The rise and fall of MoviePass

At its peak, MoviePass had 3 million subscribers paying $9.95 a month in order to watch a movie every single day in the theaters. But just 2 years later, the entire company would be bankrupt, and the chief executives, well, they would plead guilty to securities fraud. This video is the rise and fall of MoviePass.

Oh, and by the way, thanks to Relay for sponsoring this video. More on them later.

The story of MoviePass actually goes back to the 1990s when a young kid named Stacy Spikes loaded up his pickup truck in Houston, Texas, and moved out with $300 to Hollywood to chase his dreams. But unlike many people chasing their dreams, he didn't decide he wanted to be an actor. In fact, he decided he wanted to work and become an executive. So he started to work his way up in the industry, working at places like Motown Records, Sony Music, and Miramax, showing his entrepreneurial streak. In the '90s, he did things like start a film festival. He started to get exposed to the business of movies and selling movie tickets. In 2006, Spike had a somewhat radical idea. Having seen what was going on in Europe, where they had subscription services that would let you watch an unlimited number of movies each month in theaters, he said, "Why not bring that to the United States?" As is the case with many radical ideas, it took him a number of years to convince people that it was something worth investing in. But 5 years later, he raised $1 million in seed funding from some venture capitalists, including True Ventures and some others. The next thing they did was pretty smart. Rather than try to roll out the whole idea and do a big launch, They did a small test called a beta test, and they did that in 2011, launching first in San Francisco, promising people they could pay $9.95 a month and get to see one movie a day unlimited. And the good news was people absolutely loved it. 19,000 people signed up for the service in the first few days. But there was a slight problem. The customers loved it because it was a great deal, right? You get to see 30 movies a month for $9.95. It turns out the theaters didn't want to have anything to do with it. Theater operators like AMC and Landmark they came after him and said, "Hey, we're not going to let you do this. This isn't cool." And they freaked out. They didn't even get the thing off the ground. Great entrepreneurs, they tend not to give up at the first sight of, of trouble. And so they try to fix their problems. So Spikes went back to the drawing board trying to come up with a different model that would work without the theater chains cooperating. And it turned out there was already a system that made this work called Hollywood Movie Money at the time, and they ran a voucher system that would let people show up and use vouchers to see movies. So Spikes and his team put together a unique workaround. They'd issue each customer a branded debit card branded for MoviePass. And when the person said they were going to see a movie, well, MoviePass would put the cost of the ticket on the debit card and they would use it to pay for entry. Theaters would get paid full price and MoviePass, they would handle the rest. So Spikes and his team, they rolled out the new beta to new markets, trying it anywhere from $35 a month to $50 a month, depending upon the prices of local tickets. So I know what you're thinking, if they're going to sell 30 movie tickets a month, like, how does this math work? Well, it turns out that the MoviePass guys and the investors, they were all making a bet around the same dynamic that happens at gym memberships. If you go look at a typical gym where you pay a monthly fee to use it, those guys here in the US actually oversell the amount of capacity they have. Say something like a Crunch Fitness or somebody like that where you go and use the gym, they may sell 5 or 6 times the capacity of an individual facility. And the reason they can do that is because most of us sign up for gym memberships and then we rarely use them. And that was the bet that MoviePass was making, that people would buy this subscription and then they wouldn't come to many movies. By 2016, MoviePass was still small. They were kind of in the beta plus stage and they had about 20,000 members and they were losing $50,000 to $100,000 a month and seed funding was running out. So Spikes and the MoviePass team, they needed some help. And the first guy to enter the picture was a guy named Mitch Lowe. He had been part of the founding team back at Netflix, and he was a hardcore entertainment industry veteran. He came in and joined the team as somebody who, well, supposedly understood the movie business really well. And get this for a resume: Lowe had also been part of the team that had created Redbox while at McDonald's, helping grow it from just a couple of kiosks to 35,000 and billions of dollars in revenue under McDonald's ownership. Given his track record disrupting the movies industry twice, first at Netflix and then at Redbox. They brought him in as CEO in 2016. Next came in a guy named Ted Farnsworth. He was a New York City entrepreneur who had made his money building a data analytics firm that was publicly traded. He came in and invested $27 million into MoviePass, and after that, by August 2017, Ted owned a majority of the company. And then they made some decisions that would change everything. To get new customers, their first decision was to drop the price from $50 a month to $9.95. In other words, they were selling up to 30 movies a month. Let's say movie tickets are $15 each and they were selling up to 30 of those per month for $9.95. By this point, Stacy Spikes was just a minority owner and not in control anymore. He's just an investor who was kind of on the sidelines and he knew this was a disaster waiting to happen. I mean, I guess we all can in retrospect. If you do the math at $9.95 a month, MoviePass would lose money on every customer who saw more than one movie per month. So like many founders who disagree with the new majority investors' spikes, he spoke up. And you know what the investors did? The majority owners did? They pushed him out of the company, said, "See you later." And then things got horribly worse for MoviePass. Uh, but before I tell you how that happened, here's a quick word from our sponsor.

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Next, MoviePass's growth took off like a rocket. If you're gonna sell dollars for 50 cents, turns out word gets around and people tell their friends. In August 2017, MoviePass had just 20,000 paying subscribers. Uh, when they announced the price drop to $9.95, they had 150,000 people sign up in just 2 days. It crashed their website. 6 months later in February 2018, they had 2 million subscribers. By the summertime, they had 3 million subscribers. 3 million subscribers. And paradoxically, with this level of growth, the stock market got excited and the share prices of the two companies that were involved in backing MoviePass soared to nearly $33 a share by 2017. And the reason was because Farnsworth was out there making bold claims. He was telling investors that MoviePass was a data company, that they would monetize all these eyeballs and be able to market things to them. It turned out, well, that would all prove later to be a bunch of BS. He promised them also that the company would eventually be made profitable. And that was just on the horizon. They had multiple revenue streams that were going to work. There was just one problem with all these claims. They were all lies. Later, federal prosecutors would bring forth evidence showing that these guys knew that what they were saying was just not true at all. And of course, if you look at the math of MoviePass at $9.95 a month, they were basically losing money the second a person saw a second movie in any given month. In economics, there's this thing called selection bias, and selection bias is this idea that Certain systems will gear themselves up to bring in a certain type of person. And it turns out the type of person who would sign up for this unlimited moviegoing like service was the type of person who really, really liked to go to movies. This type of plan and setup didn't attract casual moviegoers who may or may not show up. This ain't no gym, right? Going to the movies is fun. Going to the gym sucks. So, so you'd end up with these people who would go see 2, 3, 8, or even 10 movies a month. And then you even had hardcore extremists. One analyst like Brother, supposedly went to go see 80 movies in 6 months, costing over $1,000 to MoviePass while paying less than $100 in monthly subscription fees. And while 76% of people in 2017 would go see a movie at least once in a year, it turns out the movie like going is really like heavily loaded. 12% of viewers buy over half of the tickets. And when presented with this kind of deal, well, people signed up for it. And it turned out at its peak in 2017, MoviePass was selling nearly 5% of the movie tickets in the United States seen that year. In the first quarter of 2018, with this like negative gross margin math they had going on, the company lost $107 million in that quarter alone.

I'd like to introduce you to my co-host for this video.

It's a deer, a baby deer. So I'm in this park, by the way, and the reason the deer are super friendly is there's no predators. So they just like hang out. Like they don't even move when you walk past them. It's a wild deer. A wild deer, fascinating thing. All right, back to our story. In the first 6 months of 2019, these guys burned over $200 million in cash. And it was basically 'cause they were taking revenue in and it was costing them an incredible amount to deliver the service. Roughly, they did like $122 million in revenue and it cost them $318 million to deliver those movie tickets to people. They were losing nearly $2.60 for every dollar that they brought in. So did these guys, Farnsworth and Low, go and fess up and stop the bleeding? No, they leaned in more. And in May 2018, Farnsworth went out to the market and told everybody that they had 17 months of cash left without having to raise any more money. But their SEC filings told an entirely different story. They had about $15 million in cash on hand, which wouldn't even cover them for the next month. And remember how back early in the story, AMC had hated the entire thing, the concept of a subscription? Well, now they saw that the idea could actually be pretty good, especially when movies as a whole are getting viewed less and less each year. So AMC at this point in 2018, they launched a competing service. For a monthly fee, you would get to see up to 3 movies a week, including seeing premium stuff like IMAX and that sort of thing. But unlike MoviePass, AMC actually owned its theaters and could use things like underutilized capacity or empty days to get people to come in then and run promotions around that stuff. MoviePass, well, they couldn't. And so it worked for AMC. They could actually make money doing all this the the same way airlines make money from frequent flyer miles and empty seats. And so they got 175,000 customers in the first month alone for AMC. July 26, 2018 was a pretty big day. The next day, a new Mission: Impossible movie was supposed to come out. And suddenly things started to go dark at MoviePass. Subscribers, they couldn't buy tickets. The company had literally run out of money to be able to buy tickets for customers. Lowe and Farnsworth, they went and got an emergency $5 million loan at 20% interest, by the way. To be able to turn the lights back on. Investors had already caused the stock to crash. It had gone from $32 at its peak to just a few cents. Even after a 1-for-250 stock split, the company was essentially worthless. The company started making desperate moves, blocking out popular movies, reducing the number of movies that people could see, just basically going back to consumers and changing the deal without telling them or giving them any advance notice. And according to the Federal Trade Commission, Farnsworth and Loew instructed their staff to change their website and make it so people who were the high-volume users, the ones that were costing them the most money, couldn't access the website and needed to reset their password in order to get in and be able to use the service. By 2018, in October, 1 million subscribers had canceled. By 2019, they were down just to 225,000 subscribers. This was a 90% drop from the peak. On September 14th, 2019, MoviePass announced it was shutting down for good. And in January 2020, the companies whose stocks had been behind MoviePass, Helioth, and Masterson, they both declared bankruptcy. Chapter 7, the kind if you're closing the door and don't expect to recover. In November 2022, Lowe and Farnsworth were charged by the SEC with securities fraud. The Department of Justice said basically that they had materially misled investors in order to convince them of things. Both Farnsworth and Lowe would plead guilty to these charges spending up to 5 or 10 years in prison, respectively. And remember how our story started with Stacy Spikes, the guy from Houston who had flown out to— driven out to Hollywood to start his career? Well, he actually led a group of bidders who bought the MoviePass assets out of bankruptcy, and he's rebooted the MoviePass service with an entirely new business model. It uses a credit system with pricing tiers, and while that's definitely less exciting than the unlimited movies for $9.95 a month scam, that the previous guys did, it might actually prove to be sustainable. Meanwhile, the unlimited movie schemes that are put forth by Regal and AMC and others, well, those are getting moviegoers by the droves, getting people to come in and see movies again. It turns out this whole MoviePass idea of subscription moviegoing was a pretty darn good idea. You just had to approach it in a way these guys absolutely did not. One of my favorite quotes about this type of scenario is one that says you can basically spend a lifetime building a reputation and then kill it in an instant. And you look at Farnsworth's resume, somebody who co-founded Netflix, who created Redbox, and then walked in and for some reason decided to ruin it all and throw it all away by lying to people in order to keep his company alive. And to me, it's sad to see somebody do that to themselves, especially when they clearly had enough money from their previous ventures, in his case, not to have to do this stuff. If you want to see a similar story of how people went to crazy town for seemingly no good reason in the pursuit of money, check out this video I did here on Juul. It was also wacky. Let me know what you think about this video in the comments below. I try to read them all. See you next time.