Why MoviePass's Crazy Cheap Subscription Just Might Work
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A few weeks ago, MoviePass dropped the price of its subscription service that allows you to go to the movies as much as you want for $9.95 per month, and its user numbers jump ed through the roof. The collective reaction has boiled down to "How the hell is that supposed to work?" Well, it might not be as crazy as it sounds.

As a co-founder of Netflix and the President of Redbox, Mitch Lowe was a crucial figure in the death of the video store. He took over the CEO position at MoviePass in June of 2016 when the company was selling $30 unlimited subscriptions, had 20,000 subscribers, and was pulling $9 million a year   in revenue. While Lowe's previous ventures have aimed to destroy the home video industry and install a new one in its place, MoviePass is selling itself as a rescue mission for a theater industry that's in serious financial trouble.

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The movie theater industry is experiencing a slow but steady decline in attendance, especially among millennials . At the beginning of August, five of the biggest theater chains reported falling stock prices. AMC, in particular, had a disastrous 26 percent loss in its value. The writing has been on the wall for a long time. Streaming is simple, comfortable, and affordable. The big theaters' solution has been to charge higher prices for gimmicks like 3D films. That worked as a temporary fix for a little while but in recent years, demand for 3D has been dropping as well. Offering more expensive options may generate interest but it doesn't put more spending power in the audience's pocket, and if anything it's only exasperated the feeling that movies are too expensive.

All the while, MoviePass has been operating in the background with little fanfare. Recently, Lowe secured some crucial partnerships that ease the ticketing process and brought in the data firm Helios and Matheson to inject some cash for the next big push to make this service more than a niche product. So far, it's kind of working. After announcing the price drop a few weeks ago, 150,000 people signed up in two days. And many people couldn't even get the overwhelmed website to load. Despite the fact that the data shows MoviePass increases attendance, and it pays out full price to the theater owners, not everyone has been happy with the announcement. AMC, a former MoviePass partner , has vocally cried foul and argued that the $9.99 offer will only serve to depress the value of the theater experience before ultimately failing to show profits.

The mission of completely reordering the struggling movie theater industry is a big task and it's hard to work out if MoviePass is a savior or a predator. Lowe has spent his life working in the industry, and he does seem to have a genuine love of movies. In an interview, he told Gizmodo that his favorite film is Lawrence of Arabia , one of the most epic widescreen blockbusters ever made, which is a good choice if you're trying to remind people why the big screen matters. But one thing is becoming crystal clear: this subscription thing is happening, and it's going to change the business whether people like it or not.

The business model

"The biggest misconception is that this thing is unsustainable," Lowe told us. He's realistic about how many unknown factors have to come together for his plan to work, but he does have a plan. Making a splash with the price drop went far better than he'd hoped. Being able to handle the overwhelming number of sign ups did not.

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Growing faster than it anticipated is a bit of a blessing and a curse. Having more subscribers means that MoviePass will have more fees coming in and more data to demonstrate its viability, but it also means more movie tickets they'll have to pay full price to cover. "In the deal terms, MoviePass got an increase in valuation from Helios if, within 15 months, we exceeded 150,000 subscribers," Lowe said. "And we blew through that number two days later... so, we have enough money now, and a lot will depend on how long the big increase lasts." The company plans to seek out more money from the markets to hold it through the proof of concept phase.

Meanwhile, the service has experienced website crashes, its app not loading showtimes, shortages of its customized GPS-enabled Mastercards , complaints about its e-ticketing availability, and a two and a half star rating in Apple's app store. Presumably, if people hang on while it raises money and scales its operations, they'll find that they are happier with the service than they thought. Long-term customers tend to give it high ratings.

There's an assumption that MoviePass is just trying to bring in more subscribers before it goes back to its old pricing. While Lowe claims that "it is absolutely not part of the model" to raise the price of subscriptions in the future, it's also not part of the model to just keep bleeding money. He said that there's a bit of a misunderstanding of how entertainment subscriptions tend to end up working. MoviePass's data over the last 50 months shows that, at first, people treat it "like a buffet where you come in for the first time and you start piling up your plate and then you can't eat it all." Over time, they settle down into a more manageable routine, visiting twice as often as they did without the subscription. But that number, on average, is still relatively small.

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A frequent moviegoer is defined as someone who goes at least once a month. Based on MPAA statistics , around 11 percent of moviegoers visit the theater 18 times a year. This was the MoviePass demographic when it was selling subscriptions in the $30-$50 range. The average customer tended to go to the theater twice as often, so that price covered the three times a month that these subscribers were heading to the box office. But the MoviePass team realized that it was missing out on the 51 percent of moviegoers who go three to six times a year. When those people double their attendance, you get an average of nine times a year. Testing out what these type of moviegoers would pay showed even $13.95 was too high. But $9.95 seems to be the 99 cents of our time. People claimed they'd be crazy not to do it, in surveys that MoviePass conducted. Add in the smaller percentage of people going five to ten times a year and the average comes out to about one visit a month. Suddenly the average payout of $8.84 per ticket doesn't seem so crazy. Of course, MoviePass execs are going off of data that was built on people who were willing to pay significantly more than the new rate. It's hard to say if the rate that people increase their attendance will be different when they are lower income, or they haven't had the motivation to go to the movies in the past.

All those numbers kinda sorta explain how MoviePass could get close to breaking even, but how can it actually make money? The answer to that question is data. First of all, MoviePass wants to show it can increase attendance at theaters. But it also wants to show that it can get people to go to the see the films that aren't working with a $100 million marketing budget. "Our customers go twice as often, almost all of that increase is the films that gross less than $20 million," Lowe told us. "We can work with the studio and earn marketing dollars from them, based on pay for performance." MoviePass wants to make recommendations like Netflix, and get paid for making those recommendations. It also wants to take "a small portion" of the demonstrated increase in attendance. How that will play out is anyone's guess. Theaters have to decide they need MoviePass first.

"If we are doubling the frequency of your customers, and when that customer comes in they're spending 123 percent more on popcorn and soda that's high-margin, don't you think the theaters are going to make more money?" Lowe asks. In the meantime, he's sticking with the approach that Netflix used when he was there. "We went to Sony to begin with and said 'give us three times as many DVDs and we'll generate twice as much revenue for you,'" Lowe recalls about the early red envelope days. Sony execs balked and told Netflix to buy the discs. So that's what Netflix did. "We went out and bought three times as many copies for about six months to prove to Sony that they could actually double their money," he says. "Forget about the pieces of plastic, think about how much you make on a particular title." After seeing the data, Sony was ready to play ball.

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Another page from the Netflix playbook that Lowe would like to use is to take advantage of the fact that people tend to be more adventurous with their choices when there's no incremental cost involved. Netflix and Amazon have been bullish on indie, documentary, and foreign films, categories don't typically sell out theaters. Lowe says that in the early days of Netflix, they just wanted to eliminate late fees, but they quickly found "that people started feeling like they had the freedom to explore documentaries and films they would never have rented in an a la carte manner." He envisions a deal with theaters in which "we'll ask them to pay us, only on the amount of seats we fill for the films they want us to add people to." How this would work on a practical level isn't clear yet, but one could imagine some sort of flash pricing in which a theater needs to put butts in the seats and MoviePass pushes that film harder when you open the app.

On an even more ambitious level, the company plans to use the data it collects in coordination with the systems of data firm Helios and Matheson. Lowe says that all (anonymized) customer data will be kept internally and they'll be licensing Helios's technology and infrastructure to sort through it. In other words, their taking Helios' data and tech, cross-referencing it with their own, and cooking up ways to sell you more shit. "We think going to the movies is a centerpiece for a lot of other transactions," he explained. "Ya know, going to dinner, getting drinks, taking Uber, and we're going to be working with local merchants around the theaters, and around the malls to drive more people to those businesses." For this service, MoviePass will also take a share of the increases that businesses see. Lowe isn't sure how much money that end of the business could make but says, "it was well less than half of the revenue in our forecast."

Theaters' reactions

Lowe is relatively happy with the way the $9.99 launch has gone so far, but the primary thing that's bothering him is the public comments by the AMC theater chain. He says that all other theaters in the country have been thrilled with his approach, and "we're actually getting six to eight theater chains every single day asking to partner with us on our system." AMC released a statement claiming that it was reviewing its legal options for rejecting the service and that this model is wishful thinking that will just drive down the public's expectations of prices at theaters.

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"AMC is spreading kind of false beliefs about us," Lowe said. AMC technically can't block the service unless it stops using MoviePass's credit card supplier, Mastercard. In that case, Lowe says he'll just go to a different credit card company. AMC announced that it was blocking e-ticketing, but this is a manual block in two theaters that's being done through the Vista sales system. But Lowe fears that AMC's tactics are spreading the impression that his service is going to be extremely limited.

But if other theater owners are happy about MoviePass, why isn't AMC? "If you look at AMC's press release, basically what they said is, 'it's not that we don't believe in subscriptions, we just don't believe in this one,'" Lowe said. "That's code for, 'we're about to release our own subscription model, and we feel kind of bad that these guys beat us to the punch.'" He also believes that AMC hoped to get a little bit of cover for its stock price plummet that began weeks before the MoviePass announcement.

As for the argument that the subscription could depress price expectations and theaters will be left holding the bag if MoviePass fails, "that is exactly what Blockbuster said about Redbox," Lowe claims. Of course, Redbox and Netflix supplanted Blockbuster, while MoviePass couldn't exist without the theaters.

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Lowe says that independent theaters are especially excited by his plans. And that may be the case, but when we spoke to Mike Maggiore, Premieres Programmer at Film Forum in New York City, he wasn't particularly thrilled with the idea. Film Forum is a non-profit indie theater that's been going since 1970. It's a little bit different than an average art house in that it sells memberships that offer perks, but that's still a far cry from a subscription. Maggiore says that the theater won't be participating in MoviePass and that "the idea of a third party drawing a percentage from a movie theater's income-whether the theater is part of a chain or an independent-is not 'exciting.'"

Alexander Olch, the founder and chief creative at NYC's Metrograph theater is quite a bit more optimistic than Maggiore. Metrograph falls into the growing category of theaters that are pushing higher end concessions alongside independent and repertory screenings. You can eat steak tartar or sea bass, and the confections do not include Raisinets. Olch tells us that his theater has offered MoviePass pretty much from the beginning when it opened in May of 2016. "We've had a really positive experience," he says and he's found the service caters to exactly the kind of customers that Metrograph targets. But when I ask if he'd be open to negotiating some sort of percentage of increases to be awarded to MoviePass in the future, he won't commit to an answer one way or another. He said, "In general if there's anything I've learned in business so far, it's that it's hard to speculate about the future."

And make no mistake, we're talking about the future of the theater business itself right now. Maybe MoviePass will blow up, expand out to other countries, corner the market, and find a way to be profitable. Maybe it'll be the MySpace of this particular approach and another service will come along that perfects it in a Facebook-style ass-whooping. The fact is the idea is out there, and someone will find a way to offer subscriptions in theaters that is popular. This kind of reorganization of the industry takes time. On Tuesday, Netflix turned 20 years old. Lowe made sure to remind me that "Netflix loses half a billion dollars a year."