Even MoviePass understands its business model is a surefire way to go out of business. Despite scrapping its plan to hike monthly fees 50% after outraged members protested, the Helios and Matheson Analytics (NASDAQ:HMNY) movie ticket subscription service will instead limit to three the number of movies a member can see in a month.

A model failure

The movie smorgasbord first implemented by MoviePass was never going to work. For just $9.95 per month, moviegoers could go to the movies once a day and MoviePass would pay the theaters the full price of a ticket. Even trying to scrape a percentage off inflated concession stand prices wasn't enough to stanch the money it was hemorrhaging. 

A number of limitations were subsequently imposed, including blackouts at certain theater chains, surge pricing, and excluding some blockbuster movies like Mission Impossible: Fallout, but the service still ran out of money, which caused an outage. To get the service working again, it was forced to borrow $5 million to pay vendors and processors.

A couple watching a 3-D movie at a theater

Image source: Getty Images.

The company proposed raising the monthly subscription fee to $14.95, but members love their deep discount and balked. MoviePass said it listened, and so although rates will stay below $10, moviegoers can now see only three movies a month. It also eliminated "peak pricing," which added a fee to certain movies in high demand.

MoviePass tried to limit the number of viewings before, running a short-lived trial that gave moviegoers the ability to see four movies a month for $29.95, but subscriber protests caused it to back off that plan, too. 

MoviePass says the latest changes will not impact the vast majority of its members, 85% of whom see three movies or less per month anyway. It claims it was that remaining 15% that was "stressing the system."

Narrowing the gap

Helios and Matheson is hemorrhaging cash each month because its 3 million MoviePass members are rushing out to see big theatrical productions, along with a cadre of other lesser films. Since it pays full price for each ticket purchased, it obviously loses money once a subscriber goes to the movies twice in one month.

Helios and Matheson, however, says that beginning with the third quarter, it will be generating incremental, non-subscription revenue of $4 to $6 per subscriber per quarter. Now, that's not nearly enough to offset the amount of money it loses on each subscriber each month -- and it is offering a $5 discount to subscribers who buy more than three movie tickets a month -- but it will narrow the deficit somewhat, and the company says actions it has already taken have reduced its cash burn by 60%.

While part of the allure is that members were really getting something for nothing after the first ticket, the response also indicated that despite declining theater attendance (because of the availability of streaming movies and other forms of entertainment), people are still willing to go out to the movies.

Other companies saw the value, and have implemented their own subscription services, albeit in a more sustainable manner; these include AMC Entertainment Holdings, Cinemark Holdings, and Sinemia.

Unintended consequences

It was clear to almost everyone that the model Helios and Matheson was using with MoviePass couldn't last for long, but limiting the number of tickets subscribers can buy makes its service unremarkable in relation to the competition. The one benefit it does have is that moviegoers can go to a wide variety of theaters; those services run by the theater operators are limited to their own chains.

Still, the changes MoviePass made are really efforts to stop losing money, and we may see it initiate more limitations in the future if it really wants to survive. Ultimately, the greatest contribution MoviePass may have made is in how movie tickets are sold, and in proving there remains latent demand by the public to go out to theaters.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.