Analyst Insight: Cautionary Tales - MoviePass Part 2

Analyst Insight: Cautionary Tales - MoviePass Part 2

Welcome to Cautionary Tales, a new series from MyWallSt. Together, we’ll unpack the most spectacular flops in business history and identify all the red flags along the way — and hopefully learn a lesson or two that will make us all better investors.

This is part two of a two-part series. If you missed part one, click here

 

The Big Lebowski

By that summer of 2017, Ted Farnsworth was at the helm of Helios and Matheson Analytics (HMNY), a provider of “insights into social phenomena” (whatever that means). 

Clearly, Farnsworth wasn’t quite sure either. According to Bloomberg, when asked what his company did he responded: “They do.... ummm... oh gosh, I don’t even know how to explain it to you. Big data. Crunching data.”

Insightful.

Regardless, Farnsworth’s pitch to MoviePass was undeniably enticing: $25 million for 51% of the company, two seats on the five-member board, and a promise to drop the monthly unlimited subscription price, temporarily, to $9.95. It’s unclear how Farnsworth got to this figure — clearly, math wasn’t involved considering the average cost of a movie ticket was more than $9. According to Business Insider: “he wanted a price that would grab headlines”.

Despite the excitement of MoviePass’ board, Spikes was dubious of the deal. According to him, up to that point, MoviePass had been “methodical about testing price points” and had gotten the subscription to as low as $12.99 in some regions. However, any lower than that and the service couldn’t turn a profit as the low price would incentive overuse. Nonetheless, Spikes’ concerns were drowned out by Farnsworth and his promise to take the company public if it reached 100,000 subscribers. MoviePass’ board approved the deal in July 2017.

Within two days of the price reduction, MoviePass reached 100,000 subscribers. Within 30 days, it had 400,000. When these results were announced to the public it launched Helios’ stock into the stratosphere. Over the course of a month, its share price rose from $2.50 to $20.40, a healthy eight-bagger for investors crazy enough to take a bite. 

But, all the while, the company was completely unprepared to handle the pressure of its ballooning user base. Its customer service lines were flooded and its vendor ran out of plastic with which to print new MoviePass cards.

The sudden rush of customers worried Spikes and he pleaded with other executives to raise prices. But, Farnsworth and Lowe didn’t want to lose momentum. By December, Spikes and Watt had been voted off the board. A few weeks later, Spikes was fired via email. The same day, MoviePass hit one million subscribers — a milestone it hit faster than Netflix and Hulu.

 

Superbad

The months that followed can only be described as reckless.

Subscriber numbers continued to climb. By April 2018, there were 2 million users and MoviePass was sponsoring events at Coachella. That same month, Helios and Matheson filed its annual report to the SEC detailing a loss of $150.8 million. Helios’ independent auditor began expressing doubts the company could stay in business. It was time to start cutting corners.

MoviePass’ greatest adversary was its heavy users, savvy customers who were bleeding the unlimited plan for all it was worth. These titans of cinema were heading to the theatre every day, even if they didn’t watch a single film. Some subscribers based in New York City reported they used their MoviePass as a way to access clean, public bathrooms in Midtown Manhattan. They would pick up a ticket for a random movie, check-in at the box office, and sneak out 5-10 minutes later. Lowe needed to find a way to slow these users down and he opted for trickery and lies.

Lowe and Farnsworth called a meeting of MoviePass’ board in which they proposed to secretly change the passwords of users to block them from accessing highly-anticipated films. Executives were confused. One warned that it would “catch the FTC’s attention and could reinvigorate their questioning of MoviePass, this time from a Consumer Protection standpoint.” The CEO shrugged this worry off and resigned to launch the program with a “small group”. He suggested they start with “2% of [their] highest volume users”, representing 75,000 people.

Lowe was also eager to introduce some friction to MoviePass’ consumer journey. In the summer of 2018, the company began requiring 20% of its users to upload photos of their ticket stubs for approval. If their stubs weren’t approved, their account would be canceled. Lowe worked hard to ensure the “randomly selected” users were all high-power subscribers. The catch was the process didn’t work on many smartphone operating systems and the service’s own verification software often failed. With an almost non-existent customer service network, MoviePass had found a way to churn its most expensive users.

Both of these programs were in place for the launch of ‘Avengers: Infinity War’. A couple of complaints popped up online but most disregarded the incident as a technological glitch.

Its impacts were unremarkable. By July, MoviePass was losing $40 million a month and Helios’ stock had fallen 99%.

 

Mission: Impossible – Fallout

All the while, Farnsworth and Lowe were pretending everything was fine.

Farnsworth gave an interview to Vice in June of 2018 in which he stated “absolutely more money is going out than coming in. Which is no different from Spotify going through $4 billion [it actually lost $1.5 billion that year] or Uber, or anyone else that’s a pioneer in the space”. He didn’t seem worried, instead, he was confident that MoviePass’ data collection would pay off, proposing that the service could become vital for studio advertising.

In a bizarre, streaming service-like twist, he also revealed that executives at MoviePass planned “from day one to buy and produce [their] own movies” because they “can guarantee a box office” and curb expenses by limiting releases to subscribers. This led Farnsworth to promise a diverse array of additional services and revenue opportunities, from selling film rights to HBO and Netflix to giving subscribers free popcorn when they saw a MoviePass production.

Internally though, mayhem still raged.

Beginning in July, MoviePass implemented surge pricing, charging an extra $2 to see the latest blockbuster franchise. Lowe chalked the fee increase up to a desire to “spread out business for the company's theater partners into the weeks following the typically high traffic opening weekends”. However, this response was met with skepticism from users and they complained ferociously. In reality, MoviePass was running out of money to pay for tickets.

By this time, MoviePass was losing $40 million a month and it was getting hard to hide from investors. The stock had tumbled more than 98% since it's all-time high in October 2017.

On July 26th, there was an outage. MoviePass members showed up at the theatre for late night screenings and their cards were rejected. The company was quick to blame this upon technical issues.

We've determined this issue is not with our card processor partners and will be continuing to work on a fix throughout this evening and night. If you have not headed to the theater yet, we recommend waiting for a resolution or utilizing e-ticketing which is not impacted.

— MoviePass (@MoviePass) July 27, 2018

In reality, MoviePass’ funds had run dry. According to the company: “The merchant processor that funds the MoviePass membership card stopped advancing funds for the purchase of movie tickets for our subscribers. As a result the number of tickets we could purchase was greatly reduced.” This just happened to coincide with the release of ‘Mission: Impossible — Fallout’, one of the biggest films of the year. In order to keep the service somewhat afloat, MoviePass blocked more than 600,000 members from booking tickets to ‘Mission: Impossible’ during its release weekend.

A mere five days before, Helios and Matheson had announced a 250-for-1 reverse stock split. This would boost its stock price from 8 cents to $21. Most viewed this as an attempt to prevent the company from being kicked off the Nasdaq. The day of the outage, HMNY lost more than 50% of its already deflated value.

 

Vertigo

On Monday, the company obtained an emergency loan. According to filings from the SEC, Helios and Matheson received $5 million in cash from Hudson Bay, which could demand repayment of more than $3 million less than a month later.

Things would never be the same again.

With the public’s faith in the company firmly shaken, MoviePass practically abandoned its foundational goal. Lowe demanded that all big blockbusters be blocked on the MoviePass app. Engineers were instructed to create a tripwire that would shut down the service if MoviePass exceeded a certain amount of daily bookings. When the money ran out, subscribers would be told there were no more screenings in their area.

According to a former staffer interviewed by Business Insider: “the trip wire started at a few million dollars, but eventually wound down to a few hundred thousand”. The whole process was a “guessing game”.

At the same time, MoviePass had added a confusing rabbit hole to its app to trick users who had cancelled their membership into re-subscribing.

All the while, Helios stock was pushed deeper into the mud. Even with its dramatic reverse stock split, it was now trading for less than $1.

As 2018 rolled on, employees were laid off or quit the company in droves.

Despite all this, Farnsworth and Lowe continued to travel by private jet, attend high-end functions, and throw yacht parties in Miami on the company’s dime. The pair were also accused of protecting their friend and MoviePass marketing consultant Bob Ellis from disciplinary action when he was repeatedly reported for sexually harassing his female co-workers.

 

Not with a Bang but a Whimper

In February of 2019, Helios and Matheson stock was delisted from the Nasdaq. By April, it was revealed MoviePass had a mere 225,000 subscribers, a significant drop from its 3 million subscriber peak. In a real “kick them when they are down” moment, AMC announced its competing service, Stubs A-List which cost $19.95 a month, achieved 800,000 subscribers in May.

In August, Mossab Hussein, a security researcher at Dubai-based cybersecurity firm SpiderSilk, found one of MoviePass’ databases was not protected by a password. It contained 161 million records, including the personal information and credit card numbers of more than 50,000 subscribers. At the same time, MoviePass fans and retail investors were discussing the company’s gimmicks on Reddit, resulting in two class-action lawsuits. These rumblings triggered a hefty investigation from FTC that was only settled in June of 2021.

On the 14th of September 2019, MoviePass bought its last ticket. The dream and the nightmare had come to a close.

Not to be outdone, Ted Farnsworth announced he was assembling a team of investors to buy Helios and Matheson and MoviePass away from its Indian parent company but these plans never materialized.

 

Rear Window

As an investor, it can be difficult to see serious lessons among the smoking rubble and hilarity of MoviePass but they’re definitely there.

Firstly, it’s a great reminder that if something seems to be good to be true, it probably is. There was no way MoviePass’ model was sustainable, even with its lofty ambitions for big data, advertising, and self-made content. Companies can hype their future as much as they want but they need to survive until tomorrow to get there. In this case, it’s clear the public and the media’s excitement may have blinded some investors.

We can also see the trials and tribulations of the ramping up period and the difficulties company’s encounter when they suddenly go viral. Mitch Lowe reflected on this in August of 2018 when he said he regretted dropping the price to $9.99 as it caused too many people to sign up. MoviePass did not have the infrastructure to support such an influx of customers.

Most importantly, MoviePass is a cautionary tale of disruption. There are plenty of antiquated industries in our midst, experiences that could be improved via technology or innovation. But solutions from one industry cannot be so hastily applied to another. When Mitch Lowe became CEO, he was heralded as the natural leader for MoviePass due to his experience in Netflix and Redbox, but the at-home movie market and the in-theatre market present very different challenges.

For one thing, you have to deal with the segmentation of the theatre industry, dominant chains like AMC, and regional price variations. This made a one-size-fits-all, direct-to-consumer subscription model illogical. 

There would be no way to effectively disrupt the industry without significant theatre partnerships or a tremendous number of subscribers (and I mean way more than 3 million). MoviePass had neither and once it proved itself disappointing to AMC, it created a powerful enemy. The movie theatre business did need to be disrupted, its attendance suffered a 25-year low in 2016 but the solution was unlikely to come from outside an established player. Hence, why AMC’s A-List was doing so well prior to Covid.

Finally, management teams are really important. At the onset, MoviePass appeared to be in good hands with Lowe at the wheel but once Farnsworth got involved it should have set off some alarms. In truth, it did in some spheres. Bloomberg and the Miami Herald wrote about Farnsworth’s questionable past in 2017 but it appears to have flown under the nose of many.

 

End Credits

I would like you to imagine these next few paragraphs as the “Where are they now?” epilogue that appears in all inspirational, based-on-a-true-story movies. Each description should be imposed over an image of each character in motion and set to ‘That’s Life’ by Frank Sinatra.

Mitch Lowe

Mitch Lowe remained at movie pass until Helios and Matheson filed for Chapter 7 bankruptcy in January 2020.

In June 2021, he and Farnsworth agreed to pay a $400,000 settlement in California for “unlawful business practices”. The FTC concluded that: "MoviePass and its executives went to great lengths to deny consumers access to the service they paid for while also failing to secure their personal information."

He is now a consultant.

Ted Farnsworth

Farnsworth has always been a “fall down 7 times, get up 8”-type of guy. In 2021, he founded ZASH Global Media and Entertainment “an evolved network of synergetic companies working together to disrupt the media and entertainment industry”. 

Again, insightful.

ZASH is the majority stakeholder in Lomotif, an American-made competitor (complete copy-paste ripoff) of TikTok. It also owns a bitcoin mining company. Recently, ZASH merged with publicly traded Vinco Ventures (BBIG).

(Please, no one buy this stock)

Stacy Spikes

In March of 2019, Spikes started PreShow, an app that gives you free movie tickets for watching 15 to 20 minutes of ads. It would appear that idea hasn’t seen much success as the company’s website now says it helps users exchange their “time and attention for in-game currency for more than 20,000 of today’s most popular games”.

More importantly, in December of 2021, Spikes was granted ownership of MoviePass and its assets by a New York City court. It’s believed his bid was for less than $250,000. 

According to Spikes: “We are thrilled to have it back, and are exploring the possibility of relaunching soon."

Anne MarieAnne Marie

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