MoviePass, an all-you-can-watch subscription service beloved by millions of movie-goers, experienced a major service disruption just a few days ago. Customers around the country were left scratching their heads, wondering whether or not this was the end of the movie ticket provider’s somewhat troubled run.
Eventually, Helios and Matheson (the company behind MoviePass) admitted that they simply ran out of money and were unable to pay their merchants and fulfillment processors – causing operations to come to an abrupt stop.
They ended up borrowing an emergency $5 million from the Hudson Bay hedge fund to restore their services – a loan that Helios and Matheson (NASDAQ: HMNY) will ultimately default on if the company goes bankrupt like many experts predict.
But the problems didn’t just start last weekend for MoviePass, a service that let subscribers pay a measly $9.95 per month to see a nearly unlimited number of movies in theaters.
Issues with their business plan were made abundantly clear back in early May, when an SEC filing by HMNY revealed that they were spending a staggering $21 million per month in expenses, even though they only had $15.5 million in the bank at that time.
When MoviePass dropped its subscription fee down to $9.95 in 2011, it attracted millions of new users in one fell swoop, which sounds great on the surface. But really, it just accelerated Helios and Matheson’s crawl towards bankruptcy. This business model, rotten to the core, was widely ridiculed by analysts – and for good reason.
The pricing made sense at first, as the average American went to the movies only a few times a year. Even with a low monthly fee, this was a profitable transaction for MoviePass.
However, the average MoviePass user took advantage of their near unlimited movie watching potential, visiting cinemas anywhere from 5-10 times per month. MoviePass would essentially pay for its users’ tickets through a fulfillment service – so the more times people went to see a film, the less profitable they were as a customer.
The service was far too cheap though, and every new customer they gained put additional financial strain on the whole operation.
Realizing their predicament, MoviePass tried to make changes to their service in a futile attempt to tip the scales in their favor. They put a stricter limit on the number of claimable tickets per month back in April, only to remove all ticket restrictions two weeks later.
In the end, none of it really helped. When the SEC filing revealed HMNY’s dire situation, its stock dropped sharply, capping off a crash that wiped out 94.52% of the company’s market cap in just 5 months.
So, with the parent company now in shambles, and MoviePass a shell of its former self (they only offer tickets on indie-films from a small number of theaters now), it begs the question:
What the heck were they thinking in the first place?
Helios and Matheson priced MoviePass at such a low point and delivered such an insane amount of value (to the detriment of the company), it almost seemed like they were trying to lose money.
And you know what? That’s exactly what they wanted to do.
A few weeks ago, I wrote about how Amazon, lead by super-billionaire Jeff Bezos, is burning through cash more and more every day with each new Prime subscriber. For only $99 a year, you get a basket of goods and services that offer value to the consumer like we have never seen before. Nobody else is able to compete with Amazon at this price point, even if they wanted to, and the company is undoubtedly losing money up-front with the service.
But in the long run, they’re establishing a huge base of customers that will never, ever shop anywhere else online. Bezos is trying to get his hooks into nearly every e-commerce dollar out there for the next millennium, and in order to do so he has to build immense credibility with would-be customers.
By continuously over-delivering value for years upon years, Amazon has cemented its place in a monopoly like position, all for the benefit of the consumer.
Helios and Matheson tried to do the exact same thing with MoviePass.
Back when Amazon was getting started, many analysts considered Jeff Bezos as a mad genius, destined to run his company into the ground with negative cashflows.
And you know what? He almost did. During the dot com bubble of 2000, Amazon would have likely gone bankrupt if it wasn’t for a deal orchestrated just a month before the big crash. On the advice of Morgan Stanley’s global-technology advisors, Amazon sold $672 million worth of convertible bonds to overseas investors. It was intended to give the company a stronger cash position as a hedge against nervous suppliers that needed quicker payments to operate.
Instead, the extra cash ended up keeping the lights on and saving the company. If Bezos had waited just a few more weeks to complete the deal, it’s likely that Amazon would have found a place in the dot com scrap heap, alongside other failed companies like Webvan and Kozmo.
So, while Helios and Matheon’s business plan may have sounded idiotic at the start – they were really just trying to become the Amazon of the movie industry. MoviePass was offering unparalleled value, building up a huge base of subscribers, and accruing wanton amounts of market trust. The endgame, according to the company, was to charge theaters and studios for film promotion – putting MoviePass in a monopolistic position over ticket sales once they had absorbed the majority of movie-goers into their userbase.
At the end of the day, though, they couldn’t grow quickly enough to save the company. A stripped down, more expensive MoviePass will live on, but only as a reminder of what could have been for an extremely ambitious idea.
