The MoviePass boost

Cinema chains in the U.S. have not been immune to the pressures facing traditional forms of entertainment. The rise of Netflix and other video streaming services helped push attendance at movie theaters to a 25 year low last year. With there being no shortage of digital content vying for our attention, change is sweeping the cinema industry, with potentially significant shifts in the way movies will be monetized. At the forefront of this change is a business called MoviePass.

MoviePass is a subscription service that last year was offering a $9.95 per month service that allowed people to watch one movie per day. This was incredibly costly for MoviePass, given that they would collect the $9.95 subscription fee each month, but were on the hook for the entire cost of the movie, which they had to pay to the movie theater.

MoviePass is an absurd business model, essentially selling dollars for dimes. The company has no control over its key costs, and MoviePass actually loses more money as people use its service more. The unit cost of a subscriber can vary –anywhere from $0 to $281 per month (watching 30 movies per month at the average U.S. ticket price of $9.38) –but one thing is clear, MoviePass is paying out significantly more money than it is taking in. While this is bad for MoviePass, it has been beneficial to movie chains that have been watching their theater attendance consistently dwindle.

Film attendance in the U.S. and Canada fell by 30% on a per-person basis between 2002 and 2017. As an offset to declining attendance, and in a bid to maintain their revenues, cinema chains have been jacking up prices. According to The Information, a news service, the average ticket price in the U.S. rose to a record high of $9.38 in the second quarter of 2018. With this context in mind, it is likely that the cinema chains have benefited from MoviePass in a number of ways.

The presence of MoviePass has resulted in a boost to cinema attendance volumes without requiring a corresponding decrease in ticket prices. This is because the MoviePass service dramatically reduces the cost per movie for Americans. For someone that watches a few movies per month, the cost per session dropped to an almost negligible amount. However, cinema chains were still getting the full ticket price which was being paid by MoviePass.

According to an SEC filing made by Helios & Matheson, the owner of MoviePass, MoviePass buys 6% of all film tickets in America, so the volume boost to cinemas driven by this subscription model is not inconsequential, particularly if ticket sales from MoviePass have been concentrated amongst the biggest cinema chains. The MoviePass CEO contended that MoviePass is responsible for boosting ticket sales by 3%, and the year to July 2018 so far has not been a disappointment, with U.S. box office receipts increasing 8.8% compared to the prior corresponding period.

Another aspect in which cinemas have benefited from MoviePass is more subtle, and ties in with other ways they are able to monetize movie patrons. The increase in attendance volumes has most likely helped drive increased volumes of high margin concession spend for the cinemas on items such as popcorn, drinks and candy. Absent MoviePass and its effective subsidization of the movie-goer, it is likely that box office receipts, as well as concession spend for the major cinema chains would be lower.

An interesting question is can a subscription model bring a similar revitalization to the movie industry that it did for the music industry?

Prior to subscription streaming services such as Spotify, the music industry had been buffeted by the specter of piracy that ate into music sales. Spotify and other streaming services have led to a turnaround in the music industry, with total global recorded music spending expected to grow at 5% annually over the next five years. Whether subscription models can spark a similar resurgence in cinemas is currently unclear. Nevertheless, theater chains have recently rolled out subscription models. AMC for example launched a subscription service called AMC Stubs A-List in June 2018. This service, for $19.95 per month, allows subscribers to watch 12 films per month.

This is a space worth monitoring, given the changes that are occurring and the fact that there are likely to be winners and losers. One clear loser is MoviePass, a business that is presently on the brink of collapse – its growing popularity has brought about a fiscal death spiral. While MoviePass has left an indelible mark on the cinema industry, perhaps the cinema chains might have more luck in devising a more sustainable subscription service.

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George Hadjia is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.

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