We appear to be watching one of the more spectacular corporate implosions of recent times as Helios and Matheson crumbles in the face of economic reality. That harsh smack in the face by the universe being that you can’t keep selling something at a loss, as they seem to be with MoviePass. Eventually – or perhaps not so eventually – you run out of money. That being, in this private sector, when you get to stop doing things. Sure, if this was the public sector then the taxpayers would be gouged to keep things going which is the reason why we keep as much as we can out of that public sector.

The basic underlying reality being that it costs more to provide the service than is gained from it being provided:

And yet, CEO Mitch Lowe’s lengthy apology letter reframes the Thursday incident that prevented subscribers from using the service in the most vague way possible.

“We sincerely apologize for the inconvenience caused from the temporary outage in the app over the past day,” the publicly posted letter, shared Friday, reads. “We have handled the issues on the back-end, and our app is now up-and-running with stability at 100%.”

Well, yes, you don’t exactly go out there and start screaming that you’ve run out of cash. Even if it’s true:

That parent company, Helios and Matheson Analytics Inc., never paid the contractors who process their customers’ payments, so the contractors stopped processing them, leaving MoviePass customers unable to purchase tickets. The company was forced to borrow $5 million to pay the Company’s merchant and fulfillment processors,” according to a filing with the Securities and Exchange Commission.

With MoviePass, customers pay a flat $9.95 monthly subscription fee for the ability to see one movie a day, every day. The business model leaves many wondering how this could possibly be profitable. The company’s own auditor isn’t sure that it is possible with the current model.

As ever Huffington Post isn’t quite getting the money part here. The customers aren’t unable to pay, that’s not it at all.

Helios, or MoviePass, isn’t able to pay. Effectively, what happens here is that you pay the company $10 a month then the company issues you a card. This is used to pay for your movie theatre visits. When you get your ticket the theatre charges the MoviePass card for the cost of it, that bill then being paid by Helios. Or not, given the processors declining to do so that is.

Money flowing into Helios from the customers works just fine, it’s that there’s not enough of it. It’s the money flowing out again to the movie theatres which is at issue – again, there’s not enough of it. Understandably, given that the one ticket could potentially cost $10 and that leaves another 29 or 30 days of the month that the user can buy another ticket. The SEC announcement of their borrowing is here:

On July 27, 2018, the Company issued a demand note (the “Demand Note”) to the Holder in the principal amount of $6,200,000, which includes $5.0 million in cash borrowed by the Company from the Holder and $1.2 million of original issue discount. No additional interest will accrue under the Demand Note aside from any Late Charges (as defined in the Demand Note) upon the failure to pay outstanding amounts under the Demand Note. The Holder may make a demand for full payment of the Demand Note from and after (x) with respect to up to $3,100,000 of the principal outstanding under the Demand Note (the “Initial Principal”), August 1, 2018 or (y) with respect to any other amounts then outstanding under the Demand Note, August 5, 2018.

Now, whether they will in fact demand repayment on that schedule is unknown but we’re getting close here to Mob style vigorish than anything else. They’ve just paid 20% to borrow for two weeks. No, not 20% per annum, but 20% of the total sum to borrow for two weeks. 520% per year……makes my and your credit card look cheap.

This is, you’ll not be all that surprised, an astonishing interest rate for a listed company to be paying. And there’s been a certain effect upon the stock price too:

Stock in Helios and Matheson, meanwhile, tanked Friday from nearly $7 at market open to $2.

The company approved a reverse stock split earlier this week to boost the price from 8 cents to $21 in an effort to keep it from falling off the Nasdaq stock exchange.

The price has been in freefall ever since. If valued at its pre-split amount, Friday’s closing price would be equivalent to less than a penny.

They’re losing out by giving away free money. It’s, obviously enough, easy enough to gain customers while you do that but if you’ve to to pay full load for the cash you’re giving away…..and no, they don’t have a special deal with the movie theatres either. They’re, according to recent reports at least, paying full whack themselves. Which they then sell for $10 a month for a ticket a day. It’s a pretty spectacular implosion, even if not one that’s entirely unexpected.

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Bloke in North Dorset
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Planet Money looked in to this last month and were quite sceptical about their business plan. When the approached the company they got a wavy hands answer about selling customer data to local businesses so they can advertise. Don’t they all.

https://www.npr.org/sections/money/2018/06/22/622699133/moviepass-fail

Quentin Vole
Member
Quentin Vole

Did no-one tell them? “Revenue is vanity; profit is sanity; cash is reality.”

But I forgot, this is the new, new economy and “the old rules don’t apply”. Now, where have I heard that before?

jgh
Member
jgh

Only an initial view at the moment, but I’m wondering if Virgin Media is going this way.

TVGOLD: Our price for our content is £2.
Virgin: We’ve only got £1.
TVGOLD: Bye bye.

BniC
Member
BniC

unless they have a deal with the cinema chains can’t see this working, and if there was demand chains most probably better offering their own subscription deal, one of the U.K. chains used to have a flat monthly fee, equated to about 2.5 tickets if memory serves so going once a week worked out nice and meant didn’t mind taking kids to their films as I wasn’t paying extra for myself

Spike
Member

My “Live Free Or Die” U.S. state forced payday lenders out of business (even before the FCPB tried to do so nationwide) with comparable crap arithmetic, totaling fees and interest for a two-week loan, then extrapolating to what the interest rate would be if the loan were taken out for an entire year, when both parties knew it would not be, and it never was. Persons living less-than-paycheck-to-paycheck are risky loan customers, deserving of high interest rates, and pay upfront fees to induce the company to take the plunge. Helios and Matheson are comparably risky to loan to, were negotiating… Read more »

Quentin Vole
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Quentin Vole

It’s worse than that, Spike – they raise it to the 26th power (at least, in the UK – I can’t speak for NH) to get 11,447% as the APR. In doing so, they’re assuming that all the up front costs would be repeated every 14 days (and, indeed, increased in line with the compound interest rate). If you applied that ‘logic’ to what my bank would charge for an unauthorised overdraft of a few quid for a day or two, you’re going to need a bigger calculator …

Southerner
Member

It’s the same principle as airlines overbooking, except that airlines do a lot of number-crunching by route by time of week by whatever else, to come up with a reliable no-show factor. It sounds like these guys worked backwards. “How many times can the mark see a movie and we still make a profit? Once a month? Good, we’ll base all our planning on that.” Even a thumb-suck would have worked better.

Spike
Member

Today there is a report that the company found a way to limit its expenses: renege on the subscriber agreement. MoviePass has stopped paying for the feature films that cardholders are most likely to want to see. https://www.engadget.com/2018/07/30/moviepass-stops-offering-tickets-for-big-movies/

It may be that the business plan to sell something for nothing was not to be perpetuated by sales to new victims but by monetizing subscribers’ personal data. But how was it not a Ponzi scheme? There are simply not enough stupid people, obediently paying their monthly fee despite never using their card, to pay for everyone else.