MoviePass is a service that lets subscribers go to the movies as many times as they want for $9.95 a month. The seven-year-old company touts itself as the solution to high ticket prices for consumers and stagnant ticket sales for theater chains. But MoviePass has had a rocky road to its current 1.5 million subscribers. The company took a while to find a price that worked for consumers. When it rolled out the $9.95 service this past August, the company was unprepared for the surge in demand. Meanwhile theater chains remain wary of any incursion on their turf and most still make MoviePass pay full retail price for tickets it distributes to subscribers—meaning it loses money on almost every transaction. In an expensive place like New York City the cost of a movie ticket can be $16. MoviePass is making a bet that by losing money to acquire customers now it will drive so much more traffic to theaters that eventually the chains will have to cut the subscription service in on the increased action–presuming, of course, that MoviePass doesn’t run out of money first.
The company was cofounded by Stacy Spikes and Hamet Watt. Since June 2016, however, it has been led by CEO Mitch Lowe, 65, former founding executive at Netflix and COO and President of Redbox. In 2017 Lowe engineered the sale of a majority stake to analytics firm Helios and Matheson Analytics for $27 million. In this interview which has been edited and condensed, Lowe talks about how he plans to make the company profitable and why marketing a subscription movie service is a little like selling health insurance.
Natalie Robehmed: How did you get involved with MoviePass?
Mitch Lowe: I left Redbox in November of 2011. In 2012 a friend introduced me and Mark Randolph, one of the cofounders at Netflix, to the founders of MoviePass. We saw that they were going after this niche audience of heavy moviegoers and they were pricing it as such: $30, $40, $50 a month. We started advising them to look at the people who aren’t going as much. They didn’t see eye to eye with us, so Mark and I walked away at the beginning of 2013. In January 2016 I was at the Sundance Film Festival at a party at Chris Kelly’s house. Chris, who had been Facebook’s first chief privacy officer, had become the major shareholder in MoviePass. Over the next couple of months we kept talking and then finally I invested in June of that year and came in as CEO.
Robehmed: How much had the company raised at the time?
Lowe: Just under $14 million over four or five years.
Robehmed: How many subscribers were there?
Lowe: There were about 23,000. The average price was $35. They had different price points by market: New York was $44.95, Kansas City was $29.95 and then there was a mid market at $34.95. I think 70% of the subscribers were in those higher cost markets.
Robehmed: What did you do when you took over?
Lowe: I wanted to understand a couple of things. One was, were those people who only go to four or five movies a year interested in going more? We found out there are 200 million people that tend to go four to five times a year. Then we researched “What’s the correlation between what you charge the customer and how often they go?” At $45, our average customer went to 3.8 movies. At $35 they went to 2.8. At $25 they went to 1.8. And at $14.95 they went to 1.1. There’s some seasonality in that, it goes up a little bit in December and down a little bit in February.
For our target audience, which is people under 35, one of the biggest impediments is “I don’t know if this movie’s worth it.” Having a subscription where, if you see a movie and don’t like it, you can just walk out, that’s really worth money. At $14.95 it was still a big deal, but at $9.95 there wasn’t a single person who we interviewed who didn’t say, “I’d be crazy not to try this.” Every price above that, we lost people.
Robehmed: But at $9.95, you’re losing money even if they only go to one movie a month. Was it hard to find investors willing to bankroll that?
Lowe: I couldn’t get anybody to believe. When you do a subscription, especially an all-you-can-eat, the first subscribers you get, about 11% of the total, are going to be in high cost markets and they’re going be people who see a lot of movies. It’s like health insurance: The first sign ups are the people that are going go to the hospital. You have to weather the storm to get to the profitable subscribers. You’ve got to get enough breakeven customers to off-set the expensive ones. I think I met 150 different VCs and family funds. Then I ran into Ted Farnsworth who owns this company called Helios and Matheson in May or June 2017. He was the first person to really believe in the $9.95 price point and was willing to come to the table with the money that it would require. Funding a company like this is not a small task. We are going to need $100 million to get up to profitability.
Robehmed: Why did you wait until Helios and Matheson came along to move on the $9.95 price?
Lowe: We didn’t have the funds to support it. I wanted to go into this more conservative, so I was ready to do $14.95 to $19.95. And he said, “No. You’ve got to do what the data tells you.” I knew then that I had someone who was a big believer and a supporter, and had the ability to help me get the funding for it. We signed the deal on August 15 and that morning launched the service.
Robehmed: How did that go?
Lowe: The first two days we signed up 150,000 subscribers. We were totally unprepared. If you look at the stock purchase agreement between us and Helios and Matheson you’ll see there is a bonus clause that if we hit 150,000 in 18 months or 15 months, we’d get $2 million. And we hit it in two days. We were only prepared for about 100,000 subscribers in a month. Our credit cards that we send people have an eight-week turnaround time and we only had one authorized shipper who could ship 50,000 a week. So it took us eight weeks to be able to get a whole new supply.
Robehmed: How many people got mad and canceled?
Lowe: I think 4.2% of people canceled in the first month and that dropped down to 2.2% or so in the second month, and then 1% or something in the third. Our growth has just continued. We’re bringing in thousands and thousands every day. And our customers are going to twice as many movies as they went to before. Sixty to seventy percent of our subscribers say, “I wouldn’t have gone to the movies if it hadn’t been for MoviePass.” They tend to like the movie at a higher rate. Sixty to seventy percent say they recommend it. On big titles like Justice League, we bought 1.8% of the national box office, but titles like Lady Bird, we’re 10% of the national box office.
Robehmed: Are MoviePass subscribers more interested in independent films?
Lowe: They still see their Star Wars and their big films. But they use MoviePass to go to the smaller films that they previously said, “I’ll wait ’til it comes out on Netflix.” My real mission here is to create a better way to distribute small films that can’t find an audience. When we build this to 10 million subscribers, it will be the perfect way to build opening weekend box office. Our customers have no incremental cost of going. When we recommend a film to them, we’re getting anywhere from 7% to 17% of our subscribers going to that film that weekend. Our natural partners are the independent theaters and the independent film makers. If our dream comes true, we’ll be having MoviePass exclusives.
Robehmed: What was your revenue for 2017?
Lowe: I can’t give you an exact number because now we’re part of a small public company, but it’s tens of millions.
Robehmed: It’s way more than 2016?
Lowe: We did just under $9 million last year.
Robehmed: How about revenue sharing with the studios or theater owners?
Lowe: As we get bigger and bigger that starts to become material for the studios. So we’re demonstrating to four studios and then a bunch of little ones how we can help them be another tool to drive awareness and ticket sales. We actually have one deal already signed. Soon you’ll also see an advertising deal. And then there are discounts from the theaters. For example, there’s a chain that we have a deal with, where our average cost of a ticket is $7.50. You’ll see a growing number of exhibitors signing deals with us. Of course, not the big three. Not for a while anyway.
Robehmed: AMC’s been very vocal in its opposition to MoviePass.
Lowe: Not so much anymore. They definitely threatened us. But now they’re like, “We’re happy to take their money.”
Robehmed: Why were they so hostile?
Lowe: This is my third time going through this where the incumbent player freaks out. My whole passion is figuring out business models that get people to consume a lot. In every scenario, the incumbent player should have done that themselves. Then when you do it, their first reaction is, “We’ve got to protect our current business.” The AMCs of the world have lost touch with their customers.
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Categories: Money Matters