Heads-up: This is a long one, but rather than do what everyone else is and write another “How is MoviePass sustainable?” thinkpiece I wanted to take a deeper dive into everything MoviePass seems to have learned from Netflix.
When I heard MoviePass CEO Mitch Lowe said this at a recent conference panel:
“We get an enormous amount of information… You are being tracked in your GPS by the phone. We watch how you drive from home to the movies. We watch where you go afterwards. We know all about you.”
I pictured someone who looked like this:
I was wrong.
He’s in his early 60s. He’s a father of three. He oddly looks like my dad. So, he’s definitely not some brash, young upstart who got rich off of something he created in his dorm room and then stumbled into a level of responsibility he wasn’t ready for. In fact, he was working at Netflix back when it was just a mail-order DVD rental service and Mark Zuckerberg was still in high school.
Lowe’s someone with enough experience to know better than to openly flaunt deceptive data mining as a business model. It was a mistake. Not surprisingly, he’s since walked back his statements, marking the latest in a long line of troubling signs for the too-good-to-be-true MoviePass, which seems to have adopted something far too close to the South Park underpants gnome approach to business:
Phase 1: Subsidize all movie ticket purchases above a $9.95 monthly subscription fee.
Phase 2: Sell consumer data to the studios? Force the theaters into profit-sharing agreements? Maybe even get a cut of concession sales? Sign up a bunch of new users in the South and Midwest who will treat their MoviePass like a forgotten gym membership card? Broker marketing deals with studios who will surely want to have their content prioritized and advertised on MoviePass? All of those things? At least a couple of them? Hope whatever you get combines to offset the costs from all of the super users who see more than 2 movies a month.
Phase 3: Profit.
Lowe has boasted MoviePass will reach phase 3 next year. Wall Street isn’t so sure. Helios and Matheson Analytics, the tech firm which bought a majority share of MoviePass in August 2017, posted a loss of just $7.4 million in 2016. Last year, thanks to MoviePass that figure ballooned to $150.8 million. To be fair, Helios says “the gross loss is only $10 million cash.” Still, that’s not good.
Like so many tech startups before it, MoviePass will only survive for as long as its investors and creditors can stomach operating at a loss, and that means perpetual fund-raising efforts which also means perfecting the fine art of the roadshow.
Lowe’s been here before. He got in on the ground floor of both Netflix and Redbox, although, technically, the latter was actually financed by McDonald’s and not by venture capitalists. Now, like Joe MacMillan forever chasing the next big thing (don’t get the reference? Go watch Halt & Catch Fire. It’s amazing, and it’s right there waiting for you on Netflix!), he’s moved on to MoviePass.
But who the heck is Mitch Lowe, other than AMC Theaters’ Public Enemy No. 1 (seriously, AMC really, really hates MoviePass)? Where did he come from?
To those of you, let’s say, 22-years-old or above, take a moment to let the nostalgia sweep over you. For those of you a little younger, that’s a picture of a video store, specifically Bette’s Flicks (formerly Video Droid) in Larkspur, California. We used to have literally thousands of them. Blockbuster alone touted 9,000 locations. Think of Netflix but with a super limited selection, a back room for porn, and something called “late fees.”
At one point in time, Lowe owned ten of these things. He operated the rental chain Video Droid out of northern California. By the time he bumped into Netflix’s co-founder Marc Randolph (i.e., the guy Reed Hastings eventually pushed aside), the then-44-year-old Lowe had logged thirteen thousand hours behind the counters of his video stores. He was also trying to launch a side business creating websites for video stores but it wasn’t going well.
“When we founded Netflix we were really just trying to solve a couple of small problems, which were: we hated this concept of late fees, and we hated the idea that the video stores could carry a limited selection.” – Mitch Lowe, speaking at Marketing United last year
As detailed in Gina Keating’s wonderful book Netflixed: The Epic Battle for America’s Eyeballs, in Netflix’s very early days Randolph and Hastings had the idea – a mail-delivery movie rental service – and a team of engineers and marketers but no one with any actual movie rental or entertainment industry experience.
So, Randolph went head-hunting and fact-finding at the annual Video Software Dealers Association (VSDA) convention, which had been in existence for nearly 20 years at that point and always brought together video store owners, home video manufacturers, and Hollywood stars. The ‘97 convention alone featured, to name a few, John Travolta, Debbie Reynolds, Leslie Nielsen, James Doohan, Edward James Olmos, and Mike Meyers.
Wading through all of that, Randolph eventually happened upon Lowe’s booth, which was touting a new way for video stores to use the internet to manage customer databases. A conversation was had, business cards exchanged. That easily could have been the end of that, but then this happened:
As Randolph turned to leave, Lowe, on impulse, grabbed his backpack and pulled him back. “What exactly are you trying to do [with your company]?” Lowe asked. They agreed to meet a week or so after to share ideas and information. Later that day, as Randolph leafed through the trade show program, he saw a photo of Lowe and realized he had been talking to the president of the VSDA.
Netflix could not have found a better candidate to be their liaison to the home video industry. As president of the VSDA, Lowe was liked and respected enough to help usher in the conversion from VHS to DVD, though not always successfully. One irate VHS advocate and video store owner had to be thrown out of the ‘97 VSDA due to his vehement protests against DVD, which he panned as “Does Virtually Diddily.” Still, most people in the industry liked and respected Lowe, and his first meeting with Randolph went so well it turned into a weekly affair.
Through their interactions with Lowe, Randolph and his team got the ideas to add a search engine to Netflix to help locate movies by title, actor, or director. He was also instrumental in making sure they included plot synopses, ratings, cast and crew lists, and let shoppers browse by genre or theme or even enter a favorite film and be shown a similar title. Basically, he helped them realize they needed to digitize all the functions a traditional video store clerk was supposed to serve, and just about everything they did as per his suggestions can still be found on Netflix today, albeit in a highly more nuanced form.
Yet Lowe was reluctant to officially join Netflix, not because he was still clinging to the old brick & mortar way of doing things. No, he recognized traditional video stores had peaked. But he really had his heart set on starting up a video rental vending machine business. He’d actually built one of his own – think of it as a proto-Redbox – and installed it in a Japanese hospital years earlier as a trial run. It was a money loser, but he couldn’t quite give up on it. Eventually, though, he learned to just put that on the backburner.
So, after months, of saying “no” Lowe finally gave Hastings and Randolph a “yes” and joined Netflix as VP of business development and strategic alliances. That was in November 1997. Netflix went live April 14, 1998.
“We hired 500 people to sit and watch films all day and catalog them according to 72,000 different film characteristics. That turned into this gigantic algorithm that then matched you to the film’s you’d like. – Mitch Lowe, speaking at Marketing United last year
Lowe tried to get the studios give them a discount on the wholesale DVD price. They wouldn’t budge. That failure along with Lowe’s realization that many of the company’s early adopters were Indian students and film-loving immigrants working in the tech industry led Netflix to initially focus on older films as well as niche and foreign titles.
In June 1998, he convinced the president of the Digital Entertainment Group to mention Netflix in a speech to the media and industry in Las Vegas, which was the first time most people in that room ever heard the word “Netflix.” The interest was instantaneous, and Lowe soon negotiated a joint promotion with Warner Bros.
But, and stop me if this sounds familiar, Netflix was losing money on every single transaction. Hastings and Randolph were busy running around raising lifeline funding, taking meetings with Amazon and Hollywood Video to discuss selling the company, and staying up late wondering, “How do we find a viable business model?”
“We were trying to figure out what to call this thing. The thing that everyone wanted was Movies By Mail. Then we all started talking and knew that eventually, we would deliver movies through the internet […] We didn’t know if streaming or downloading would win out, but we knew it would be on the internet. At the time, we thought, ‘Let’s think 10, 20 years ahead and describe what it is we want to do.’ And we were coming back from a fundraising trip to Paris, where we had seen the word ‘Flix’ in a window. So, that’s why we called it Netflix.” – Mitch Lowe, speaking at Marketing United last year
At the end of 1998, Netflix posted an $11 million loss. A year later, it was up to $29.8 million. The year after that, $57.4 million, by which point the great dot-com bust was underway.
Netflix very easily and probably should have gone under. Luckily, investors still believed in Randolph and Hastings, each of whom had already struck it rich with prior start-ups, and home video people still respected Lowe. Moreover, Blockbuster Video was arrogant and stuck in its ways and had made a lot of enemies by driving hard bargains with all of the film studios and gobbling up the competition. In a slight preview of what’s happening now with MoviePass, part of Netflix’s long-term viability would come down to Lowe’s ability to negotiate with the studios.
It wasn’t easy, but he finally got Warner Home Video and Columbia Tri-Star to agree to a lower price in exchange for a cut of the revenue, marking the first online DVD-revenue sharing agreement. This relief in Netflix’s overhead costs allowed the company to significantly upgrade its warehouse inventory. Granted, that’s not exactly the sexiest of advancements in a company’s history, but it’s the type of thing that helps keep the lights on.
Not, obviously, that Lowe was alone in helping make that happen. The importance of Hastings’ decision to raise prices and move strictly to a subscription-based service instead of a la carte can’t be overstated. New hire and experienced programmer Tom Dillon used hacked data from the Post Office to ingeniously streamline the company’s distribution centers. Marketing head Leslie Kilgore re-designed the logo into what we still know today and worked her people so hard several of them ended up in, as Keating put it, “counseling for job-related stress.” Lowe was just in the thick of it with the rest of them, doing his part.
But a David vs. Goliath fight was looming. Blockbuster had twenty million active users; Netflix had just three hundred thousand. Blockbuster, however, was weakening, having dragged its feet far too long on converting to DVD from VHS, not to mention a series of other costly errors (remember Blockbuster Music?). When Blockbuster’s CEO somberly declared the company would never again see positive growth he was promptly replaced with John Antioco, a business vet who specialized in reviving distressed properties.
In 2000, Hastings offered Netflix to Antioco for $50 million, to essentially become Blockbuster’s online arm, but he was laughed out of the room. The ensuing war of words between the two in the press predicted the tech disruptor vs. entrenched industry stalwart dynamic we currently see playing out between Lowe and AMC chief Adam Aron, who takes a special delight in trashing MoviePass in the press. However, unlike AMC and Aron Antioco didn’t view Netflix as an assault on Blockbuster but instead a mere insignificant nuisance. He believed online DVD rental was a niche business that would be but a stop-gap on the way to the true future: video on demand. Turns out, so did Hastings.
“The business model of the movie theater business is exactly like it’s been for the last 20 or 30 years. Unlike Netflix, Amazon, or Hulu, who know who exactly who their customers are and how to micro-target them, only 9% of moviegoers are part of a loyalty program or have their email address attached to their film attendance. It’s an incredibly inefficient model. This is why the studios have to spend twenty to fifty marketing million dollars on Superman when they should already know exactly who watched the previous 15 of them.” – Mitch Lowe, speaking at Marketing United last year
Many of the same tricks Lowe is currently playing with MoviePass were first played by Hastings during this period. Price cuts leading to a huge membership surge, promises of profitability tied to an IPO listing date and a target number of total members. For Hastings, that number was 3 million subscribers; for Lowe, it’s 5 million (MoviePass is currently up to 2 million).
Hastings reaching his goal came with an extreme cost. The only way Netflix could make the books work prior to an IPO listing was to lay off 40% of its staff, purging itself of the last of the non-executive employees who’d been with them since the very beginning. Cutting the fat worked. The company went public on May 23, 2002, and raised nearly $90 million. The fight with Blockbuster, of course, still loomed, but neither Randolph nor Lowe would be around to celebrate the inevitable victory. Instead, Lowe’s final days at Netflix were spent returning back to the thing he’d backburnered so long ago: the video rental vending machines business.
Along with Randolph, he created Netflix Express, a video rental kiosk they pilot tested in a Las Vegas grocery store. The results were far more encouraging than expected, but Hastings didn’t see the future in it, not when the company was already going to need to invest so much to prepare for digital distribution. Adding resources to another physical distribution business didn’t make sense to him.
Serendipitously, a McDonald’s executive then approached Lowe about partnering with Netflix on a video rental kiosk business. Lowe had now found a corporate partner to shoulder some of the cost, but it was the wrong kind of corporate partner. Hastings didn’t want Netflix to be associated with the McDonald’s brand. So, he shot down the proposal. In short, Hastings saw digital as the future and while Lowe saw the truth in that he wasn’t ready to completely give up on physical product.
Their paths clearly diverging, Lowe officially left Netflix in January 2003 and jumped to McDonald’s to work with Gregg Kaplan, who had already been experimenting with a series of kiosks, on launching Redbox. Shortly after that, Randolph left as well, having already been supplanted by the more assertive Hastings, and Lowe was essentially replaced with Ted Sarandos, who also came from a video store background and had been with Netflix for a couple of years at that point.
“People are afraid of changing the way they do business, especially the studios. The studios are horrendous when it comes to business innovation.” – Mitch Lowe, speaking at Marketing United last year
Lowe’s time at Redbox – beginning as a consultant, graduating to a VP, and then becoming President – was ripe with friction and insane growth. The film studios didn’t like seeing their product hawked for just $1 a night and the fledgling video stores, still reeling from Netflix, correctly sensed a knockout blow on the way from Redbox. Lowe actually ended up having to sue several of the studios due to their hardball tactics. Disney, in fact, still doesn’t deal with Redbox directly. But the low-cost and Starbucks-like convenience of Redbox (i.e., there’s one around every corner) was too enticing for consumers to pass up. Redbox passed a billion rentals by 2010, a year into Lowe’s time as President of the Company. When he left a year later, Redbox had over 13,000 kiosks nationwide. To put it another way, nearly 70% of the U.S. population lived within 5 minutes of a Redbox.
That’s also around the time MoviePass started, but similar to Netflix Lowe wasn’t actually there for those very first days. While Stacy Spikes and Hamet Watt were launching MoviePass in 2011 Lowe was transitioning into a consulting business and a series of different gigs, such as serving on the board of Medbox, Inc., where he hoped to get in early on the cannabis market. He joined MoviePass as an advisor in 2014 and took over as CEO in June 2016.
It is under his watch the company has increased its membership by 900%, partnered with Helios and Matheson Analytics in order to stay afloat, entered into an experimental film distribution deal with The Orchard, purchased Moviefone, and generally positioned itself as the inevitable future of film attendance if only the damn movie theaters would help them out. Many of the hardships he currently faces probably feel to him like deja vu, prompting thoughts like, “I remember watching Reed Hastings go through that.” Even his idea to build MoviePass around users who will treat it like a forgotten gym membership is based on the period when Netflix realized profitability rested not with attracting cinephiles but instead casual fans who would be sucked in by a great offer but soon grow too busy with life to take full advantage of it.
The challenge to Netflix back then is the same to MoviePass now – how do you turn a revolutionary idea which the entrenched businesses despise into something truly sustainable? If Lowe can figure it out, MoviePass might well become theater owners’ last great hope to turn around historic downturns in film attendance, particularly among those millennials who’ve only ever known subscription-based entertainment options. If not, oh, well, there’s always something good to watch on Netflix. Lowe had a little something to do with that, too.