Why MoviePass Was Destined to Crumble

Industry Focus: Consumer Goods is going to the movies! At least, they're talking movies, revisiting a late summer theme from last year to see how the business has fared so far year to date.

In this segment, host Vincent Shen and Fool.com contributor Asit Sharma discuss MoviePass, the once-unlimited movie subscription service owned by analytics firm Helios and Matheson Analytics (HMNY). The pair break down MoviePass' woes by analyzing the numbers -- and discussing their own experiences.

A full transcript follows the video.

This video was recorded on Sept. 4, 2018.

Vincent Shen: We've covered some of the high-level box office results, some of the trends that we've seen with the different studios, and the dominance of a single one, those results for this year. Now, I want to talk about MoviePass. A lot of moviegoers will say that this rising star burned out a little too quickly, but its influence on the industry will hopefully be more permanent, at least from a consumer perspective.

I was a MoviePass subscriber until this past week, actually. I've since been disappointed by the trajectory that the service took, in terms of some of the changes that they've made to the features and things along those lines. But, Asit, why don't you start us off and walk us through the saga a little bit, since MoviePass really took off late last year?

Asit Sharma: MoviePass is a great idea in search of deep pockets. It found those deep pockets in a company called Helios and Matheson Analytics, an analytics company with skimpy pockets, but which thought that combining its expertise in analyzing data with a subscription service like MoviePass, together, these two companies could deliver valuable information to movie houses, production studios, cinema chains. They joined up forces late last year. Since then, we've been able to see MoviePass's economics in the financials of Helios and Matheson Analytics. And they've been atrocious. The company has had to curtail its subscription model on successive occasions. I believe the latest iteration is a plan which lets moviegoers see three movies in a month for $9.95. That's down from an unlimited selection of movies. In addition to that, you can only choose from six titles daily, which is also down from an unlimited amount of titles. Now, you can purchase additional tickets in each 30-day period at a $5 discount.

However, even this reduced model, I believe, is very unsustainable. The reason is that MoviePass has to pay the price of the ticket to the theater chains. Its business model, its business plan, was to make money in two stages. One, it would ramp up subscribers -- which it did, into the millions. I believe the latest figure that we have available to us was 3.2 million subscribers. Once it had this huge subscription base, the company would then try to sell data analytics to the entities I mentioned before. It would arrange for private screenings, it would promote movies through its app. All of these alternative revenue streams have, in some way, materialized, but in an accounting sense, they're not material. They have not made an impact to the bottom line.

If you visualize this, after the first time a customer sees a movie during a month, MoviePass is actually at a neutral. In fact, it hasn't covered a single cent of its overhead expenses. It's just covered the first ticket that it then has to hand over to the movie house. After that, it gets in the red each time you see a movie.

The parent company, Helios and Matheson, has sustained enormous losses in a short amount of time. Its cash burn in the first six months of this year was $219 million. It recorded revenue of $122 million for the subscription services of MoviePass, while at the same time, its cost of revenue came in at $313 million. This is a bad idea from an economic standpoint, to run such a service through a third party. However, it might make sense for cinema chains to replicate that model. They already have the revenue and expenses on their own P&L.

I'm curious, Vince -- I know we were chatting before the show -- given that overview, you have some experience with MoviePass. I think you have a relative who also has a very interesting experience with MoviePass.

Shen: I'm going to do this in three stages. Austin, I want to call you in on this. You mentioned that you're still currently a MoviePass subscriber, but you've been in it for, what, six months?

Austin Morgan: Yeah, about six months.

Shen: And you've seen how many movies in that time?

Morgan: I've seen probably about one movie a month.

Shen: OK, one movie a month, you're paying $9?

Morgan: It's like $8.99, yeah.

Shen: OK, so you're playing about $9. The thing is, theaters in this area, usually around $12-13 bucks. MoviePass is footing that full bill to the theater operators.

Morgan: Correct.

Shen: So, even on that one movie, they're already losing a couple of bucks. Let's be generous, and we'll play it by the average ticket price in the country. You said around $9.25, right, Asit?

Sharma: That's correct.

Shen: One movie a month, $9.25. You're paying about $9. That seems like it could potentially be sustainable if we forget about all the overhead and the fixed costs. Let's just not worry about that stuff, right? This is a lean company, they can do this. They have an app, that's it. I recently ended my membership. I was a member for about 11 months. In that time, I counted through my history on the app, I saw about 27 movies. I would consider myself probably being on the higher end of volume. Most people don't have the time or, maybe, necessarily, even the interest to see as many as two, three movies a month.

I'm going to bring in somebody who's absolutely an outlier, who's my brother. He also recently ended his MoviePass subscription to sign up with a competing service, which we'll talk about. I told him to give me a final tally before the show. He saw over 80 movies over about a 10-month period. When you're seeing eight movies in a month, and D.C. ticket prices being around $12 each -- and that's low, frankly -- costing the company essentially $1,000, but only collecting about $100 in revenue, in terms of that monthly subscription. You can see why the company had some of the challenges with cash flow, why there have been all these changes to their service, the features that they offer, and why they have essentially gone from not quite unlimited but close to it, one movie per day each month; from any of the movies out there that are available to now just three a month with a surcharge for additional viewings.

Not everybody, obviously, is like my brother, seeing that many movies. I think he's probably in the top 1%. But there's definitely a challenge when even somebody who's not going as frequently, like our producer, Austin -- the system isn't sustainable.

Sharma: I hope the CFO of Helios and Matheson isn't listening to this podcast. You just identified a major source of their cash burn.