Growing Pains? Or Does MoviePass Have a Serious Problem?

MoviePass keeps making headlines but probably not in the way it hopes. So far this month, the movie theater subscription service has been accused of blocking subscriber access to certain movies, canceling memberships of subscribers it thinks are gaming its system, and tracking member movements before and after a movie.

That's hardly the kind of publicity MoviePass wants to get as it heads toward a possible IPO, especially when questions remain as to whether this young company can operate as a viable long-term business.

Running interference

Owned by Helios and Matheson (NASDAQ: HMNY), MoviePass offers theatergoers the opportunity to see one movie a day at a cost of only $9.95 per month. At last count, MoviePass has over two million subscribers, but it has run into problems along the way as the its business model gets called into question. The moment a moviegoer sees two movies in a month, the company starts losing money.

To make up the shortfall, industry site Deadline says the subscription service has deals in place with some 1,000 independent theater operators where it receives $3 on a ticket sale or 25% of concessions sales, and sometimes both.

Some chains, such as AMC Entertainment, have balked at giving MoviePass a cut, so the ticketing service blocked access to a number of locations. Others, like Cinemark Holdings, have launched their own competing offerings.

MoviePass contends that it drives significant traffic to theaters, buying up approximately 3% of all domestic box office tickets sold. And when the company promotes a particular film, as it has done for Death Wish or I, Tonya, it's purchasing upward of 10% of the total.

According to reports, MoviePass' mobile app blocked subscribers from buying tickets in certain markets to the Jennifer Lawrence movie Red Sparrow. The service responded by saying it was "testing" member behavior by pulling ticket inventory for a limited time, just like "how we organically promote films."

Considering that tickets for Death Wish were available for purchase at the same theater where Red Sparrow was blocked, it's been speculated that MoviePass is trying to see if it can drive moviegoers toward films where it is getting a cut of the action, and away from others where it's not.

Undermining subscriber confidence

While that would seem to hurt customers, some of them are claiming they've been falsely accused of violating MoviePass' terms of service, which allows subscribers to use their MoviePass Card to only buy 2D movie tickets. If you use the card to purchase 3D or IMAX tickets, food from the concession stand, or gift cards, your subscription can be permanently canceled.

Recently, a number of subscribers have complained that their accounts were abruptly and wrongly canceled, but MoviePass contends they were defrauding the company, something MarketWatch notes has recently become an area of concern for the business as the number of subscribers has mushroomed.

Members were also surprised to learn that MoviePass was tracking their movements. During an interview at an industry conference, CEO Mitch Lowe revealed that the service watches "how you drive from home to the movies. We watch where you go afterwards," something MoviePass' privacy policy failed to disclose.

It apparently wants that information, so it can eventually use the data to make recommendations on where to go after the movies. It suggests MoviePass might want to build out a service with restaurants or other venues to get a cut of their proceeds if it ended up directing subscribers to their locations as well.

Because that information shocked many users, MoviePass sent out an app update that removed the location tracking capabilities, calling it an "unused" function, and company leadership released a statement to address the privacy concerns.

MoviePass is a unique concept that millions of moviegoers are enjoying, and why shouldn't they? They're getting a great deal on the box office experience. But that's coming at the expense of MoviePass, and the repeated snafus could harm its ability to generate streams of revenue beyond the cost of a subscription. Those other sources are vital to MoviePass' survival if it ever wants to turn itself into a profitable operation.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends IMAX. The Motley Fool has a disclosure policy.