMC’s income. Warning shots have been fired. MoviePass abruptly pulled out of 10 AMC theaters recently, and there’s still plenty of room to twist the vice. Alexa, play ‘Power’ by Kanye West.

Ticket Share. MoviePass plans to take a cut of ticket sales too. They want $3 of every ticket sold at all theaters. Small theaters have been willing participants, high off the foot traffic finally passing through their dusty halls. MoviePass already cut deals with 1,000 independent theaters around the country to get a $3 per ticket and/or 25% of concession sales. The big dogs are not cracking though, and we’re now looking at a high stakes game of chicken. AMC boss Adam Aron said in an earnings call late last year, “AMC has absolutely no intention, I repeat no intention, of sharing any — I repeat, any, of our admissions revenue or our concessions revenue with MoviePass.” I repeat, this a high-stakes game of chicken, I repeat, high-stakes.

Beyond Movies. MoviePass wants to bring more to the big screen beyond movies. The company envisions certain films being exclusive to MoviePass members and bringing the bingeing experience to the big screen, potentially through movie marathons. Additional plans to modernize the experience include broadcasting live sports in theaters. This could be the biggest facelift for the big screen since 3D glasses.

Partnerships. MoviePass wants to own the experience of the night out on the town, as Wired puts it. That means they’ll eventually push restaurants, dessert spots, and other entertainment as part of a complete package. As you can expect, they’ll collect fees from all of them. “Eventually, a virtuous circle materializes. Studios pay MoviePass to get butts in seats. Theaters and nearby shops and restaurants give MoviePass a small cut of all the extra business it’s sending their way. And MoviePass, well, passes the savings onto you.

As consumers, we’re sitting in the driver’s seat. We get to a) watch an entertaining, high-stakes power grab play out right in front of our eyes, and b) get the benefit of a better movie experience if it succeeds. It’s only right that the company taking Hollywood by storm has a Hollywood plot line, although it mostly just seems like a rip-off of the Godfather. As spectators, we get to witness one of the boldest growth strategies we’ve seen in a while. The company is building the sidewalk under it as it sprints full-speed ahead. It’s also exemplifying some important business concepts we can all appreciate, such as loss-leading, leverage, and monetization.

Enjoy the show.

Disclaimer: This article does not intend to provide investment advice. The companies mentioned are not currently or planning to raise funds via Slice Capital’s funding portal. Slice Capital does not view the companies mentioned as direct competitors to any of the issuers currently raising on Slice’s funding portal.