MyWallSt Exclusive: The Cautionary Tale Of MoviePass, Part 1

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This is part one of a two-part series. For the second and final part of the story, click here.

Let’s play a game of ‘Only Connect’. What do the controversial navigation app RedZone, a nationwide network of psychics, and Chaka Khan all have in common? They’re all linked to financier Ted Farnsworth.

Farnsworth is America’s most unfazed businessman. He starts companies like he’s collecting Starbucks rewards or airline miles. According to the Miami Herald, he has registered 50 businesses in the state of Florida in the last 30 years. Even more awe-inspiring, only four of these were still in operation by 2018 and the three that he took public saw their value drop by 99% within three years of listing. 

Not to mention Farnsworth has been the target of eight different civil suits revolving around unpaid bills and has been cited 11 times for failing to pay federal income taxes on time.

Farnsworth’s ventures have included a pay-per-call psychic service touted by La Toya Jackson, two energy drink companies, a vitamin manufacturer, and some run-of-the-mill multi-level marketing schemes. 

All of these titans folded in spectacular fashion.

First was the Psychic Discovery Network, the epitome of ‘90s hotlines and their infomercials. Its 900 number racked up phone bills across the nation before the Federal Trade Commission stepped in. The Network had more than 50 consumer complaints on file, leading the FTC to label its sales tactics as “abusive” in 1998. Farnsworth stated he knew nothing of these complaints but he did sell his stake in the business.

Next up was the XStream Beverage Network, which stumbled onto the market in 2001 and drummed up investor excitement in 2002 when it attempted to acquire European energy drink, Dark Dog. Founder and CEO Farnsworth dubiously labeled Dark Dog as the Pepsi to Red Bull’s Coke, somewhat embellishing its performance and recognition in the region. Sadly, the deal never materialized and Farnsworth resigned in 2007 as the company was relegated to the world of penny stocks. 

Not a month later and he was back on the scene with the Purple Beverage Co. The “antioxidant-rich drink” went public via a reverse merger with a film company. For a few months it dazzled investors with its impressive array of celebrity spokespeople before collapsing in the wake of the Great Recession. This was followed by LTS Nutraceuticals, which vanished almost as fast as it had appeared due to a failure to “make required regulatory filings”.

While he was down, Farnsworth was not out. In 2015, he founded Zone Technologies, the creator of RedZone Maps, a navigation app that diverts you around “danger and crime” using crowdsourced information. 

Critics were quick to point out this kind of data collection promotes racial profiling, but that didn’t stop Farnsworth. He hyped the company so much it attracted the attention of Helios and Matheson Analytics, an equally murky and troublesome IT and data management company based in New York. Helios and Matheson bought RedZone in 2016, making Farnsworth Chairman. He would become CEO three months later.

This would set Ted Farnsworth on a collision course with 2017’s most infamous company: MoviePass.

Mission: Impossible

MoviePass was founded in 2011 by Stacy Spikes and Hamet Watt. Spikes was a music and film executive who had the idea for a movie theatre subscription as far back as 2005 but couldn’t find any investors or partners. 

At the time, movie theaters and production companies were focused on upselling, hence the dramatic rise in 3D cinema and big-budget pictures. Theatres believed that if they increased spectacle, they could justifiably raise ticket prices and make up for any decrease in theatergoers. When James Cameron’s ‘Titanic’ came out in 1997, it was the highest-grossing and most expensive movie ever made.

But things changed considerably between 2005 and 2011.

The movie theatre business seems to be one of the great quandaries of the modern age. It somehow manages to be in a perpetual state of decline and yet thrives during periods of economic uncertainty. During the Great Depression — despite mass layoffs, widespread bankruptcies, and millions of foreclosures — Hollywood entered its Golden Age. Throughout the period, between 60 and 80 million Americans went to the movies once a week or more. Not long after, the television arrived. In 1946, British cinema attendance was a staggering 1.6 billion. By 1965, this number had fallen by more than 75%.

The cinema business ebbs and flows. When the 1981-82 recession hit, the worst since the Great Depression, American theatre attendance jumped by more than 10%, while the unemployment rate rose sharply. In 2009, during the height of the Great Recession, ticket sales were up more than 17% while attendance rose by 16% year-over-year.

However, by 2011, things were coming to a head. The boost of Recession escapism and the novelty of 3D were quickly waning. 2011 marked the worst year for movies in more than 15 years. Ticket revenues dropped by 4.5% year-over-year while theatre attendance continued its steady decline. That same year, Netflix became the largest source of Internet streaming traffic in North America and it introduced its first original series: ‘House of Cards’.

Maybe it was time to revisit the subscription service idea.

No Country for Old Men

By 2011, Spikes and Watt came together to raise $1 million in venture capital and launch a subscription trial in San Francisco. Initial demand shocked them. Despite only being offered in 21 theatres, 19,000 users attempted to sign up on the first day, crashing the company’s server. But, there were still several kinks to work out.

First off, MoviePass didn’t inform any of the included cinemas that the service was launching, leaving many wondering why they were suddenly being inundated with digital bookings. Most of them stopped accepting MoviePass tickets within three days. 

On top of this, MoviePass hadn’t quite worked out how best to collaborate with theatre chains so it was simply booking tickets on behalf of its members via MovieTickets.com. Unfortunately, MovieTickets.com is owned by AMC and the theatre giant wasn’t happy its own website was being commandeered by a third-party service. It threatened legal action against MoviePass, so it was back to the drawing board.

A second test launched a few months later in collaboration with Hollywood Movie Money, a nationwide gift card company. With Money’s 36,000 theaters, MoviePass launched in new markets, creating membership rates based upon average local ticket prices. Subscriptions cost between $29 and $34 a month, had a limited number of movies, and required users to print a voucher to redeem at their theatre. This was quickly deemed too cumbersome and annoying and was replaced by an app and digital vouchers. But, once again, AMC stepped in and pressured Hollywood Movie Money to break off its partnership with MoviePass or risk losing access to thousands of theaters.

Undeterred, Spikes and Watt raised more capital and gained key investors AOL and William Morris Endeavor. Together, they approached Discover Card and struck a deal to launch the MoviePass debit card. This allowed for a seamless ticketing process as MoviePass would load the cost of tickets onto the card and members would use it to pay at the box office. It also backed movie theatre chains into a corner as they were forced to accept the cards anywhere they accepted a regular Discover card. Worse still for AMC, MoviePass’ popularity eventually attracted the attention of MasterCard.

By 2014, the MoviePass MasterCard had made its debut, meaning more than 91% of all cinemas in the United States could be accessed by a subscriber. This, combined with the continued decline in theater attendance, broke AMC and the chain agreed to enter into a temporary partnership with MoviePass.

Lost in Translation

In January of 2015, the one-year AMC-MoviePass pilot program was launched in Boston and Denver. At the time, MoviePass had a few thousand subscribers paying around $32 a month. This rate was raised to between $35 and $45 upon request from AMC, with additional charges for premium formats like IMAX and 3D. In exchange, subscribers could see one movie a day. MoviePass agreed to pay face value for tickets and AMC would pay to access detailed consumer data.

This partnership was a big deal for MoviePass because it was the first time it had a chance to legitimize its business model in the eyes of the wider industry. Spikes and Watt believed that the program was their opportunity to prove that a subscription service would increase cinema foot traffic and concession sales. The hope was this would eventually incentivize movie theatres to sell tickets to MoviePass at a discount, which could result in the service becoming profitable.

Over the course of the year, MoviePass and AMC prepared data for a white paper report. The results were published in early 2016 and things looked pretty mixed.

Initial figures showed the average AMC moviegoer heads to the cinema one and half times a month. After MoviePass, it increased to just over three times per month. However, this impact was not long-lasting. The rate regressed back towards the pre-MoviePass average as the service’s novelty wore off. If users didn’t go to the movies at least two times a month, they were paying more for a MoviePass subscription than the company would spend on tickets, meaning it could turn a healthy profit from consumers’ forgetfulness.

According to Business Insider, officials within AMC were unimpressed and convinced they could create a better and more lucrative subscription service in-house. Some even believed that MoviePass had intentionally skewed data to its benefit.

For this reason, AMC terminated its agreement with MoviePass and once again the two were at odds.

If We Build It, They Will Come

Despite disappointing the largest movie theatre chain in the world, MoviePass would not give up. In June 2016, Mitch Lowe, a former executive of Netflix and RedBox became MoviePass’ CEO. Stacy Spikes became co-chairman with Hamet Watt.

Lowe was quick to flaunt the service’s supposed strengths: it was popular with Millennials, its subscribers spent 120% more on concessions, and it increased a film’s theatrical release window by incentivizing patrons to head to the movies after opening weekend. According to Lowe, if MoviePass could acquire “3 million subscribers, it can add 5 percent to total ticket sales”. This should have been great news for theatre owners and production companies, not to mention that MoviePass hoped to one day sell studios detailed consumer data to help them better select and release films.

But these silver linings were not enough to make up for the fact that MoviePass was lacking its key ingredient: subscribers — lots and lots of subscribers.

After its AMC pilot, MoviePass’ unlimited plan remained at an eye-watering $50 a month. According to the company, this was to ensure MoviePass could “bear the risk of over-usage, and get the benefit of under-usage”. Clearly, this was not a deal consumers were willing to take, as MoviePass had a mere 20,000 subscribers and $10 million in revenue.

Then, Lowe struck up a friendship with Brian Schultz, the CEO of Studio Movie Grill, a small chain of Texas-based cinemas known for its in-theater dining experience. In December of 2016, Studio Movie Grill purchased a stake in MoviePass. The same week, Shultz announced Studio Movie Grill would offer its customers a one-month, unlimited MoviePass trial for $10. This instance would become a beautiful case of foreshadowing.

While Lowe admitted the temporary measure would “be expensive”, he believed it was a necessary “part of their subscriber acquisition costs”. Studio Movie Grill was eager for the deal in the hopes it would increase their already impressive concession revenue due to the fact they served full meals and alcoholic beverages. But with a mere 24 locations, it was unclear how much of an impact the deal would have for MoviePass.

The Big Lebowski 

A year later, MoviePass was struggling. Subscriber numbers remained low, costs high, and there was no sign of any major theater chain coming back to the negotiating table.

With their dream on the line, Spikes and Lowe took investor meetings in New York, and there they met Ted Farnsworth. 

Upon first impression, one former MoviePass employee called him a “bumbling, lovable, sort of optimistic guy” who “wants to be your best friend”. 

Another called him a “con artist”… 

The ridiculousness of MoviePass could not be contained in a single piece, click here for Part 2.