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The past months have been shaped by the emergence of a new industry and the war between its first movers: subscription-based movie ticketing services. We heard about the arrival of AMC's Stubs A-List, about Sinemia's steady growth and most publicly we heard about the turbulences MoviePass has been going through lately. Recent setbacks have certainly hampered the outlook for this company. In this article, against all the skepticism and destructive reports, I will highlight a few theories, which might indicate that the business model of third-party subscription services like MoviePass or Sinemia is actually the most promising one to bring about real change to the theater industry. I will give a projection about where disrupter MoviePass, whoever will possibly acquire the company, or whoever will perhaps follow in its footsteps, might be heading within the next years and about the impact this will likely have on industry consolidation.
Renowned Film Industry Analyst Alan Wolk Joins the Discussion
In order to sanity check my predictions and to bring a well-informed opinion to the table, I decided to invite film industry analyst Alan Wolk to comment on the topic and to elaborate on possible future scenarios. Alan Wolk has established himself as one of the industry's most influential thought leaders and is a frequent contributor to and columnist for Slate, Forbes, Decider, and other industry news sites. For more interesting articles, follow Alan Wolk on LinkedIn.
The Business Model of Third-Party Theater Subscription Services
MoviePass has been trying to bring to movie theaters what Netflix achieved with video streaming: Watch as many movies as you want for $9.95 per month. You choose your film on the app and simply swipe their credit card at the box office. MoviePass then pays the full price of your ticket at most theaters. Prices range from $9 to $15 and up, putting MoviePass in the red when a subscriber watches just one movie per month. Very similarly, yet believed to be more sustainable, Sinemia follows this concept with a larger variety of more limited plans. These platforms generate income from subscription revenue, advertising, and the user data they generate. The latter is probably the most meaningful aspect. It gives film studios access to first-party data about their moviegoing customers. MoviePass and Sinemia can tell the moviegoing habits. They know what time consumers go to the movies, what movies they like, and what genre they like. When a film studio comes out with a new movie, and they want to use such theater subscription platform for marketing, MoviePass or Sinemia have a very good idea of who is going to watch the movie as they start to advertise it to their bases.
Not Everyone at an All You Can Eat Buffet Bingeeats
The counterintuitive idea behind this business model is that in the long run a company such as MoviePass will not lose money whenever someone buys a single ticket. You can compare the service to an all-you-can-eat buffet since this concept comes to movies with a lot of the same underlying principles. While some people will overeat, most people will not eat more than they usually would. The economics work thanks to the law of averages. There are more than 200 million occasional moviegoers in the United States. MoviePass keeps its price low in order to attract those occasional moviegoers. Losses incurred from heavy moviegoers are offset with gains from customers who only occasionally go to the theater.
The business model of MoviePass, in which it raised hundreds of millions from investors and then redistributed that money to consumers in the hopes of quickly amassing market share, has been deployed again and again by companies, many of which lost much more money over a much longer period than MoviePass did. Amazon went public in 1997 and only recently became reliably profitable. Netflix is profitable, but is expected to have a negative cash flow of up to $4 billion this year. Uber, meanwhile, lost $4.5 billion in 2017, its ninth year in business.
Hits kept coming for MoviePass, not in a good way. Users experienced widespread service outages after the company was unable to pay for movie tickets and had to borrow $5 million cash to remain in business. MoviePass limited the number of films members can watch to three a month. This major change was implemented after the company reversed its decisions to 1. increase the monthly fee to $14.95 a month, 2. restrict access to Hollywood blockbusters within their first two weeks of release, and 3. include surge pricing for certain movies and showtimes. The stock of MoviePass' parent company Helios and Matheson fell as low as 3 cents, raising the likelihood of eventually being delisted from the Nasdaq stock exchange. That is exactly the problem the company tried to address when it approved a 250-for-1 reverse stock split, which temporarily boosted the share from 8 cents a share to $21.
On paper, the MoviePass model makes sense. 85 percent of American moviegoers only go to 4 or 5 movies a year. When they join MoviePass, they double their consumption and go to about 10 a year. They balance out the 15 percent of the population that go 18 times before joining MoviePass, and then after that go to about 24 movies a year. MoviePass then targeted urban, young, and childless, who were disproportionately made up of that 15 percent of consumers going to the movies an awful lot. According to MoviePass 40 percent of their costs were incurred by that 15 percent of heavy moviegoers. Suburban married people, the majority of the 85 percent who only go to the movies 4 or 5 times a year, joined far less. MoviePass will have to focus on the occasional moviegoer from now, which will, however, make it difficult to achieve their goal of 5 million subscribers by the end of the year.
Scale first was believed to be the key to profitability. MoviePass hoped to grow large enough to be able to pressure chains like AMC to give them discounted prices, a fair bargain, given the amount of business that MoviePass’ millions of subscribers were bringing to theaters across the country. However, the company’s approach got initial discussions off to an antagonistic start and the plan has not yet come to fruition on a large scale. MoviePass therefore changed its strategy and tries to get better marketing fees from exhibitors and studios for movies highlighted on the MoviePass app, while continuing to pay full price.
Also, MoviePass is currently working on new features that will make the service even more competitive. These include a family plan and a bring-a-friend option. Also, the company started testing an option to watch movies in 3D and IMAX, which will have an additional cost between $2 and $6. Ultimately, MoviePass plans to implement a Rotten Tomatoes-like system in which subscribers will rate movies and provide more details about their opinion.
Triton Funds LLC, a $25-million fund run by University of California of San Diego finance students, was one of the first ones interested in taking over the troubled company. They stated the movie subscription model is here to stay, and the company’s declining share price is a strong buying opportunity. According to CEO Mitch Lowe, MoviePass also received offers from "very big media companies that understand the value that [they are] generating".
Founded in Turkey, this theater subscription service has been around for a few years and also operates in Canada, Australia, the U.K., and now the U.S. In order to rival MoviePass, Sinemia features a variety of membership plans, such as $3.99 for one 2D movie a month or $14.99 for three movies per month, which also includes 3D and IMAX showings. They introduced four categories of family plans, ranging from $7.99 for two people to see one 2D movie a month to $89.99 for six people to see three 3D and IMAX movies a month. The company has enjoyed steady growth over the past year by offering more flexible plans instead of unlimited movie ticketing. Consumers choose the plan that best suits their moviegoing frequency. Sinemia is therefore believed to follow a sustainable model as its categories of plans better control and predict consumption. Yet, only very little information is available about the financial situation and the subscriber base of the company, which makes a full comparison with its competitors difficult.
Purchasing a ticket using their cardless service is still a huge headache. Once you enter the approximate date, time, and number of people for the movie you would like to see, Sinemia generates a temporary credit card number for you to go through the process of actually ordering the ticket on ticket-selling websites. Also, their app does not work without technical issues. When MoviePass went dark during the release weekend of Mission: Impossible - Fallout, Sinemia users were not able to purchase tickets, either. The company claimed that their server problems were due to an influx of interest in the service thanks to issues at MoviePass. Users turned to social media to voice their discontent.
How Moviegoing Has Changed and How Theater Subscription Services Make It Better
According to Alan Wolk, moviegoing has changed in two ways. On the one hand, luxury theaters have emerged, which cost more money, but also give customers a much nicer experience. On the other hand, since the 1980s and 1990s, theater chains have turned into multiplexes and squeezed seats together the same way airlines did. This delivers a much less pleasant experience and makes people rather stay at home and watch Netflix. In 2017, theatre attendance therefore hit its lowest point in 25 years. What MoviePass did was bringing people back to the theater, making them watch more movies, and hopefully reenergizing them to become the moviegoers for years to come. This is something that everyone in the film industry has been trying to do for years, especially with the younger demographic that has been the cornerstone of MoviePass’ subscriber base.
MoviePass also raised attendance to smaller films that people would not normally take a chance on. The service is therefore especially beneficial to the independent world, since customers have no cost in trying out recommendations of lesser-known films. A service like Sinemia will get moviegoers a discount on the two or three big films they will see any way, but it does not necessarily encourage them to try something new. Nevertheless, MoviePass might lose this competitive advantage as they shifted from offering unlimited tickets to allowing just three movies a month.
Should It Be Alarming That Every Theater Chain Is Now Coming up with Their Own Subscription Service?
When theater chains offer own subscription plans, the benefits of such concept are limited to only their theaters. MoviePass and Sinemia, on the other hand, advertise movies and collect user data across nearly all theater chains. AMC recently rolled out its Stubs A-List subscription for $19.95 per month. The service has signed up more than 260,000 in its first seven weeks. Stubs A-List lets members see three movies per week, lets them watch multiple movies a day, allows repeat showings, and includes access to 3D and IMAX movies. While some of these features might for now seem like the better offer, we have seen that MoviePass is working on new features to catch up. In addition to that, AMC's price of $19.95 per month is mostly targeting the heavy moviegoers, it is not attracting the 200 million market of Americans who really want to go to the movies more often, but are looking for a much better deal.
Alan Wolk maintained that it would be self-defeating for each theater chain to have their own version of MoviePass. For moviegoers a lot is about geography. How far is an AMC theater from my house as opposed to a theater of another chain? In densely populated areas, AMC might not have the movie I would like to see and I might easily decide to switch to another theater chain close by. Theater chains will therefore likely hurt themselves by launching their own subscription plans. Also, a world of 100 movie theater subscription services at 100 different theater chains is not efficient from a transaction cost point of view. Aggregators such as MoviePass or Sinemia reduce transactional friction for moviegoers and solve their problem of having to make a decision between subscription services.
The Studio World's Inefficient Marketing Needs a Disruption, Badly
The downside of traditional film marketing is its inefficiency to find the one customer that likes the movie and get him to the theater. Marketing expenditure or "prints & advertising" (P&A spend) has traditionally accounted for about 70 percent of the film budget. For a $100m film budget that means $70m P&A spend, which adds up to a total of $170m that is required to make a movie and then create a huge buzz around it to reach as many people as possible. The disadvantage of this approach is that a studio like Warner Bros. does not know who 75 percent of the people are, who watch their movies. Therefore, this system is in strong need for further disruption. While quite some work has already been done in order to develop more targeted and big data-based film marketing, the use of new advertisement and data collection platforms such as MoviePass or Sinemia opens even more doors for film studios and greatly drives forward this development.
MoviePass or Sinemia as Joint Acquisition of the Major Studios
MoviePass' increasing competition is proof that the days of paying $15 for a single movie ticket are behind us. Subscriptions are the future of moviegoing. The course that Hollywood takes from here will have a lot to say about the industry’s long term growth potential. It will need to formulate a workable, financially viable subscription model that will keep this reinvigorated moviegoing base going to the movies. I decided to discuss with Alan Wolk about where the newly formed industry might head over the next couple of years and what the future of a company like MoviePass might look like.
Alan Wolk explained that the studios, which lack first-party data on moviegoers since tickets are sold through theater chains, might be especially interested in owning a theater subscription service. A likely scenario therefore could be that the major film studios will acquire MoviePass once it reaches critical mass and breaks even. Alan Wolk added that the most efficient approach for major film studios would be to buy the company as a joint investment. This idea reminds a bit of Hulu's formation and initial ownership by Comcast, Disney, Fox and Warner in order to become competitive in the world of video streaming. Such collaboration would allow for large scalability and give every studio access to a central data and advertisement base. Should one studio acquire MoviePass alone, the other studios might decide to catch up and bring out their own subscription services as well. This would take us back to the problem of inefficiency, since people likely will not be loyal to one studio or another. Therefore, studios will hopefully understand that joining forces would be in their best interest. Alan Wolk also mentioned that studios might also do combo deals, which allow you to either see movies in theaters or watch them online.
Why would the rise of an exhibitor-owned service such as Stubs A-List not be as beneficial for studios as the one of a third-party service like MoviePass? In my opinion, the important factor here is bargaining power. In the hypothetical case that AMC's Stubs A-List takes the lead in the race for theater subscriptions, AMC will gain power over studios. The other way around, if the studio world bought a third-party subscription service, they will have more control over theaters.
A Vertically Integrated, Direct-To-Customer Studio World?
If MoviePass was owned by the studios, studios would invest in movies and would then pay for the same movies at the box offices of theaters. This does not make full sense and shows that in the scenario at hand exhibitors would be in the way of coherent value creation for studios. What if the middle man was eliminated and studios would become direct-to-customer in the moviegoing industry? Studios would get paid a monthly fee by their users to produce movies and then distribute them through their own theaters. Much like Netflix, but offline. If studios bought MoviePass and then also acquired AMC, they would have a solid theater subscription channel in addition to their streaming offerings.
How likely is such vertical integration in the theater world? Alan Wolk sees vertical mergers as less likely and says that theater chains will resist as will studios, who can always sell their films online. I personally believe the opposite. We have seen recently with the AT&T-Time Warner deal that there are less and less obstacles to vertical integration. If film studios, theaters, and subscription-based movie ticketing services all were in vertical alignment, the traditional studio world would be well equipped against pure streaming giants such as Netflix and Amazon. In addition, it would nicely complement the streaming ambitions of studios with the offline moviegoing experience, which pure streaming companies cannot offer.
The U.S. Department of Justice has recently announced that they will review the famous "Paramount Consent Decrees", which has been on the books since 1948. The antitrust lawsuit forced studios to divest themselves of ownership in movie theaters and prohibits, to this day, vertical integration between studios and theaters. However, much has changed in the film industry since then. Cities now have more movie theaters and consumers are no longer limited to watching movies on the big screen. Also, streaming services like Netflix are now both producing and distributing content. The deregulatory push of the Trump Administration and the review of the Paramount Consent Decrees might now open new possibilities for vertical integration in the theater industry.
Taking the Wait-And-See Approach
Might MoviePass be acquired by film studios? Might theater chains buy MoviePass? Might the company at some point purchase movie theaters? Or might even a streaming giant be interested in the service? Here, an interesting scenario would be if Amazon bought MoviePass and then bundled the service with Amazon Prime. This would give Amazon control over still another business field, movie theaters. Whichever scenario will materialize, all of them somehow bring along the idea of verticality in the existing system.
Recent events caused a lot of delusion and uncertainty about the future of MoviePass. Will MoviePass make it under current leadership? Will Sinemia or any of the other competitors eventually take the lead? Or will the service go bankrupt and disappear? The vision of MoviePass once was to get to 20 million subscribers and account for 30% of box offices. All parties that might have an interest in acquiring the service are likely taking a wait-and-see approach and are hoping for the company to become profitable. Everything is possible. MoviePass' disruptive business model cannot be ignored and it will shape the future of the movie industry.
(Inspired by articles on 24/7 Wall St., Business Insider, Business Insider, Business Insider, Business Insider, Business Insider, Business Insider, CinemaBlend, CNNMoney, CNNMoney, Deadline, Deadline, Forbes, Forbes, Gizmodo, Hollywood Reporter, Hollywood Reporter, Marketplace, MarketWatch, Media Play News, Media & Entertainment Services Alliance, Media & Entertainment Services Alliance, MovieWeb, PYMNTS.com, Quartz, Refinery29, Seeking Alpha, Steemit, The Motley Fool, The New Republic, The Next Web, TheStreet, The Warp, The Warp, USA TODAY, Variety, Variety, and Variety as well as a video on YouTube.)
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