Foreign over the past 20 years. Silicon Valley has created trillions of dollars of wealth for investors. There are millions of people who want to take a piece of the pie for themselves by creating the next Netflix or Amazon Perhaps the single dumbest idea to come out of this Venture Capital bubble was movie pass. The idea was relatively simple: You can buy a movie pass subscription for ten dollars per month.

This allows you to watch an unlimited number of movies at any Cinema that you want. This was a great deal for consumers. At the time, the average price of a movie ticket in the US was nine dollars. Getting a movie pass subscription was a no-brainer because if you watch more than one movie per month, you'll save a huge amount of money.

Unsurprisingly, their number of subscribers skyrocketed to over 3 million within less than two years. The problem was MoviePass had no commercial relationship with the movie theaters, meaning that they had to pay full price for each movie that their subscribers watched. This was a recipe for disaster, and the more subscribers they got, the more money they lost. By June of 2018, the company was burning 45 million dollars per month.

Despite the strong subscriber growth, Movie Passes share price declined by 99 and was delisted from the NASDAQ. Shortly thereafter, the company ceased operations on its face. The business model of MoviePass was absurd and never had any chance of working. Its bankruptcy should not have been a surprise for anyone who looked at it objectively.

Despite this, between 2017 and 2018, Moviepass's parent company was able to raise over 250 million dollars in convertible notes and warrants from institutional investors to fuel their cash burn the whole movie pass. Saga was basically a massive subsidy That Wall Street provided to movie Watchers But how could any investor be so dumb to fund this project this past? November The Department of Justice indicted Michael Lowe and Ted Farnworth the former CEOs of MoviePass and its parent company Helios and Matheson Analytics, which traded under the ticker symbol Hnny. Allegedly, they conducted a highly sophisticated, years-long con designed to defraud investors. In this video, we'll look at exactly why Imoviepass failed and how they were able to raise hundreds of millions of dollars.

MoviePass is actually quite an old idea, having been founded all the way back in 2011. Before 2017, they had three different pricing tiers: a 15 Tier that allowed you to watch two movies per month, a 22 tier which allowed you to watch three movies per month, and a 40 tier which allowed you to watch unlimited movies. These prices weren't that compelling to moviegoers because they only offered a small discount compared to just buying the tickets themselves. Because of this, they were only able to amass 20 000 paying subscribers in 2017.

MoviePass CEO Mitch Lowe Met with Ted Farnsworth the CEO of the data analytics firm Helios and Matheson Analytics Farnsworth had an idea to Turbo Charge the company's growth. They got rid of the previous pricing structure and instead offered just one unlimited plan that cost 9.95 per month. So for a little under ten dollars, you can watch any movie at any theater on any. Day Without Limits Also, as a data analytics firm, Helios supposedly had big data and artificial intelligence technology issues to take MoviePass to the next level.

The idea was that they could analyze the movie-going behavior of their subscribers and use this to Target digital advertisements This was meant to be a major Revenue driver for MoviePass Going forward. almost immediately, there was skepticism about how this new business model would work. Giving away unlimited movies for the monthly cost of just one ticket seemed too good to be true despite the seeming absurdity of the business model. Farnsworth and Lowe reassured the financial media that this plan would be profitable.

You when you make an offer, if you've you know we have figured out a way to give people a deal they cannot believe we can even afford to give. Yeah, because you lose money. Yeah, no, we actually don't Uh, and how do you not lose money? We have built a system that attracts people. a price point that attracts people that only go three to six times a year.

When they become a movie pass subscriber, they go to twice as many films, but that's still not very much. but it. but it's it's the majority of the United States goes less often than six times a year, there's 36 million people that go 18 times a year. So we've built that such an attractive price.

Our customers are telling other people about this. there's going to be Word of Mouth for you guys. Thanks so much! Mitchell Lowe's said that movie passes ten dollars per month price point attracts people who watch three to six movies per year. When they get MoviePass that number doubles to 6 to 12 Movies per year.

Even at the high end of 12 Movies per year, that's only one movie per month. The average cost of a movie ticket is nine dollars. so at a 10 monthly fee MoviePass could still make a one dollar profit. That would be great if it were true.

but in the beginning investors seem to believe in the movie pass. Vision Unsurprisingly subscription skyrocketed because the value proposition was so good. Within about one year, the company Grew From 20 000 subscribers to over 3 million Heliosa's stock price surged and they were able to raise hundreds of millions of dollars. Thank you! Remember that one of the main reasons for Helios to acquire Movie Pass was to apply their big data and artificial intelligence technology to help analyze customer data.

Better decision as far as enjoying the movie. but going to the movies, there's much more to it than just going straight to the movie theater. You go to dinner, you might have drinks, you might use you Uber or Lyft So we're going to help our subscriber get to all those businesses and get discounts and benefits and so will Uber pay for that information. Do the Hollywood restaurants I mean are they paying for that data? They will.

As we drive more and more of our subscribers to their businesses, we'll take a share of the incremental profits. And how do you know where people are going after they go to the movies? Well, you know, today, with your phone in your pocket, people can track pretty much where you are you log on to Facebook They know where you are when you log into our app. We know where you are because we automate your movie subscription by essentially what theater you're close to. Well, obviously that is valuable data, so it's you're shelling the data.

I Mean that's it Mitch Lou Claimed that they could use the MoviePass app to track the location of their users based on your consumer. Behavior MoviePass Could supposedly give you targeted advertisements for restaurants Uber cars and other things you might buy when you go out to watch a movie. This would create a revenue stream which would help MoviePass become profitable even if their subscribers watched more than one movie per month in early 2018. Mitchell Lewis Spoke at a private event hosted by the Entertainment Finance Forum where he said, quo we get an enormous amount of information.

We watch how you drive from home to the movies. We watch where you go afterwards. unquote. There were presumably prospective investors attending the event and lo wanted to convince them that MoviePass could generate significant revenue from advertising.

These claims cause significant backlash in the media over concerns of data privacy. Shortly after this, Farnsworth's assistant emailed him saying quo, this is a major mess. It's annoying because we literally can't do any of it. Unquote.

In their effort to convince investors that MoviePass could become profitable, they had inadvertently kicked off a consumer privacy. Firestorm Luckily for consumers, there is nothing to be concerned about. Even if MoviePass wanted to track their user's location, they had very limited ability to do so. The only time they recorded location data was when the user was either searching for a nearby theater or checking into a theater.

Basically, they only knew which which movie theater you want to. Such basic data is a very little use to advertisers. Also, all the talk about Helios integrating their big data and artificial intelligence technology into MoviePass was just talk prior to owning MoviePass Helios owned an app called Red Zone Maps which helps people to avoid high crime areas based on crime reports from local police. They also did some I.T Consulting Services While they certainly had some data analytics capabilities, they hardly had the type of artificial intelligence technology that could be useful for MoviePass.

In fact, Helios never integrated any of his Technologies into MoviePass as a testament to how useless movie Passes data was in 2017. The Company generated zero advertising Revenue In 2018, they generated advertising revenues so insignificant that a movie pass employee jokingly said that it wouldn't pay for anyone's salary. foreign. MoviePass First unveiled its 10 Unlimited Plan Mitch Lowe's said that it would be profitable because the average viewer would watch less than one movie per month.

However, this was not true. The average viewer was watching closer to three movies per month. However, Low tried to spin it by saying the number of movies each person watches will decrease gradually over time. The idea is that when people first sign up for MoviePass, they are excited by it and try to watch as many movies as they can.

but over time they'll settle back down to a more normal movie-going behavior. So, while they would lose some money at the beginning, eventually, they'd become break even on the subscription Revenue alone. As it turns out, there is no factual basis for this claim, and in fact, this did not happen. Since the number of movies watched wasn't decreasing Naturally, they instead had to resort to scanning in April of 2018 Lowe and Farnsworth instructed MoviePass employees to change the passwords of the top four percent of heaviest using subscribers.

This would prevent them from logging into the app and thus reduce the number of tickets that MoviePass had to buy a movie pass. Employee warned Low that this could cause problems with the FTC as this action was likely illegal. Lou Went forward with it anyway. This gimmick successfully decreased the number of movies watched per subscriber in an SEC filing.

MoviePass pointed to the decline in movies watched per subscriber. As validation of their business plan. They said quo. As our subscriber base matures, we are naturally seeing significantly reduced usage over time.

Unquote, They said nothing about the fact that they changed their users passwords, but this was only a temporary solution. Eventually, the subscribers figured out ways to reset their passwords and continued viewing movies. The cash burn continued to accelerate, reaching 45 million dollars per month by the summer of 2018. by this point, things were getting desperate in light of the increasing losses.

Helios's share price was plummeting and investors were hesitant to pour more money into this black hole. They needed some way to get a lot of cash into their coffers quickly to avoid a bankruptcy. So they came up with perhaps their most outrageous gimmick yet. In March of 2018, they cut the price further still to 6.95 per month, but only if you pay for an entire year upfront.

The 10 per month price was already unsustainable. The seven dollar price was obviously not going to work in the long run, but because consumers had to pay the entire annual fee up front, it brought in a lot of cash in the short term. This only delayed the inevitable for a few months. In August of 2018, MoviePass had run out of gimmicks.

To keep the system afloat. They canceled the unlimited plan, replacing it with a new plan that limited subscribers to three movies per month. This was despite CEO Mitch Lowe repeatedly saying that the unlimited plan was profitable and sustainable. Over the prior year and a half, this was extremely unpopular with the existing subscribers and 90 of them canceled their subscriptions.

At this point, the company had finally reached the end of the line. Their stock price declined by 99 and was delisted from the NASDAQ at which point it transitioned to trading on the over-the-counter Pink Sheets. The share price declined by 100 on the Ping sheets and now sits at one hundredth of a cent, making the company effectively worthless. In 2019, the company officially ceased operations.

Thank you Foreign Mitch Lowe and Ted Farnsworth now face charges of Securities and wire fraud and could spend the next 20 years of their lives behind bars. If the allegations were correct, they knew the 10 unlimited plan was unsustainable and would never be profitable. So why did they do it? The simplest explanation is short-term greed. While the fraud was going on, the two men received millions of dollars in compensation and flew around the country on the company's private jet.

But there's more to the story than just living large for a few years. Farnsworth and Lowe had a plan from the beginning which they believe would eventually make Movie Pass profitable. The idea was to generate media hype and build a massive subscriber base with the 10 unlimited plan. In this regard, they were successful scaling to 3 million paying subscribers at the peak.

They lied about their artificial intelligence and AD targeting capabilities as well as doing their password resetting gimmick to trick investors. The 10 per month unlimited plan was never meant to be profitable. It was instead a bait and switch whereby they would increase prices once they achieved critical mass of subscribers. This is effectively what they did when they replaced the unlimited plan with a three movie.

Maximum If enough people like MoviePass to continue with the new worst plan or simply forget to cancel their subscriptions, this may create a profitable company and desperate effort to make this work. they made it extremely difficult to cancel the subscription. Many customers who thought they canceled were automatically enrolled into the new plan without their knowledge. But despite all of their gimmicks, the plan ultimately ended in failure and now the two masterminds will have to answer for their alleged crimes.

All right guys, that wraps it up for this video. What do you think about? MoviePass Do you think it had any chance of succeeding? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one. Wall Street Millennial Signing out.

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