There’s been another bomb at the box office, and it isn’t a movie.
MoviePass parent Helios & Matheson lost nearly half of its remaining value today as investors continued to flee the cash-burning movie service. That drop followed a 31% dive yesterday, after the company filed a statement with the SEC warning that it would have to sell equity in the coming weeks for it to remain solvent. Since Thursday’s opening bell last week, the stock has moved from $2.13 to $0.79, a drop of 63%. The company’s market cap is now $51.44 million.
MoviePass CEO Mitch Lowe said in a written statement that “Our burn rate has been slashed by 35-40% by the implementations and abuse prevention measures we have put in place over the last few weeks. We have always known, from when MoviePass took off in August, that it was going to be a high cash burn business model. We are not changing our guidance on 5 million subscribers by the end of this year – which should make us profitable/cash flow positive according to our business model. We have access in capital markets to over $300 million. So there is plenty of cash available to sustain the subscriber growth and movie-going habits of our users.”
Those are the facts as we know them, but let’s consider some of the options the company has now.
Even if you believe the market demand for Helios’ stock (I, for one, find them incredulous), there is an enormous challenge of converting that money into equity now. The envelope math looks like this: a month ago when the stock closed at $4.21, buying 20% of the company would have cost roughly $55 million. At the company’s current average burn rate of $21.7 million per month, that cash would have lasted approximately 2.5 months.
Now though, with the stock price so low, getting cash on the balance sheet today is a much harder proposition. That same $55 million that bought an investor a fifth of the company last month would be a complete buyout today. Buying 20% only costs a bit more than $10 million now, or roughly two weeks of burn.
So what’s the trick here that will save the company?
The obvious option is to radically control burn. The company could offer pricier tiers for heavy users of MoviePass, and could put a ceiling on the number of films a customer can watch per month as it did temporarily a few weeks ago. Lowe seems deeply committed to overall subscriber growth though, and that makes any sort of constraints on the product unlikely. The reason is that subscribers are the leverage Lowe needs to negotiate better partnership arrangements with theater chains, so he has to keep trying to grow users rapidly.
One theory is that the company could be negotiating equity deals with theaters chains like AMC, which could be enticed by the low price of the stock to “buy in” to MoviePass’ popularity. Such media equity partnerships are not unusual — Sony, for instance, was a major shareholder in Spotify, as was Warner Music group, although both have since sold off large percentages of their holdings. Given the reliance of MoviePass on theater chains, building an equity partnership could prove to be the service’s savior.
A well-publicized partnership — including discounted movie tickets for MoviePass — could boost the stock significantly since the cost savings would improve the company’s burn rate. That could be an enticing proposition for the chains, since they could realize an almost immediate gain on their investment, plus the on-going proceeds of a partnership going forward.
The other tactic would be to sign up more MoviePass subscribers who watch limited films. This is what might be called the “gym membership model” of trying to identify customers who want to buy a membership as an aspirational purchase, but who won’t actually use the facilities often. The challenge, beyond the incredibly short time period to try to build that marketing funnel, is that MoviePass appears to lose money on the very first ticket a customer purchases. The question isn’t how much revenue each customer generates, but how much the losses can be minimized.
The situation is a high-wire act, and the company will either hit the ground in the next few weeks, or it will right the ship, limit expenses, and get enough equity investors to give it some cash to burn and keep on growing. I’d say use your MoviePass while you have it, but then again, that’s exactly why the company is faltering to begin with.