The Guy Who Owns MoviePass Says Losing Money Was the Plan All Along

MoviePass is a case study in how tech disruption works, both because it’s so obvious that the company itself loses money hand over fist and because the deal it offers is so good you can’t help but look for the catch. A movie ticket costs somewhere between $10 and $15 and yet MoviePass offers monthly subscription packages for $9.95 that let users can see up to one movie a day. How the hell is that supposed to work?

One answer is that it works by burning through a lot of cash, since MoviePass pays theaters for every ticket users acquire through the app, albeit sometimes at a discounted price because of deals with cinemas. (For instance, a deal with Landmark Theaters gives users expanded options like e-ticketing and seat selection, and also, judging from my own experience, preferred in-theater ad placement for American Animals, MoviePass’s first foray into movie acquisition.) Last month, news that the company was spending more than $21 million a month while having only a combined $43 million in cash and payments on deposit with merchant processors sent its stock down to a low point from which it hasn’t recovered. It’s losing enough money that even the stock market has become extremely skeptical. Some have even suggested that MoviePass’s looming potential failure portends the bursting of the tech bubble.

But the people at the top of the company insist that everything is fine, that it’s not really about the $9.95 a month coming from each subscriber. Rather, it’s all about the number of subscribers, a.k.a. the vast compendium of data it’s getting with each signup. That allows MoviePass to sell studios info about trends, do predictive analysis on which movies will perform well, and push movies to its subscriber base. Once MoviePass acquires enough users, it says, the whole thing will turn the corner. (Judging by its stock performance of late, not a lot of investors agree.)

Meanwhile, some recent modifications to the app—including users no longer being allowed to see the same movie more than once—have made it less of a bargain for subscribers. As all this was going on, I talked to Ted Farnsworth, the CEO of Helios and Matheson Analytics, MoviePass’s parent company, about the service’s financial health, why theaters love MoviePass, and what it does with users’ information.

VICE: A few months ago, there was a to-do after [MoviePass CEO] Mitch Lowe said that MoviePass tracks customers before and after they go into the theater. That was walked that back a bit later, but what lessons were learned that hubbub?
Ted Farnsworth: One thing is, we never did anything outside of the policies or procedures of what people obviously approved. And I know Mitch—when he was saying that, he was saying that in jest, but obviously people didn’t take it like that.

What we do is locate people. Not tracking, but locating. If you’re looking at the movies at home to see what theater you want to go to, we have to see what’s the closest theater to where you are. When you get to the theater and check in, we have to know what ticket we’re going to buy for what theater. That’s what he’s talking about.

The lesson learned is that data has become such a hot topic in today’s world, with Facebook and everything else going on. And we do not sell our data to anyone, and don’t plan on selling it to anyone. But it really shows you how sensitive of a subject it is.

So, what are you doing with the data?
Take yourself out of there—your name, your credit card information, we don’t need any of that stuff. What we want to know is what are your viewing habits, and then we can give you a better experience from MoviePass by recommending movies that you would like. What we don’t want to do is get into the position where if we’re pushing one of our movies, and you have no interest whatsoever in comedy, we don’t want to bug you about it. [The data] gives us viewer habits more than anything, which is extremely critical, we think, for advertising with the studios.

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Is that a model where you say, “This demographic likes these movies?”
It works more like a Facebook or Google ad model. We know if you like a certain movie. And studios come to us and say, “Here is our slate for the next six months, these are our movies coming out.” Well, we know movie one is going to do well, and movie two is going to do well, but maybe not movies three or four. We can evaluate that internally, and then the studios will say, “Out of those six, here are three that we want to engage you for advertising, to push people to go to the movie.”

One weird experience I’ve found using MoviePass is that my own appreciation for a movie, whether I like it or not, is more lenient once you take the ticket cost out of the equation.
It’s like “MoviePass insurance,” or whatever you want to call it. You’re much more likely to rate a movie that you aren’t crazy about: “Eh, it was OK.” But if you pay $12 for it, then you say, “This movie is junk.” And you’re not going to tell anyone about it. You have a different take if the money doesn’t come out of your pocket. You definitely look in movies in a whole different light, so I think that’s a big opportunity for us. We may do our own version of Rotten Tomatoes or something.

What do theaters get out of the MoviePass model?
One is you get double consumption. The average person in America goes to four movies a year. We’re looking to get them to go to eight movies a year. For movie theaters, their biggest margins are in concessions, and know that MoviePass holders spend double in concessions. If you think about it, it’s common sense. You’re walking into the movie, and there’s no money out of your pocket, so you feel like you have a few more bucks, so you’re going to get the popcorn and Coke. That, to me, is the biggest gain for theaters

You’re also getting more people in the seats. We do great on opening weekend for small-budget films, but we also do well in week number two, week number three, when movies normally drop off. It gives them more of a tail for the movie itself, so it works great for the production company as well as the theaters.

“When someone comes in and disrupts what you’re doing, you don’t know which way to turn, and we’re coming at it a million miles an hour.”

How do those theater deals work? Are theaters locked into the deal for a specific amount of time?
The contracts can be anywhere from a testing period of a year to five years. The theater is actually giving us a discount. That can go anywhere from 15 to 25 percent on the ticket. They’ll give us discounts, but we’ll also push people into the theater, give them more traffic, because they’re a partner theater.

Some theaters have been resistant to partnering with MoviePass. Why?
Take AMC. From day one, AMC came out in a negative way: “No MoviePass, we’re going to sue MoviePass,” all these threats. And then they realized they couldn’t stop us from coming, because it was a credit card. And we’re paying them 100 percent of the ticket.

I think the hesitation is that a third-party company is getting between them and their customers, and that’s caused them anxiety. It’s no different than Orbitz for the hotel business, or Uber for the taxi business. When someone comes in and disrupts what you’re doing, you don’t know which way to turn, and we’re coming at it a million miles an hour. That’s the biggest hesitation.

Because MoviePass and the theaters are not the same entity, there will always be a disconnect between the faceless app and the in-person service at the box office. How do you address that?
That’s a great question. Because it really is different from others. If you have a problem with Apple or Google, you’re not going to get them on the phone. Ours is different, like you just said, it’s an app but it ties into a physical location and physical machine, and a lot of moving parts. Some of the things we’re doing on the engineering side is to make it a more seamless transaction. Theaters that we do business with that are partner theaters, we’re integrated into their backend. Take a look at Landmark theaters. We’re integrated into their whole system, and I have to tell you, complaints in a system like that are dramatically less than a regular theater that you’re not hooked up to.

I want to get into the business model. From the back of napkin math, it seems like there is more money going out than coming in.
I’d say there is absolutely more money going out than coming in. Which is no different from a Spotify going through $4 billion [it lost $1.5 billion in 2017]—not that we’re going through that—or an Uber, or anyone else that’s a pioneer in the space. I knew we would go through hundreds of millions of dollars. We never thought differently. My whole thing was that you get the subscription side to break even, or a little bit of loss, while you’re making money in the other areas, the advertising side of it. When we came out everybody thought it was all about the subscription service, that that’s the only way we’re going to make money. We never really corrected that, because we didn’t want to, if only because we wanted to have the runway to where we could build this up with millions of subscribers with nobody else coming into the space, without giving away our little trade secrets.

But we always knew from day one that we were going to buy our own movies, produce our own movies. We can guarantee a box office. For this movie, we know we’re going to buy $3 million worth of tickets, $5 million worth of tickets. We have a great idea, especially now, how much we’re going to buy at the box office. That’s almost a guarantee buy-in. How that affects the other stuff is, when you own a piece of the movie like American Animals—the one that we just launched—we know that as we push our subscribers to that movie, it’s going to drive other revenues. So, our deal with HBO or Netflix, or Amazon Prime, or international rights, or transactional like Apple, whatever it is for that movie, now we’re making money from that movie because we own it. We own a piece of it. All of those other ancillary revenues, we’re making money on those.

I know I saw one email about American Animals through the MoviePass list. Is that how you drive people into the theaters to see it?
We do email, we do campaigns, push notifications, things like that. It’s been extremely effective for us. Extremely. Look, American Animals had the best opening per screen that Orchard has ever had, and it’s a division of Sony. It was something like $35,000 a screen, which is amazing.

Do you envision MoviePass getting to a place where only subscribers will be able to see a certain movie you acquired?
Yep. Absolutely. We definitely see that, not right now, but down the road doing some exclusives with theaters, and then going direct to Netflix or Amazon right after that.

Do you have a break-even point for subscriptions where you’ll be in the black?
It’s always been pretty much 5 million subscribers. That’s when we’re cash flow–positive. We’ve always said we’ll hit that by the end of this year, and I believe we’ll hit it before the end of this year.

Can you tell me where you’re at right now?
We’re putting out an announcement Monday or Tuesday to give an update.

A friend of mine hasn’t bought MoviePass because they don’t expect you’ll be around next year. What reassurances do you have to potential customers?
The only thing I can say to them is we’re doing $9.95 a month, and if you go to one movie, what’s your exposure? Nothing. If we’re not around next month, you’re not paying nothing.

We’re so confident where we are, I’m not worried about that. The money side is the least of our worries. It’s customer service, growth, how to handle growth, the options, like bringing on a guest plan, a family plan, those things.

I do know the $9.95 price has shifted. Is that going to be steady?
I think it’s right where it is now. If you look back in the history of us, we’ve never gone up in price in all of our testing. We’ve never gone to $12.95, $14.95. We went to $6.95. We have different reasons for that, whether it’s we want to drive certain volumes of the subscribers, because then you have more people going to the movies.

Will I ever get free popcorn with my MoviePass?
For $9.95, you want free popcorn? We’re gonna give you free popcorn, free beer, free coffee, and a free movie.

Perfect. Sold.
You know what? Absolutely. We will. To give you an idea, say of you’re gonna see one of our movies, say American Animals, that’s the perfect place for us to give you a free popcorn or a free Coke. We’re looking at all those things all the time. Anytime that the consumer can benefit from that, I think it’s a win for MoviePass.

This interview has been edited and condensed for clarity.

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