MoviePass Will Fail And Decimate Helios And Matheson's Shareholders

Kurt B. Feierabend profile picture
Kurt B. Feierabend
527 Followers

Summary

  • Fast-growing MoviePass has an unworkable pricing model.
  • Potential additional sources of revenue for MoviePass won't materialize.
  • When MoviePass runs out of cash, toxic financing almost makes it certain Helios and Matheson will receive large amounts of cash.
  • Helios and Matheson's shareholders will suffer heavy dilution.

Helios and Matheson's (OTC:HMNY) and MoviePass' new $9.95 monthly subscription price for MoviePass, while wildly popular with movie fans, is not a sustainable price. Moviepass will run out of cash. Once MoviePass fails, financing in place with Helios and Matheson almost guarantees that Helios and Matheson will be flush with cash while leaving Helios and Matheson's shareholders footing the bill.

Background

MoviePass is a theater subscription service which allows subscribers to see a virtually unlimited number of movies at theaters for a set monthly fee. Subscribers receive a debit card which MoviePass will credit with the full ticket price of almost any movie which a subscriber wishes to see with a limit of one movie per day. The subscriber then purchases the ticket at full price at the selected theater using the debit card.

MoviePass itself has been around and largely unprofitable since 2011 and has been experimenting with different pricing for subscriptions since inception. In August, MoviePass teamed up with Helios and Matheson and together they introduced a new low subscription price which sells itself--$9.95 per month for unlimited movies. MoviePass believes that the heavily reduced price will pull in exponentially more subscribers and will change the customer mix to include more customers who would subscribe because of the cheaper price while only occasionally using the service.

MoviePass certainly hit at least one metric out of the park--the low monthly subscription price drew in a deluge of movie-loving subscribers. The number of subscribers swelled from around 20,000 subscribers in August before the price change, to 600,000 subscribers in October. As Helios and Matheson has the option to take a greater than 50% stake in MoviePass, MoviePass' rapid growth in subscribers has caused Helios and Matheson's common shares to skyrocket as well. After soaring from the $2's before teaming up with MoviePass to a euphoric $39 per share, Helios and Matheson's common shares gave up some ground but still sit at over $12 per share.

Data on Pricing Plan

We get some good information from a recent Forbes interview with MoviePass' CEO Mitch Lowe which is helpful in determining MoviePass' prospects. In paraphrasing Mr. Lowe about the $9.95 pricing the article says, "That is to say, after an initial burst of activity in which subscribers may attend four or five movies per month for a few months, the vast majority will settle into a pattern of seeing just enough movies to justify the subscription price."

At around $10 per movie ticket and making an assumption that "a few months" is three months, that translates to an effective cost per customer acquisition of $105. After the customer settles into watching movies at around one movie per month to justify the subscription price, the customer will be only slightly unprofitable. As spending money to acquire unprofitable customers is never a good business plan, it's fairly clear that MoviePass needs to find other sources of revenues just to cover the price of the tickets, let alone covering MoviePass' other operating expenses.

In press releases Helios and Matheson suggested that selling customer data, advertising and striking deals with theaters to give MoviePass discounted tickets would add to the bottom line.

Selling customer data and advertising comes with a few issues. First, customer data and advertising are already very cheap and prices are in a downward trend. Companies are finding it harder to rely on web/mobile-based ads for revenues. Second is that the unique data which MoviePass could provide for sale would be very specific and low in value such as data on how many movies people would see on average under an unprofitable subscription plan.

The other way MoviePass mentioned they could add to their revenues is by having theaters pay MoviePass for the value they provide. There's no question that MoviePass does provide value to theaters. MoviePass states that subscribers see 101% more movies and consume 123% more concessions. Those metrics add good information when trying to hone in on MoviePass' value. If there's a way to quantify the dollar amount at which theaters are benefiting from MoviePass, the maximum amount of money theaters might be willing to pay MoviePass can be determined.

We can use AMC Entertainment Holdings' financial statements to get a proxy of how much MoviePass contributes to the net income of theaters. Per AMC's income statement, AMC's gross margins on their concessions are 83% and concessions sales usually run about half of the ticket price. Additionally, a good approximation for the short run is that each additional ticket adds 100% contribution margin to theaters. Also, MoviePass CEO, Mitch Lowe, said subscribers see enough to justify the subscription price. A subscriber can justify the price at an average of one movie per month. As one movie per month is 101% more than without a subscription, the average subscriber must have been previously seeing one movie about every two months. Based on that data, we can put a fairly hard number of the value MoviePass provides to theaters and that value is around $7.50/month in net income to theaters per subscriber with the additional ticket sales and concessions.

That $7.50/month is the most that MoviePass could expect to extract from theaters considering the value MoviePass provides. If, for example, theaters split that amount with MoviePass through the cost of reduced ticket prices, it not only would drastically reduce the effective customer acquisition cost from around $105 per subscriber down to about $65, but it would reduce the payback period on MoviePass' revenues from 'never' down to around seventeen months.

However, that seventeen months doesn't account for MoviePass' other operating expenses and seventeen months is still an excruciatingly long time. Add to that, theaters have to contend with the risk that the subscription price will make movie-goers value the theater experience less as AMC has already indicated. Additionally, as MoviePass is currently paying full price per ticket, MoviePass can't simply ask theaters for a discount. They would have to systematically cut off or threaten to cut off theaters until those theaters agree to give MoviePass a discount, a practice which would likely hurt MoviePass' value proposition to their own subscribers and therefore the value proposition to theaters, much more than theaters would be hurt. MoviePass has also been in business since 2011 and appears to have only had limited success in getting reduced ticket prices. It seems unlikely that theaters will suddenly acquiesce to giving discounts to MoviePass anytime soon.

What Happens from Here?

When it becomes obvious to everyone that the $9.95/month pricing structure doesn't work, Helios and Matheson's recent $100M financing ensures that Helios and Matheson's common shareholders will undergo heavy dilution.

Per the $100M note, the buyer of the note will pay Helios and Matheson around $25M while the remaining unfunded $75M can be funded, at the buyer's option, and converted to shares of Helios and Matheson initially at a pre-deterimined price of $12.06 per share per the agreement. If Helios and Matheson hits any of the numerous criteria for default, which seems likely given MoviePass' outlook, the buyer can convert the unfunded portion of the note into shares at 75% of the lowest volume-weighted average price of the previous thirty trading days, with a upcoming floor price of $1.928/share unless the buyer and Helios and Matheson agree to an even lower price.

This financing will ultimately have the effect of driving down Helios and Matheson's share price while adding more cash to Helios and Matheson. In short, MoviePass' subscribers get a good deal, MoviePass gets funding to let them survive longer, Helios and Matheson gets cash from selling perpetually discounted shares to the buyer of the note and the buyer of the note can dump the discounted shares onto the market and make a generous profit. It's a win-win-win-win-lose situation where the only loser will be Helios and Matheson's common shareholders.

When Will This End?

MoviePass certainly has a large cash outflow to fund given the 600k recent subscribers who will at least initially take heavy advantage of the $9.95/month pricing. At around $105 cost per subscriber, that may cost MoviePass around $60 million to satiate its subscribers until the subscribers' initial movie appetite starts to wane. The recent loans and MoviePass' new $89.95/year offer ($6.95/month plus a fee) may indicate that MoviePass is trying to contend with the large cash outflow.

MoviePass can buy themselves a few months if they can completely fund the initial surge in ticket sales and effectively market the $89.95 annual price point. Monthly subscribers will eat up MoviePass' cash too quickly while the $89.95 annual plan allows those subscribers to sign up who will bring enough cash with them to fund themselves for a few months. Either way, the writing is on the wall and signs are pointing to a few extra months at the most before MoviePass goes into distress.

This article was written by

Kurt B. Feierabend profile picture
527 Followers
Kurt B. Feierabend is a financial analyst and private investor. He holds an MBA from the University of Minnesota and has an engineering background which includes nuclear power generation, electrical engineering and software engineering.

Disclosure: I am/we are short HMNY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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