For those curious what happens to new normal "disruptors" when they run out of money and can no longer operate at a loss to capture market share (a favorite strategy for Silicon Valley and most "hot" names such as Tesla, Netflix, Uber, and in many ways, Amazon) look no further than MoviePass.
The company, which rose to prominence after allowing its members to watch a virtually unlimited number of movies for a very low monthly price, only to see its business model implode after it failed to "scale" and leverage its user base and quickly ran out of cash, has seen a deluge of users hitting the exits after it was forced to scale back the number of movies users could see each month. The embattled cinema-subscription provider has seen its subscriber number collapse by 90% from a peak of more than 3 million to just 225,000 in under a year, according to a report by Business Insider, which cited "internal data" even though the company declined to officially confirm the humiliating figures.
Last summer, when things were still running relatively smoothly, MoviePass claimed in June 2018 that it had signed up more than 3 million subs for its $9.95 monthly plan, which let customers see one movie every single day. However, that model quickly proved unsustainable as we previously reported, and MoviePass was forced to change that to a three-movies-per-month plan. So, last August MoviePass began to convert subscribers on annual subscription plans to the three-movies-per-month subscription plan, by giving annual subscribers the option to either cancel or refund their annual subscription or continue on the new three-movies-per-month subscription plan.
As it turns out, most canceled: over 90% of MoviePass’ prior subscribers were no longer interested in paying the same price for a service that offered dramatically scaled-backed terms.
Then, in an attempt to spark renewed membership interest, in March MoviePass introduced a refashioned “unlimited” plan, dubbed Uncapped, priced at $14.95 per month (or $119.4 per year), to again allow customers to see one movie daily, which however came with big caveats, described by MoviePass like this: "Your movie choices may be restricted due to excessive individual usage which negatively impacts system-wide capacity."
It was too little too late, and as BI reports, MoviePass managed to sign up only about 13,000 new subscribers Uncapped launched in mid-March, a far cry from where it was a year ago.
It’s easy to grow sales and acquire subscribers with a negative variable margin. This suggests that @MoviePass’s value proposition can’t support a positive one (although financial viability concerns are also likely weighing on subscriber numbers). 1/https://t.co/4Zlzxpw1he— Dan McCarthy (@d_mccar) April 20, 2019
Meanwhile, the company's liquidity struggles are only getting worse, and as of March 21, 2019, parent company Helios & Matheson Analytics only had $2.8 million in cash on hand and $13.1 million on deposit with its merchant and fulfillment processors related to subscription revenues.
In an attempt to give the melting ice-cube a few more months before pulling the plug, last month Helios and Matheson said it raised a $6 million new round of financing from “certain institutional investors,” which closed March 25, Variety reported. The company said it would use the $5.56 million net proceeds (after placement-agent fees) “to accelerate MoviePass’ product development, fine tune its subscription technology, and increase MoviePass Films’ investment in new films."
Translation: the newly raised funds will be used to fund the company's cash burn and delay its bankruptcy filing by a few months.
The only question is whether once MoviePass does file for Chapter 7 liquidation, will anyone go to prison. The answer may well be yes: last month, MoviePass, which hasn't filed financial results since Q3 2018, announced it would restate historical results for the8 months ended Sept 2018, as a result of a cut in revenue for the first three quarters of 2018 restated to $198.3 million vs $204.9 million previously, which boosted the company's operating loss from $320 million to $327.4 million for the same period. Separately, the New York Attorney General opened a securities-fraud probe into whether Helios and Matheson misled investors. Among other legal woes noted by Variety, MoviePass also is the target of a class-action lawsuit by subscribers claiming the the change in the “unlimited” plan was a deceptive “bait-and-switch” tactic.
The good news for investors: at least MoviePass' painful lesson in what happens when the cash to fund "disruption" runs out, will come in relatively early, before the company could suck in far more capital. And while most other major disruptors will suffer the same fate once their generous VC or public capital backers lose the faith, the amount of capital involved there will be orders of magnitude higher. Until then, we eager look forward to even more unprofitable companies going public and proving that not only is the number of greater fools out there truly unprecedented, but that a sucker is indeed born every millisecond.