If you’re not familiar with Helios
and Matheson Analytics, don’t worry about it; their business is almost entirely
built around Movie Pass. If you’re not familiar with Movie Pass, the basic idea
was that users would agree to pay a monthly fee for a specified period, in
return for which they would be able to go to an unlimited number of movies. The
number of movies per month was later lowered to a specific number, but
regardless of how often you were allowed to use it, the business model was
clearly based on having more subscribers who pay for the service and never use
it than subscribers who go to the movies all of the time…
Now, we should probably concede
that there have been many other subscription businesses based on this same
model that have succeeded very well over the years. A familiar example would be
“health clubs” – private gyms – that offer memberships at somewhat less than
the actual cost of providing service to an additional customer. Since a certain
number of their customers will sign a two-year contract and then use the
facility less than a dozen times – in some cases the number of customers
actually going to the gym has been recorded at less than 25% of those paying
for the privilege – this model can be highly lucrative. Unfortunately, it is
much easier to go to the movies than it is to go to the gym, and attendance was
correspondingly higher…
Without auditing their books
I can’t tell you how much of the resulting operations failure was predictable,
but one fact that stands out in the Market Insider article and other accounts
of the company’s failure is that Helios never managed to negotiate a discounted
high-volume rate for the movie tickets it was providing to its subscribers. If
the company had obtained such a rate – say $5 per movie – and then offered
customers five movies per month for a subscription of $30 per month they would
have made $60 on every customer who attended all 60 movies over the 12 months,
and more than that on anyone who attended fewer than that. Meanwhile, if movie
tickets cost from $10 to $15 each, the service is still a good deal for the
customer, since they will break even if they go to two shows a month, and save
money after three…
Marketing a service that
provides a finite number of movies, even at a remarkably good price, would have
been much more difficult than just advertising “unlimited” movies and hoping
that the majority of your customers don’t attend more than a few movies each
year, of course. By the same token, it would probably have been a good idea to
get the bulk discounts on movie tickets before you started offering the service
to the public, and it probably would have been an even better idea to figure
out what would make movie studios want to offer you bulk discounts in the first
place…
Given all of these issues, I’m
not sure why investors are continuing to hold onto the stock when Helios has
seen its stock value drop from somewhere over $100 a share to somewhere under
10 cents a share, but then I can’t explain why people would keep buying more
shares as the company was leaning further and further into its death spiral,
either. It’s possible that people don’t really understand how sunk costs work,
or what escalation of commitment means…
But that’s a discussion for
another day…
