As investors, we always want to find the next big money-maker stock that’s going to fill our account with profits beyond our wildest dreams.
We want to get in at the start of the newest Amazon, or Google, or Netflix and find ourselves suddenly multimillionaires, thanks entirely to good timing.
The problem, however, arises when we jump on the bandwagon without consulting our good business sense.
That “problem” can be the difference between gains of over 400% or losses of 99%.
If that “99% losses” sounds familiar, it’s because that’s the current status of MoviePass which has been in the news quite a bit lately.
You might recall first seeing MoviePass enter the news cycle and social media ads this past October, when they lowered the price of their monthly movie subscription and their stock soared to an all-time high of nearly $39 per share.
If you’re not familiar with MoviePass, it’s a subscription service branding itself as the Netflix of movie theatres.
The strange comparison aside, MoviePass subscribers pay $10/month to see as many movies in theatres as they want (up to one a day) using their MoviePass card.
The card is sent to subscribers after they sign up and essentially works as a debit card provided by MoviePass.
Thirty minutes before the start-time of the movie you want to see, you can log on to the app to secure your seat. You do have to be within a mile of the specified theatre and cannot purchase your seat more than 30 minute before the start of the film.
MoviePass will then send the necessary amount of money to cover the ticket to your MoviePass card, which you then use to pay for the ticket the same way you’d use a credit or debit card.
As a consumer and avid movie fan, this sounds incredible. I can see up to 30 movies a month, get the whole movie theatre experience, and pay only $10 a month.
Clearly, other consumers felt the same way, as shown by MoviePass’ 3 million subscribers.
So, what exactly is the problem?
Well there are quite a few as it turns out.
As investors, we want to get a great deal and put our money into a company that’s going to shoot up.
However, as investors we also have to keep our eyes open and consider the business side of these companies, especially new up-and-comers.
The most glaring issue I see with MoviePass is that they still pay the full price for every movie ticket.
So, while MoviePass subscribers are only paying $10/month, MoviePass the company pays $10-$12 every time one of their subscribers sees a movie, and that can be as often as 30 times a month, per subscriber.
Clearly, there is going to be a huge cash problem with that business model.
Originally, MoviePass went through many iterations of its subscription model, using various price structures and ascending tiers to make the company fiscally possible.
There were subscription models starting at $20 a month to see 3-4 movies, up to $100/month for unlimited plans and the ability to see 3D movies as well.
While those seem like more realistic models without having a partnership or deal with major cinemas and theatres, when company Helios and Matheson (HMNY) purchased a majority stake and became the parent company of MoviePass, they wanted a model that would be more appealing to price-conscious consumers.
Hence, the ridiculously low price of $10/month.
Now in general, I can get behind the MoviePass business model.
With the rise of streaming and on-demand video and television, movie theatre-goers have been leaving cinemas in droves.
So clearly, there is an incentive to get more butts back in seats at movie theatres, which MoviePass could definitely accomplish.
However, it seems that a very obvious route to take would be to make a deal with the top theatre chains in the country (Cinemark, AMC, and Regal) to buy tickets in bulk at a discounted price, or to have an existing deal in place to buy tickets for half price while selling many more than the theatres would be doing on their own.
Of course, I have no knowledge of whether there were talks of such a deal and for whatever reason it didn’t materialize, so who’s to say why certain moves didn’t happen while others did.
However, I think we can all appreciate the cash crisis that MoviePass has found itself in as a result of offering to pay for subscribers to see a movie a day at full ticket price for only $10/month.
Investors who jumped into MoviePass believing it would be the next Netflix are now feeling the pain of not looking any further, since MoviePass’ stock has fallen an astounding 99%!
From its high of nearly $39 in October to now trading at 8 cents, that is one heck of a fall.
Netflix (NFLX), on the other hand, has gone up over 400% in the last two years alone, and beyond that has completely dominated the streaming industry in a way that keeps very few companies from ever being serious competitors.
So, what sets these two companies apart? Why did one soar to success previously unprecedented while another has fallen to practically being worth nothing?
This is the point we as investors really have to investigate and understand so we can know if a company is a good bet or not.
Netflix is a revolutionary company that changed how people watched movies and television.
MoviePass had the potential to be revolutionary and to revitalize the movie theatre industry. Who knows why the decisions were made about the pricing structure that has caused it to almost definitely be out of cash sooner rather than later.
The fact is, where Netflix pivoted every time something happened, new technologies, new competitors, etc. to reach the unbridled success it has, MoviePass has faltered, yes gaining more subscribers, but losing money hand over fist.
Netflix began its DVD mail subscription service in the late 90s, when VHS tapes were still the norm and DVD was just starting to be adopted by some people.
That bet turned out to pay off when DVD quickly took over, and now VHS tapes are all but an ancient relic of a previous time.
When broadband came out into the mainstream, Netflix CEO and founder Reed Hastings believed it would make the internet faster and more accessible, which led to a pivot into a streaming model.
As we all know, that more than paid off and has completely changed the way we watch content.
Netflix is the master of pivoting and not allowing obstacles of any kind to stand in its way.
MoviePass came up with a good idea that attracted millions of paying subscribers, who just weren’t required to pay enough to make the business viable.
As investors, you must keep this in mind—if a company sounds like it’s providing too good a deal to consumers, it probably is and will probably run out of money…unless it learns to pivot.
