MoviePass CEO on how the company will finally break even

Tech Critic
Yahoo Finance

MoviePass is the “Netflix of cinema”: For $10 a month, you can go see all the movies you can stand — in theaters. It’s a screaming, outrageous deal for movie fans. In cities where movie tickets are $15 each, you come out ahead when you see only one movie.

During December, my first month as a member, I saw seven of the Best Picture Oscar nominees — for $10.

Scroll to continue with content
Ad
MoviePass is “Netflix for movie theaters.”
MoviePass is “Netflix for movie theaters.”

In February, the price dropped to $8 a month, and then in March, to $7 a month. In early April, it went back up to $10, but the company says that those cheaper plans will come back periodically. (All of these prices require an annual commitment. And the $8 and $7 deals required a $20 “activation fee,” which dilutes the deal a little.)

Here’s how it works. When you sign up, they mail you a MoviePass debit card. When you arrive at the theater, you open the MoviePass app, which lists the showtimes. Tap the movie you’re here to see (3-D movies and IMAX movies are not eligible) — then buy the ticket normally, from a kiosk or a person, using your MoviePass card to pay for it.

This card lets MoviePass buy your tickets for you.
This card lets MoviePass buy your tickets for you.

The theater gets the full ticket price — but MoviePass is paying the full price for you. Most people’s first question about MoviePass is, “How can this company stay in business?”

The math doesn’t really work out, does it? Let’s say you go to the movies twice a month. In New York, that’s $360 of movie tickets a year — but you’re paying MoviePass only $120 a year. MoviePass is losing $240 a year, just on you. Multiply that by MoviePass’s 2 million subscribers, who are currently buying 6% of the nation’s movie tickets. How is that sustainable?

To find out, I invited Mitch Lowe, MoviePass CEO, and Ted Farnsworth, CEO of Helios and Matheson Analytics, which owns MoviePass, to sit down for a chat. Lowe was a co-founder of Netflix, back in the day, and later helped run Redbox, the DVD-rental vending machine company.

David Pogue (right) interviews Ted Farnsworth (left) and Mitch Lowe.
David Pogue (right) interviews Ted Farnsworth (left) and Mitch Lowe.

Here’s an edited transcript of our chat.

Pogue: You must go through your life explaining how MoviePass works. And everybody says exactly the same thing back to you…

Lowe: Which is, “how can you possibly afford such an amazing deal?”

Pogue: Yeah. How do you make money?

Lowe: There’s two groups of people that go to the movies. There’s 11% that go 18 times a year, and they buy half of all the movie tickets in the country. 5.5 billion tickets.

There’s another 200 million people (89% of moviegoers) that only see the blockbuster hits. They go to four maybe five films a year. They see “Star Wars” and the Marvel films. Our product is priced to reactivate those casual moviegoers, to get them to go see the great independent films that now they say, “I’m just going to wait and stream at a later date.”

Pogue: People do complain about the price of movies.

Lowe: The last 18 years, the prices have almost doubled. So the solution that the theater exhibitors have is, “let’s just keep raising the price 2%-3% a year.” And you know what our view is? You can’t keep raising prices in a business that is not attracting people, especially young people.

Pogue: OK, but if I’m paying $7 a month, I’m paying less than half of the price of one ticket. You’re paying the theater double that — so I don’t understand how you can stay in business.

Lowe: Well, have you seen Spotify’s financials? They spent $2 billion more on music content licensing than they brought in in revenue. Netflix has to borrow billions of dollars each year to pay for the content that, over time, they hope to make their money back on. We’re investing in building a huge subscriber base.

Pogue: Originally, MoviePass was $50 a month. What did the membership numbers do when the price dropped down to $10 last fall?

Farnsworth: Well there were about 20,000 users at the time, and Mitch’s deal was that we would have 250,000 in 18 months. He had 18 months to get 250,000. We got there in two days.

Pogue: And the site crashed, right?

Farnsworth: We had dinner the night before, and I was telling Mitch that we’re going to crash the site tomorrow… “No, it’s not going to happen. No, we’re good. We’re good!”

Pogue:: Now that you have 2 million members, it gives you certain kind of clout, right?

Lowe: Well, you know, it’s sometimes misinterpreted, this kind of clout or leverage idea. Believe it or not, we truly want to re-energize moviegoing. What we really want to do is to continue to get more people to go to the theaters.

People have told us they’re starting movie clubs, and now they’re going with a bunch of friends, going to the movies every week together and then going out afterwards. We have a guy who said, “I’m going to turn 40. I’m going to go to a movie for 40 days in a row leading up to my 40th birthday.” But what’s even cooler is people are seeing films they never would have seen without a MoviePass card.

Pogue: But I’m confused about that, because every time someone goes to a movie, you’re losing more money. Don’t you secretly prefer people who don’t use the card as often?

Lowe: They [the people who see a lot of movies] become more valuable to us. They evangelize the service. They become more valuable to our partners, the studios, exhibitors.

Mitch Lowe is the man behind MoviePass.
Mitch Lowe is the man behind MoviePass.

The AMC battle

You’d think that the theaters would love MoviePass. It’s filling a lot more seats, since MoviePass subscribers, on average, see twice as many movies.

But AMC, the nation’s largest theater chain, is not a fan. “[This] small fringe player in the reselling of movie tickets is not in the best interest of moviegoers, movie theatres and movie studios,” it said in a statement. “In AMC’s view, 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… We are actively working now to determine whether it may be feasible to opt out and not participate in this shaky and unsustainable program.”

Ouch!

Perhaps as a demonstration that it’s no longer a “small fringe player,” MoviePass responded by blocking 10 busy AMC theaters from its program for two months (which just ended). I asked Lowe about that episode.

Pogue: Can you guys explain the AMC standoff in the 10 theaters?

Lowe: We’re in 661 AMCs — every AMC. And what we wanted to understand is, in a competitive environment where there’s a Regal and a Cinemark and probably some independents around the AMCs, what would our customers do if they couldn’t go to the AMC? It’s not to try to [force] any kind of changes in —  AMC’s going to make their decision at some point in the future on their own.

Pogue: A decision about…?

Lowe: Whether to partner with us. What we’re asking for is the same bulk rate discount they give Costco. When you go to Costco, you can buy AMC, Regal, and Cinemark tickets for 20% to 25% lower than the face value, and they sell hundreds of millions of dollars at Costco a year. And that’s all we’re asking is, “Give us the same rate you would give anybody.” And in exchange, we will drive people so often to your theaters that, you know, you’ll have to hire more employees to serve more popcorn.”

Pogue: Have other chains said, “OK, we’ll give you discount like that?”

Lowe: Lots of independents.

Farnsworth: Landmark was our most recent one — Mark Cuban’s company.

Lowe: Independents — typically they own five to 20 theaters — they tend to be onsite and really get a sense of what’s happening to the customers.

Whereas the big players, the big three, generally aren’t as close. That’s why Blockbuster missed out on Netflix. This is why Blockbuster missed out on Redbox. This is why Marriott missed out on AirBnB. And Hertz missed out on Uber. The big incumbent players spend more time protecting their current business. Then when a startup happens, they don’t know how to compete.

Pogue: Can you give me any stats about how many more times does a subscriber go to the movies than before?

Lowe: Yeah, they go twice as often. Whether they went four times a year; now it’s nine. If they went 18 times a year, it’s 36, etc.

But what’s even more interesting is they buy more concessions — more than double the concessions than they used to.

We’re prepared to prove that we’re a positive force in the industry. Getting more people back to the movies; spending more money on concessions; and seeing the small films, not just the big hits that really don’t need help. You know, the big titles have plenty of customers. It’s the “I, Tonyas,” the “Ladybirds” — those are the films that need more support. [MoviePass subscribers are] going more often. And they’re going during the weekdays, when the theaters are empty, and they’re buying high-margin concessions. All those are real positives.

The business model

Even at this point in the interview, I still didn’t get how MoviePass plans to stop losing money. Eventually, Lowe revealed the master plan: His goal is to break even on the subscription fees; after that, anything he can make from marketing and data is pure gravy.

He outlined four ways he intends to drive down MoviePass’s costs:

  • First, MoviePass subscribers’ moviegoing frequency tapers off. At first, they see a lot of movies, reveling in the freedom of not having to pay for them individually. But, Lowe says, “by the fourth or fifth month, it gets down to a norm. In time, a larger percentage of our subscribers will pass their fourth month,” thereby costing MoviePass less per person.

  • Second, the company intends to woo people who don’t go to the movies a lot — who won’t use the card as much. “The second big lever is going after the occasional moviegoer more and more, so that they represent a larger and larger percentage of our subscriber base.”

  • Third, MoviePass hopes to sign up more people in places where movie tickets cost $7 or $8 instead of $15. “So we’re getting more and more subscribers in Omaha and Kansas, to offset New York and L.A. We drive down [our cost per subscriber] by promoting the service in those low-cost towns, where the average cost is $7 or $8.” Farnsworth notes that when MoviePass started, big-city subscribers made up 55% of its membership; that’s down to 30% today.

  • Fourth, MoviePass hopes to get bulk-rate discounts from the movie chains, as described above.

Once the company has approached break even on the subscription fees, it can start generating revenue outside the subscription: “Studios paying us to market their films. Selling advertising on our site. Building out this night at the movies, where we evolve into an OpenTable for your night at the movies. You just saw ‘Ready Player One,’ and five minutes after you walk out, we can tell you, ‘Hey, there’s a soundtrack to this film. Maybe you’ll love it. Click here,’ and have it delivered to your phone.”

Farnsworth believes the company can make $6 a month per subscriber through these methods.

The future

Lowe expects to sign up millions more by the end of 2018, representing 20% of all movie-ticket sales. Of course, anything can happen; already, a competitor, Sinemia, eliminates two of MoviePass’s drawbacks — it lets you buy your tickets online, at home, and it permits you to see IMAX and 3D movies. (The catch: You get to see only two or three movies a month, depending on the plan you choose.)

Pogue: What is the end game? What is MoviePass going to become?

Lowe: Reed [Hastings, CEO of Netflix], recently said, when asked what’s his major competition — and I don’t think he was joking — he said, “sleep.”

We’re not there yet, but Netflix, Hulu, Amazon, the streaming services are our competition. It’s leisure time we’re all fighting over. Over the last 20 years, there’s been this trend toward cocooning. You know, “Netflix and chill.”

But then you’re sitting by yourself laughing or being afraid. And going to the movies is an experience. You have 50 people laughing around you. That’s so much more interesting and fun than sitting by yourself. So I think we’re playing into this great trend of getting out, being around other people, going with friends to see movies together. It’s not going to replace streaming, but our vision is to re-energize that night out to the movies.

Pogue: Will you guys start being a producer of movies?

Farnsworth: We already bought our first movie with MoviePass ventures. We announced it at Sundance, which is “American Animals,” coming out in June.

But another one of Mitch’s ideas early on was, buy in alongside these producers and distributors. We’ll put our money up and will guarantee them a certain box office open, out of our money, and then we partake in the ownership of the movie. So we’ll make 50% of the revenue on streaming —HBO, whatever. We’ll make money on all the other ancillary revenue of that movie when it goes to DVD or streaming and all the different avenues.

Ted Farnsworth runs Helios and Matheson, MoviePass’s parent company.
Ted Farnsworth runs Helios and Matheson, MoviePass’s parent company.

Pogue: And your company, just bought Moviefone [from Verizon, Yahoo’s parent company]. What’s the relationship there?

Farnsworth: Oh yeah, absolutely. It’s a natural for MoviePass, because that’s a great advertising platform for us. They get 7, 8 million unique users a month coming to Moviefone. We can turn them into MoviePass subscribers, and use that advertising platform as well.

Mitch and I pinch ourselves all the time of how fast it’s gone and how fast it’s grown. I mean, Spotify, 12 years old, I think, and we’re six or seven months old, so it’s going to be interesting.

Pogue: What’s that stat? You’re the fastest growing…

Farnsworth: Yes, the fastest-growing subscription company in the history of the internet. We were the fastest one to get to a million. How long did it take you at Netflix?

Lowe: 38 months.

Farnsworth: 38 months. And we got there in four.

We go to the theatres and spot check and talk to people. They don’t know who we are…

Pogue: You find people in line showing their MoviePass cards?

Farnsworth: We start talking to them. What is that? How does that work? And then we always ask them all, “How do they make money?”

Pogue: And what do they say?

Farnsworth: They say, “I don’t know, but we love it.”

Correction: Ted Farnsworth, CEO of Helios and Matheson Analytics, said 7, 8 million unique users a month go to Moviefone. That number was misstated in an earlier version of this article.

David Pogue, tech columnist for Yahoo Finance, welcomes non-toxic comments in the Comments below. On the Web, he’s davidpogue.com. On Twitter, he’s @pogue. On email, he’s poguester@yahoo.com. You can sign up to get his stuff by email, here.  

Read more

 

 

 

What to Read Next