Let's All Go to the Movies

MoviePass, the nifty little subscription service everyone's abuzz about, recently slashed the price of its service. It used to be as high as $45 a month, but now you can get it for the low, low price of $9.95 a month. So, for what it costs you to stream Netflix in HD, once a day you can go to the theater and see a 2D, non-IMAX screening of the latest film. And for those of us in major metropolitan areas, it's a steal. Here in Los Angeles, $9.95 is only a few dollars more than a matinee ticket at the cheap theater closest to my apartment.

Now, the battle to put butts in seats is one that the theaters have been fighting and losing since the 1940s, so anything that could possibly bring more people in is a good thing, right?

Right?

If that were the case, why would this be the headline in the Los Angeles Times the same day that MoviePass announced their new pricing:

See unlimited movies for $10 a month? Not so fast, says AMC Theatres

AMC Theatres has publicly declared their intent to find a way to block MoviePass at their theaters. And as Polygon reported, AMC Theatres stopped participating in a MoviePass pilot program that allowed subscribers to see 3D and IMAX films. All this despite The Hollywood Reporter headlines such as  "Moviegoing Slows to a Standstill Amid Historic August Slump" and "Summer Box Office Suffers Historic Decline in U.S."

To understand why the exhibitors aren't on board with MoviePass, we need to examine the realities of movie theater attendance. As much as the industry and the press would like you to think that attendance is in free fall, if you were to dig through the data and chart the annual ticket sales from 1980-2016, you'd get this:
 

North American Ticket Sales 1980-2016

Data from the National Association of Theater Owners

As the handy little trend line indicates, ticket sales in North America are currently trending downward, but are roughly in-between the high point and the low point of the 35-year period. So, while theater chains are experimenting with adding restaurants and alcohol to compete with Netflix and your big screen TV, they aren't desperate enough to need an outsider to help spur overall sales. At least not yet.

But the real concern the exhibitors have about MoviePass becomes readily apparent when you read this report about the 2016 Box Office by the Motion Picture Association of America:

"Frequent moviegoers – individuals who go to the cinema once a month or more – continue to drive the movie industry, accounting for 48 percent of all tickets sold in the United States and Canada."

The moviegoer that MoviePass is best for is the frequent moviegoer. This is the concern of the exhibitors. It's not that MoviePass undercuts their ticket prices; it's that MoviePass appeals most to their best customers—the very ones keeping the industry alive. MoviePass is quick to point out that they pay the theater full price for each ticket, but the exhibitors are right to feel antsy. How do you think those customers might feel if MoviePass fails and they have to pay full price for tickets again?

In order to assuage these fears, MoviePass has to prove that it will be profitable all on its own. Someone, somewhere, is going to pay for those movie tickets, and it won't be the theaters or the studios. Our first hint at MoviePass's plan for profitability comes from Bloomberg:

Ted Farnsworth, chief executive officer at Helios and Matheson [the majority stakeholder in MoviePass], said the goal is to amass a large base of customers and collect data on viewing behaviors. That information could then be used to eventually target advertisements or other marketing materials to subscribers. “It’s no different than Facebook or Google,” Farnsworth said. “The more we understand our fans, the more we can target them.”

So, you might subscribe to MoviePass, but ultimately, you will be the product. While they won't directly subsidize the ticket prices, studios, theaters, and advertisers would love to get even more information about the viewing habits of their customers. MoviePass would be another tool in their arsenal.

Secondly, there's the whole gym membership metaphor. Get tons of people to sign up, and hope that the vast majority don't use it. There is obviously some demand for the service. As Deadline noted, "In the two day period after the movie ticket subscription service announced a drop in price to $9.95 a month, it raised its sub level to more than 150,000..." But this is no guarantee of success. America has a built-in, annual 'buy a gym membership' holiday, theaters don't.

But, MoviePass is also banking that infrequent moviegoers will outnumber the frequent. In this CNET interview, Mitch Lowe, CEO of MoviePass, stated that their "primary subscriber is someone who, today, is only going to between 3 and 6 movies a year, and now they'll go to between 6 and 9 instead."

If Lowe turns out to be correct, and the average subscriber only goes—at most—nine times a year, MoviePass does have a chance of turning a profit. In 2016, the average price of a movie ticket in the United States was $8.65. If the subscriber sees nine movies, the total cost of tickets would be $77.85. The annual subscription will cost $119.88, leaving $42.03 for MoviePass. But, this is all based on their hopes—we won't know for sure until we watch this experiment play out. If Lowe ends up being wrong, and the average subscriber is more akin to the frequent moviegoer and attends closer to 12 films a year, MoviePass's profits could vanish in a poof of ticket stubs.

But let's say, for argument's sake, that MoviePass ends up being right. The average person ends up seeing nine films, and it's up from their normal three-to-six. It's that audience that MoviePass hopes can deliver the biggest impact. From the CNET interview:

"We think there's a group of customers out there who've stopped going to the movies as often as they used to -- particularly between the ages of 18 and 39 -- who'd love to go to the movies more often, but have two problems. One is the risk of seeing a bad movie, and the second is they already belong to Netflix and Amazon and they can just wait and see it later. Usually people talk themselves out of going. 'I've gotta get there. It might not be a great movie. It's going to be 10 bucks. If I'm already paying for Netflix, I'll just wait until it comes out.'
We think that's hurting the movie business. By giving people the insurance... if you see a bad movie you can just walk out and trash it to your friends the next day, and not feel bad that you wasted 10 bucks. That way, it can actually be fun to see a bad movie. Or see a movie you didn't think you'd like and fall in love with it. We think we can expand people's interest in film, make it more enjoyable and result in more people going to the movies more often."

This is where MoviePass has an opportunity. As much as the chart above shows that tickets sales aren't in some catastrophic collapse, theaters do have an attendance problem. It isn't getting people to come to the theater, it's what people are choosing to see, and when they choose to see it.

2015 North American Box Office Gross

Data from BoxOfficeMojo

In 2015, the North American box office grossed $11 Billion. The top ten films of the year made up almost 40% of that total. If you include the next ten films, all told the top twenty films would make up 51.72% of the box office gross for the year. According to BoxOfficeMojo, there were 705 films released in 2015.

But, for the theaters, the news gets even worse. In 2015, the top ten films, on average, grossed roughly 33% of their total domestic take during their opening weekend. Compare that with 2000, where the opening weekend for top ten films averaged only 21.4% of their total gross. Film rent—what the theaters give the studios for "rental of the film print"—is the most expensive for the opening weekend of a film. So not only is the box office more and more dependent on blockbuster releases, as the audience has become more inclined to catch a big release opening weekend, the theaters have started to earn less revenue overall.

To get theaters on board, not only does MoviePass need to help increase attendance, they need to increase attendance for the other 675 films and they need to help drive attendance later in a film's box office run. If the average subscriber is primarily using their pass to see the same top-20 films on or near opening weekend, the biggest problem the theaters face won't be addressed and the theaters have no incentive to play ball. And If I were an exhibitor, I'd want to see a dramatic change. A 1-2% increase in traffic isn't going to be enough. But all that will be for naught if MoviePass isn't profitable. 

This doesn't mean that the exhibition industry isn't prime for some disruption, just that MoviePass needs to prove that it's the way to do it.