Sometimes a deal can truly be too good to be true. Such is the case with Helios and Matheson Analytics Inc.'s (OTC:HMNY) MoviePass. The attempt to bring an on-demand subscription model to movies hasn't been working out for the company, as shares have plunged to under a dime as of this writing.

Since lowering the plan's price from $50 per month to $9.99 per month last year the company has taken steps to make the underlying deal less consumer-friendly: Members were originally allowed to see one movie per day, but that is now down to three per month with a discount for additional movies. In April, MoviePass stopped letting members use the service for multiple viewings of the same movie. Surge pricing was introduced, and later revoked. The blocking of new releases from the plan was also implemented and then revoked.

Is the end of MoviePass near?

A chalkboard drawing of an arrow headed down.

Image Source: Getty Images.

A three-pronged plan for failure

Industry analysts knew it wasn't a matter of if, but rather when, Helios and Matheson was going to have to apply a hard monthly cap, because without significant changes, MoviePass was destined to fail. Three of the service's most-pressing concerns:

Noneconomical model: The biggest problem with MoviePass was unit economics, particularly the fact its variable costs were higher than revenue. The higher-cost MoviePass Plus product cost users $9.99 per month, or less than the cost of one movie, while users could watch a movie every day.

With 3 million subscribers, you'd expect the company would have been able to persuade theaters (the variable expense) to cut prices because of scale. Simply put: This did not happen, and the company typically pays face value for tickets.

The theater industry is rather cutthroat, with margins in the low/mid-single digits. In the United States, theaters generally keep roughly half of the ticket price (less from blockbusters and releases from powerful studios like Disney) and live on concession-related revenue.

While the conditions appear similar to the airline industry, since the incremental cost of a moviegoer is nil, theoretically giving MoviePass an upper hand in negotiations, most feared a devaluation of movie prices in the eyes of the consumer if/when MoviePass folded.

Adverse selection risk: The second issue with MoviePass is adverse selection risk. It's a term you rarely hear outside of the insurance industry, but it simply means users that will provide the company losses are the ones most likely to buy the product. MoviePass attracted "super users," a few going to the cinema daily, which drained the company's cash.

At one point, the company was burning cash at a rate of $45 million per month, which is significant considering the company has reported only $38 million in total revenue the last four fiscal years. At one point, the company had to take a high-interest short-term loan to avoid a service outage.

It's possible limiting these super users to three movies per month could ameliorate the cash burn, but the company notes 85% see fewer than three movies a month. So it's unlikely limiting these super users will reverse the cash drain totally.

"Build-it-and-they-will-come" revenue-generation strategy: So while we've established the direct-monetization model was uneconomical, management appeared to point to additional monetization once a large subscription base was built.

Earlier this year, MoviePass CEO Mitch Lowe suggested the company was going to use the data from its subscribers to augment direct revenue and suggested the app tracked customers' movements.

This went over about as well as expected, with data manipulation becoming a bigger deal in the wake of Facebook's data scandal and subsequent massive sell-off. Lowe quickly "clarified" this comment while promising the company will not sell user data.

The future

Regardless of what happens, Helios and Matheson Analytics Inc. has likely changed the movie industry, and for the better. Many large theater chains developed subscription plans -- less consumer-friendly, of course -- to compete with MoviePass. The most notable is AMC's Stubs A-List, which costs $19.95 per month and limits members to three movies, and at its chains. MoviePass can be considered a proof of concept for these theaters.

For investors, the lessons are equally pertinent. MoviePass always felt like many start-ups in the tech bubble of the early 2000s, companies that were operating at a variable cost loss but promised to make it up on volume...eventually.

Most of those businesses folded when funding dried up. If something is too good to be true, often it is, and as investors, it's a good idea to steer clear of companies that are not viable on a unit-economics basis.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.