At first glance, MoviePass seems like an offer that's great for moviegoers, and perhaps theater owners, but terrible for the company offering it. For $9.95 a month, MoviePass offers members one ticket a day to any regular (not 3D or IMAX) movie; the company says MoviePass is available in more than 91% of U.S. theaters. In theory, that means a member could see 365 movies each year in theaters for less than $120.
That seems like an offer that's too good to be true. But Ted Farnsworth, CEO of Helios and Matheson Analytics Inc. which just purchased a majority stake in MoviePass -- which is led by Netflix co-founder and former Redbox president Mitch Lowe -- insists that's not the case. Farnsworth explained in an email exchange with The Motley Foolwhy his company believes in the service.
"MoviePass will be paying the full price of every ticket sold at theaters, with the exception of IMAX or 3D," Farnsworth wrote. The company originally sold its all-you-can-see plan for $30 a month, hoping to make money in the way many gyms do -- profiting from people not using the service much, but not canceling. Its new $9.99 price has a different, much longer-term, financial model.
At least one movie theater chain objects
For struggling movie theater chains, this offer should bring in new customers. That's badly needed, as AMC Entertainment Holdings (NYSE: AMC) saw Q2 diluted earnings per share decrease to a loss of $1.35 per share compared to earnings of $0.24 per share in the same period in 2016. For AMC and other theater chains, MoviePass seemingly amounts to a good Samaritan standing outside its theaters buying tickets for people who otherwise would not have.
"Currently the greatest segment of people moving away from attending movie theaters are Millennials," wrote Farnsworth. "A study commissioned by AMC found that people want to attend theaters for the true cinematic experience. However, the major obstacle is the cost of the ticket. MoviePass eliminates this obstacle -- and consequently, 75% of current MoviePass users are Millennials."
AMC does not see things that way and issued a press release saying MoviePass "is not in the best interest of moviegoers, movie theaters, and movie studios. ... 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." The theater company also said it's consulting with its attorneys to "determine if or how AMC can prevent a subscription program offered by MoviePass from being used at AMC Theatres in the United States," saying that MoviePass seems to be aiming for ticket discounts in the future.
Why is MoviePass doing this?
MoviePass pays full price for tickets in most cases, but it does have deals with some theaters (generally smaller, local ones) where it receives a portion of the ticket price back, according to Farnsworth. The CEO however, does not see that as a path to profit. Instead, he believes that buying MoviePass makes sense for the data about moviegoers it will provide.
For instance, with MoviePass we'll have an understanding of a moviegoer's preferences so if he or she went to see a thriller, we'll be able to target ads for another movie of the same genre. Or perhaps we'll be able to offer them the film's soundtrack for purchase. As we build the whole ecosystem for the movie business, the studios and players will see their profits increase. MoviePass will be able to track trends and offer insights of habits to studios so that the studios will know how to better allocate budgets.
Farnsworth believes that the data gleaned will eventually be worth more than the cost of acquiring it. That seems like an expensive bet, but it's one that will benefit movie fans while the experiment goes on.
With AMC, the largest theater chain in the U.S., not supporting the idea, it seems like MoviePass has a very difficult road. Since the average ticket at an AMC theater sells for $9.33, the subscription service would make $0.62 if a passholder only saw one movie a month. Since many would likely see two or three, losses would be substantial absent significant alternative revenues down the line.
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