MoviePass: Fallout

Just when you think MoviePass is dead and gone, The Ringer publishes an interview with MoviePass CEO Mitch Lowe and Executive Vice President Khalid Itum, where they detail their struggle to keep MoviePass afloat. At one point Itum remarked that the weekend Mission Impossible: Fallout came out was when they realized “…that we can’t necessarily provide the service we had been providing..."

You don't say.

My argument, from the beginning, was that MoviePass was an interesting idea, but one that was poorly thought out and poorly implemented. The fact that they didn't realize this until almost one year after announcing their "Unlimited Movies for $9.95 Plan" is, sadly, unsurprising.

“Over 80 percent of subscribers were great customers,” says Lowe—“great,” in this case, meaning rule-abiding and low-frequency. “We were roughly breaking even on that group.”

Like gyms at the start of every new year, MoviePass was banking on generating revenue from people signing up for the service and then never using it. But given the cost of the monthly subscription and the average cost of a movie ticket in the United States, I’m surprised that they were breaking even on 80% of their consumer base. The teensiest amount of research would have warned them about frequent moviegoers. They account for 48% of ticket sales in the domestic market and not only would they be the most interested in a theater subscription service, they would be the ones who would benefit the most from it. Or, to borrow Lowe’s own parlance: not great customers.

I, for one, fell into that ‘not so great’ category of customer. Then again – and I’ll admit this is entirely anecdotal — I ran into many people in LA who signed up for the service, and immediately began to see movies on a weekly basis. At $9.95 a month, MoviePass was cheaper than a matinee ticket at most area theaters, and you could go (almost) as much as you wanted. As analyst Michael Pachter noted when interviewed for the article:

“Nobody was dumb enough to sign up for MoviePass and not use it.” When I ask Pachter what MoviePass’s biggest mistake was in 2018, he doesn’t hold back: “Their biggest mistake was launching.”

But not only did they not think through how their customers would use the service, they apparently didn’t think through how they should approach the exhibitors.

MoviePass fashioned itself as a disruptor, and thus, behaved disruptively. It demanded that exhibitors share profits with it on concessions; it demanded exhibitors provide discounts on tickets; boasting its marketing heft and ability to push users toward specific movies, it demanded deals from distributors.
What they failed to anticipate, for some reason, was the way the industry—both exhibitors and distributors—responded to this behavior. “The cinema business is quite a small business actually,” says David Hancock, the director of research and analysis for cinema and home entertainment at IHS Markit. “It’s a relatively restricted number of people in there, and they know each other relatively well. You often get outsiders coming in, not understanding the business, and [they] say, ‘We’re going to impose this on you guys.’ Each time this happens, the business closes ranks. [And] the way MoviePass came in, they were just asking to be isolated.”

As I wrote way back when: “[the exhibitors hesitance] 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.” And evidently they did. But pissing off the distributors and exhibitors while doing it isn’t exactly the path to success. The history of MoviePass can be described as a a seemingly unending series of poor executions around a decent idea. And, as a user, that was evident from the beginning.

There is a UI design philosophy that Apple codified back in the 1980s on the Mac —one that is still used today on both macOS and iOS. You probably haven’t noticed it, but pay attention the next time you are prompted to choose ‘Yes’, ’Okay’, or ‘Confirm’. There’s a really good chance — as in 99% or higher — that those options will be on the bottom right of the dialogue screen. This means, assuming that the program adheres to the design philosophy that is suppossed to be implemented universally across the system, you shouldn’t need to read the options. You would instinctively know where it is: The bottom right.

When I first signed up form MoviePass, I kept running into an error where I would input my MoviePass card number into the system, and it would cancel out. I did this multiple times before finally realizing my error: The ‘Confirm’ button was on the left, not the standard right.

When I complained to my friends, they laughed and — fairly — pointed out that it was my fault for not reading the dialogue box. But that was beside the point. In a properly designed app, I wouldn’t need to read it.

MoviePass: Poorly thought out and poorly implemented, through and through.

MoviePass 3D: Attack of the A-Listers

If you work at MoviePass, you know your company's future is in question when Vanity Fair runs the headline "Enjoy MoviePass While You Can, Folks". Only a few days ago, Business Insider reported that MoviePass lost $40 million in May alone, and that it would need to raise up to $1.2 billion in additional funding. While they’ve taken actions to bring down their costs— such as blacking out new releases, allowing subscribers to only see a movie once, and will soon start charging you a fee to see a movie during 'peak hours'— conventional wisdom is that MoviePass will fail; it’s just a question of when.

But despite all this, tomorrow AMC Theatres is launching “Stubs A-List”, a new teir of their existing membership program centered on a MoviePass-esque subscription plan for $19.95 a month. With this program, AMC now joins Cinemark in offering a subscription service, which leaves Regal as the only major American theater chain without one. But why would they do this? You’d think given all the financial woes facing MoviePass, my own pessimistic appraisal of MoviePass would lead to an equally pessimistic appraisal of AMC’s A-List program. But, I think there’s more at play here than many realize:

  1. They know more than we do — As the largest theater chain in the United States, AMC has a huge advantage, even over MoviePass, of determining the impact a subscription ticket service can have.
    All MoviePass cards are actually a MasterCard. Through backend trickery—and a requirement for customers to verify the purchase—these cards can only be used to purchase tickets at approved theaters. After MoviePass launched its $9.95 subscription plan, if AMC saw a significant increase in tickets being purchased using a MasterCard, and a similar increase in attendance, it would be a safe guess to attribute that growth to MoviePass. But they can even take this further. Because MoviePass can only be used for tickets, if MasterCard usage didn’t increase at the concessions stand, but, like attendance, there was a notable increase in concessions sales, those sales could also be attributed to MoviePass users. With that data, AMC could easily determine if launching their own service would be profitable. In other words: AMC has done the math. Some other foolish company paid tens of millions of dollars to prove the concept.
  2. Customer Lock In - With MoviePass, you can use it (almost) everywhere. If AMC noted an increase in attendance, it would follow that this increase wasn’t limited to any one theater or chain. I’m sure someone inside AMC corporate just sees that as potential lost sales. It's just a matter of convincing consumers that A-List is a better deal than MoviePass.
  3. The Middle Man - MoviePass is little more than a middle man. MoviePass pays the full price of the ticket, and they hope that in the future their losses will be offset, either through advertising partnerships with the studios or by receiving a cut of the ticket and concessions sales from the theater. In the already thin margin business of film exhibition, giving another vendor a cut of the sales isn’t appealing. This is greatest weakness of MoviePass's business plan—without these partnerships, they have no hope for profitability. And if you are AMC, why would you cut a deal with the middle man? You could launch your own program, and any (potential) increase in revenue would be yours to keep. 

The TL;DR — While MoviePass is doomed to fail, there is a chance that AMC’s program will actually succeed.

MoviePass 2: Electric Boogaloo

Just wanted to share a few things that were cut from yesterday's post, mainly because they didn't fit in or were irrelevant to the topic at hand. Also, a bit of follow up.

First, even though it's a few months out, my friends and I have already started discussing our plans to see The Last Jedi. For large groups like us, I've found that it's easiest to have one person collect the money and buy the tickets. But, MoviePass is only good for one person, and can only be used day of. If you're going to want to use your MoviePass and see The Last Jedi opening weekend, I hope you like the front row. For large releases—like a Star Wars—I can see MoviePass arguing that the average subscriber will still go out and buy tickets in advance. For Star Wars in particular, I know I would. But the more I thought about it, the less certain I am that this will stick. Outside maybe Marvel, I don't think any franchise other than Star Wars demands that you get your tickets in advance if you are hoping to catch a screening the opening weekend. And even then, when I worked at a theater, I'd say most Marvel films had decent seats available for walk-ins starting Sunday afternoon or evening. I've heard one suggestion that MoviePass could block the opening weekends of certain releases in order to help drive sales to later in a film's box office run, but deciding which films get blocked could be another big can o' worms.

Secondly, a small note on the box offices of 2000 and 2015. As I had noted yesterday, in 2015, the top 10 averaged 33% of their total gross in their opening weekend, but in 2000 the top ten only grossed 21.4% of their total take on opening weekend. However, there was one notable outlier in 2000: X-Men. It grossed 34% of it's total on opening weekend. I doubt anyone realized it at the time, but it definitely was a hint at the future of the box office.

Finally, a note on the concessions stand. One argument you will hear—and I even had someone bring it up to me last night—is that movie theaters make most of their money through concessions sales, so anything that drives attendance must be a good thing. Eh, it's not so simple. While concessions are incredibly profitable—like super, mega profit margins profitable—tickets are a volume business. Yes, theaters only see a smaller percentage of the ticket sales, but it adds up quickly. I don't remember any specifics—and if I did I probably couldn't share them—but I'd say it's a safe, educated guess that at the theater I worked at, 30% of the net profit came from ticket sales. Again, this is based on my own experience at one theater, so your mileage may vary. But, if I was an exhibitor, something that threatened a significant percentage of my profits—like, say, a subscription service that undervalues my tickets and is of questionable profitability—it is something I'd be very leery of. So, what I said about attendance, also applies to concessions. A 1-2% increase in concessions sales coming directly from MoviePass subscribers won't be enough to allay those concerns. So, unless MoviePass subscribers buy concessions in significantly greater numbers than the average theater goer, the concessions stand is ultimately a moot point. MoviePass still needs to provide a dramatic change.

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?


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.