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let’s play a game of ‘just connect’. What does the controversial navigation app RedZone, a nationwide network of psychics, and Chaka Khan have in common? all are linked to financier ted farnsworth.
Reading: Movie pass blog
Farnsworth is America’s most unflappable businessman. he starts businesses as if he were collecting starbucks rewards or airline miles. According to the Miami Herald, he has registered 50 businesses in the state of Florida in the last 30 years. even more impressive, only four of these were still in operation in 2018 and the three he made public saw their value drop by 99% within three years of listing.
Not to mention that Farnsworth has been the subject of eight different civil lawsuits revolving around unpaid bills and has been cited 11 times for failing to pay federal income taxes on time.
Farnsworth’s businesses have included a pay-per-call psychic service promoted by Toya Jackson, two energy drink companies, a vitamin manufacturer, and some run-of-the-mill multi-level marketing schemes.
all these titans folded in spectacular ways.
First was the Psychic Discovery Network, the epitome of ‘90s hotlines and their infomercials. Its 900 number racked up phone bills across the nation before the Federal Trade Commission stepped in. The Network had more than 50 consumer complaints on file, leading the FTC to label its sales tactics as “abusive” in 1998. Farnsworth stated he knew nothing of these complaints but he did sell his stake in the business.
The next step was the xstream drinks network, which appeared on the market in 2001 and sparked investor excitement in 2002 when it tried to acquire the European energy drink, dark dog. Founder and CEO Farnsworth dubiously labeled the dark dog as the Pepsi in Red Bull’s Coke, somewhat embellishing its performance and recognition in the region. Sadly, the deal never materialized and Farnsworth resigned in 2007 as the company was relegated to the world of penny stocks.
not a month later and I was back on the scene with the purple drink company. the “antioxidant-rich drink” went public through a reverse merger with a movie company. for a few months he dazzled investors with his impressive array of celebrity spokespeople before collapsing in the wake of the great recession. this was followed by its nutraceuticals, which disappeared almost as quickly as they appeared due to “no required regulatory filings”.
while he was down, farnsworth was not out. In 2015, he founded Zone Technologies, the creator of RedZone Maps, a navigation app that steers you away from “danger and crime” using crowdsourced information.
Critics were quick to point out that this type of data collection promotes racial profiling, but that didn’t stop Farnsworth. He hyped the company so much that it attracted the attention of Helios and Matheson Analytics, an equally shady and troubled IT and data management firm based in New York. Helios and Matheson bought Redzone in 2016, making Farnsworth president. he would become CEO three months later.
this would put ted farnsworth on a collision course with the most infamous company of 2017: moviepass.
mission: impossible
moviepass was founded in 2011 by stacy spikes and hamet watt. Spikes was a music and film executive who had the idea for a subscription movie theater in 2005, but was unable to find investors or partners.
At the time, movie theaters and production companies were focused on increasing sales, hence the dramatic rise of 3d cinema and big budget movies. theaters believed that if they increased the show, they could justifiably raise ticket prices and offset any decline in theatergoers. When James Cameron’s “Titanic” was released in 1997, it was the highest-grossing and most expensive film ever made.
But things changed considerably between 2005 and 2011.
The movie theater business seems to be one of the great dilemmas of the modern era. it somehow manages to be in a perpetual state of decline and yet thrives during periods of economic uncertainty. During the Great Depression, despite massive layoffs, widespread bankruptcies, and millions of foreclosures, Hollywood entered its golden age. throughout the period, between 60 and 80 million Americans went to the movies once a week or more. soon after, television arrived. in 1946, British cinema attendance numbered a staggering 1.6 billion. by 1965, this number had dropped by more than 75%.
The movie business comes and goes. When the 1981-82 recession hit, the worst since the Great Depression, American theater attendance rose more than 10%, while the unemployment rate rose sharply. in 2009, during the height of the great recession, ticket sales increased more than 17%, while attendance increased 16% year over year.
However, by 2011, things were coming to a head. The boost of Recession escapism and the novelty of 3D were quickly waning. 2011 marked the worst year for movies in more than 15 years. Ticket revenues dropped by 4.5% year-over-year while theatre attendance continued its steady decline. That same year, Netflix became the largest source of Internet streaming traffic in North America and it introduced its first original series: ‘House of Cards’.
maybe it was time to review the idea of the subscription service.
it’s no country for old men
for 2011, spikes and watt teamed up to raise $1 million in venture capital and launch a trial subscription in san francisco. the initial demand surprised them. Despite only being offered in 21 theaters, 19,000 users attempted to register on the first day, crashing the company’s server. but there were still several problems to solve.
MoviePass failed to inform any of the listed theaters of the service’s launch in the first place, leaving many to wonder why they were suddenly inundated with digital reservations. most of them stopped accepting moviepass tickets within three days.
Also, moviepass hadn’t found the best way to collaborate with theater chains, so it simply booked tickets on behalf of its members through movietickets.com. Unfortunately, MovieTickets.com is owned by AMC and the theater giant was not happy that its own website was controlled by a third party service. threatened to take legal action against moviepass, so it went back to the drawing board.
A second trial was launched a few months later in collaboration with Hollywood Movie Money, a nationwide gift card company. With Money’s 36,000 theaters, MoviePass launched into new markets, creating membership rates based on average local ticket prices. subscriptions cost between $29 and $34 a month, had a limited number of movies, and required users to print a coupon to redeem at their theater. this was quickly deemed too cumbersome and annoying and was replaced with an app and digital coupons. But once again, AMC stepped in and pressured Hollywood movie money to break its partnership with MoviePass or risk losing access to thousands of theaters.
Undeterred, Spikes and Watt raised more capital and won the effort of key investors AOL and William Morris. together, they approached discover card and struck a deal to launch the moviepass debit card. this allowed for a seamless ticketing process as moviepass charged the cost of tickets to the card and members used it to pay at the box office. it also cornered movie theater chains, as they were forced to accept the cards anywhere they would accept a regular discover card. Even worse for AMC, the popularity of MoviePass eventually caught the attention of MasterCard.
In 2014, the MoviePass MasterCard made its debut, meaning one subscriber could access more than 91% of all theaters in the United States. This, combined with continued declines in movie attendance, broke up AMC, and the chain agreed to enter into a temporary partnership with MoviePass.
Lost in Translation
In January 2015, the one-year AMC-MoviePass pilot program was launched in Boston and Denver. At the time, MoviePass had a few thousand subscribers paying around $32 a month. This fee was raised to between $35 and $45 at AMC’s request, with additional charges for premium formats such as IMAX and 3D. in exchange, subscribers could watch one movie a day. moviepass agreed to pay face value for tickets and amc would pay to access detailed consumer data.
This partnership was a big deal for moviepass because it was the first time it had a chance to legitimize its business model in the eyes of the industry at large. spikes and watt saw the show as their chance to prove that a subscription service would increase theater foot traffic and concession sales. the hope was that this would eventually incentivize theaters to sell moviepass tickets at a discount, which could result in the service becoming profitable.
During the course of the year, MoviePass and AMC prepared data for a white paper. the results were released in early 2016 and things seemed pretty mixed.
Initial figures showed that the average AMC moviegoer goes to the movies one and a half times a month. after moviepass, it increased to just over three times a month. however, this impact was not lasting. the rate fell back toward the pre-moviepass average as the novelty of the service wore off. If users didn’t go to the movies at least twice a month, they were paying more for a MoviePass subscription than the company would spend on tickets, meaning it could make a handsome profit from consumers’ oblivion.
According to Business Insider, AMC officials were unimpressed and convinced they could create a better, more lucrative subscription service internally. some even believed that moviepass had intentionally skewed the data to their advantage.
For this reason, AMC terminated their agreement with MoviePass and once again the two were at loggerheads.
if we build it, they will come
despite disappointing the world’s largest movie theater chain, moviepass didn’t give up. In June 2016, Mitch Lowe, a former Netflix and Redbox executive, became CEO of MoviePass. stacy spikes became co-chair along with hamet watt.
Lowe was quick to tout the service’s purported strengths: It was popular with millennials, its subscribers spent 120% more on concessions, and it increased a movie’s opening window by incentivizing customers to go to the movies afterwards. of the opening weekend. According to Lowe, if MoviePass could acquire “3 million subscribers, it could add 5 percent to total ticket sales.” this should have been great news for theater owners and production companies, not to mention that moviepass hoped to one day sell detailed consumer data to studios to help them better select and release movies.
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But these positives weren’t enough to make up for the fact that moviepass was missing its key ingredient: subscribers, lots and lots of subscribers.
after its amc pilot program, moviepass’s unlimited plan remained at $50 per month. according to the company, this was to ensure that MoviePass could “take the risk of overuse and reap the benefit of underuse.” Clearly, this wasn’t a deal consumers were willing to accept, as MoviePass had just 20,000 subscribers and $10 million in revenue.
Lowe then struck up a friendship with Brian Schultz, the CEO of Studio Movie Grill, a small Texas-based movie theater chain known for its theater dining experience. In December 2016, Studio Movie Grill purchased a stake in MoviePass. The same week, Shultz announced that Studio Movie Grill would offer its customers a one-month, unlimited trial of MoviePass for $10. this instance would become a beautiful case of foreshadowing.
While Lowe admitted that the temporary measure “would be expensive,” he believed it was a “necessary part of the subscriber acquisition costs.” Studio Movie Grill was eager to accept the deal in the hope that it would boost their already impressive concessions revenue due to the fact that they served full meals and alcoholic beverages. but with only 24 locations, it was unclear what impact the deal would have for moviepass.
the big lebowski
a year later, moviepass had problems. Subscriber numbers remained low, costs high, and there were no signs of any major theater chains returning to the negotiating table.
With their dreams at stake, spikes and lowe attended investor meetings in new york and met ted farnsworth there.
at first glance, a former moviepass employee called him an “awkward, lovable, somewhat optimistic guy” who “wants to be your best friend.”
another called him a “scammer”…
by that summer of 2017, ted farnsworth was at the helm of helios and matheson analytics (hmny), a purveyor of “insights into social phenomena” (whatever that means).
Clearly, Farnsworth wasn’t too sure either. according to bloomberg, when asked what his company did, he replied, “they do…. ummm… oh god, I don’t even know how to explain it to you. big data processing data.”
insightful.
Regardless, Farnsworth’s offer for MoviePass was undeniably tempting: $25 million for 51% of the company, two seats on the five-member board, and a promise to temporarily lower the monthly subscription price. Unlimited at $9.95. It is not clear how Farnsworth arrived at this figure; Clearly, the math didn’t play a role considering the average cost of a movie ticket was more than $9. according to business insider: “he wanted a price that would grab the headlines.”
Despite the excitement of the moviepass board of directors, spikes was skeptical of the deal. according to him, up to that point, moviepass had been “methodical in testing price points” and had managed to get the subscription as low as $12.99 in some regions. however, if it is lower than that, the service would not be able to make a profit as the low price would incentivize overuse. However, Farnsworth and his promise to take the company public if it reached 100,000 subscribers drowned out Spikes’ concerns. MoviePass’s Board of Directors approved the deal in July 2017.
Within two days of the price reduction, MoviePass reached 100,000 subscribers. Within 30 days, it had 400,000. When these results were announced to the public it launched Helios’ stock into the stratosphere. Over the course of a month, its share price rose from $2.50 to $20.40, a healthy eight-bagger for investors crazy enough to take a bite.
But in the meantime, the company wasn’t prepared to handle the pressure of its growing user base. their customer service lines were flooded and their supplier ran out of plastic to print new moviepass cards.
The sudden rush of customers worried the spikes and begged other executives to raise prices. But Farnsworth and Lowe did not want to lose momentum. by December, spikes and watts had been removed from the board. a few weeks later, spikes was sent by email. On the same day, MoviePass hit 1 million subscribers, a milestone it reached faster than Netflix and Hulu.
very bad
The months that followed can only be described as reckless.
The number of subscribers continued to increase. As of April 2018, there were 2 million users and MoviePass was sponsoring events at Coachella. That same month, Helios and Matheson filed its annual report with the SEC detailing a loss of $150.8 million. Helios’s independent auditor began to express doubts that the company could stay in business. It was time to start cutting corners.
moviepass’s biggest adversary was its heavy users, savvy customers who were losing the unlimited plan for all it was worth. These movie titans headed to the movies every day, even if they didn’t see a single movie. Some New York City-based subscribers have reported using their MoviePass as a way to access clean public restrooms in downtown Manhattan. they would pick up a random movie ticket, check in at the box office and sneak out 5-10 minutes later. lowe needed to find a way to slow down these users and opted for deception and lies.
lowe and farnsworth called a moviepass board meeting where they proposed secretly changing users’ passwords to lock them out of highly anticipated movies. the executives were confused. One warned that it “would attract the attention of the FTC and could reinvigorate their challenge to MoviePass, this time from a consumer protection standpoint.” the CEO shrugged off this concern and gave up on launching the program with a “small group.” he suggested they start with “the top 2% of [their] highest volume users,” which is 75,000 people.
lowe was also keen to introduce some friction into the moviepass consumer journey. In the summer of 2018, the company began requiring 20% of its users to upload photos of their ticket stubs for approval. if your checks are not approved, your account will be cancelled. Lowe worked hard to ensure that the “randomly selected” users were all high-power subscribers. the problem was that the process did not work on many smartphone operating systems and the service verification software itself often failed. With an almost non-existent customer service network, MoviePass had found a way to attract its most expensive users.
both programs were implemented for the release of ‘avengers: infinity war’. A couple of complaints surfaced online, but most dismissed the incident as a tech glitch.
its impacts were not noticeable. By July, MoviePass was losing $40 million a month and Helios stock had fallen 99%.
mission: impossible – consequences
meanwhile, farnsworth and lowe were pretending everything was fine.
farnsworth gave an interview to vice in June 2018 in which he stated that “absolutely more money goes out than comes in. which is no different from spotify spending $4 billion [it actually lost $1.5 billion that year] or uber, or anyone else who’s pioneering the space.” He didn’t seem concerned, instead confident that MoviePass’s data collection would pay off, suggesting the service could become vital for studio advertising.
In a strange twist similar to that of a streaming service, it also revealed that moviepass executives planned to “buy and produce [their] own movies from day one” because “they can guarantee a box office” and reduce expenses by limiting the premieres. to subscribers. This led Farnsworth to promise a wide range of additional services and revenue opportunities, from selling the film rights to HBO and Netflix to giving subscribers free popcorn when they watch a MoviePass production.
internally, however, chaos was still raging.
Starting in July, moviepass implemented a price increase, charging an additional $2 to watch the latest blockbuster franchise. Lowe attributed the fee increase to a desire to “spread the business out to the company’s theater partners in the weeks following the typically high-traffic opening weekends.” however, this response was met with skepticism from users and they complained fiercely. actually, moviepass was running out of money to pay for the tickets.
At the time, moviepass was losing $40 million a month and it was becoming difficult to hide from investors. the stock had fallen more than 98% from its all-time high in October 2017.
On July 26 there was a blackout. MoviePass members showed up at the theater for late-night showings and their cards were declined. the company was quick to blame this on technical problems.
We have determined that this issue is not with our card processing partners and will continue to work on a solution this afternoon and evening. if you haven’t been to the theater yet, we recommend that you wait for a resolution or use e-ticketing, which is unaffected.
— moviepass (@moviepass) July 27, 2018
Actually, the moviepass funds had run out. According to the company: “The merchant processor that finances the MoviePass membership card stopped advancing funds for the purchase of movie tickets for our subscribers. As a result, the number of tickets we could buy was greatly reduced.” This coincided with the release of ‘Mission: Impossible – Fallout’, one of the biggest movies of the year. To keep the service afloat, MoviePass stopped more than 600,000 members from reserving tickets for “Mission: Impossible” during its launch weekend.
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Just five days earlier, Helios and Matheson had announced a 250-for-1 reverse stock split. This would increase their stock price by 8 cents to $21. Most saw this as an attempt to prevent the company from being delisted from the Nasdaq. on the day of the blackout, hmny lost more than 50% of its already reduced value.
vertigo
On Monday, the company obtained an emergency loan. According to SEC documents, Helios and Matheson received $5 million in cash from Hudson Bay, which could require repayment of more than $3 million less than a month later.
Things would never be the same again.
With the public’s faith in the company firmly undermined, moviepass all but abandoned its founding goal. Lowe required that all major blockbusters be blocked from the MoviePass app. Engineers were instructed to create a tripwire that would shut down the service if MoviePass exceeded a certain number of daily bookings. when the money ran out, subscribers were told there were no more showings in their area.
according to a former staff member interviewed by business insider: “the tripwire started with a few million dollars, but eventually dwindled down to a few hundred thousand.” the whole process was a “guessing game”.
At the same time, moviepass had added a confusing rabbit hole to their app to trick users who had canceled their membership into resubscribing.
All the while, Helios stock was pushed deeper into the mud. Even with its dramatic reverse stock split, it was now trading for less than $1.
As 2018 progressed, employees were laid off or left the company en masse.
despite all this, farnsworth and lowe continued to travel by private jet, attend high-profile functions and throw parties on yachts in miami with company money. The couple was also accused of shielding his friend and MoviePass marketing consultant Bob Ellis from disciplinary action when he was repeatedly accused of sexually harassing his co-workers.
not with a bang but with a groan
In February 2019, Helios and Matheson shares were delisted from the Nasdaq. In April, it was revealed that MoviePass had a mere 225,000 subscribers, a significant drop from its peak of 3 million subscribers. In a true kick ’em when they’re down moment, AMC announced its competitor service, Stubs A-List, which costs $19.95 a month, hit 800,000 subscribers in May.
In August, Mossab Hussein, a security researcher at Dubai-based cybersecurity company Spidersilk, discovered that one of MoviePass’s databases was not protected with a password. it contained 161 million records, including the personal information and credit card numbers of more than 50,000 subscribers. At the same time, MoviePass fans and retail investors were discussing the company’s hacks on Reddit, resulting in two class action lawsuits. These rumors triggered a major FTC investigation that was only resolved in June 2021.
On September 14, 2019, moviepass bought its last ticket. the dream and the nightmare had come to an end.
Not to be outdone, Ted Farnsworth announced that he was assembling a team of investors to buy Helios, Matheson and MoviePass from their Indian parent company, but these plans never materialized.
rear window
As an investor, it can be hard to see any serious lessons amid the smoldering rubble and hilarity of moviepass, but they’re definitely there.
First of all, it’s a great reminder that if something seems too good to be true, it probably is. there was no way the moviepass model was sustainable, even with its lofty ambitions for big data, advertising, and self-created content. companies can promote their future as much as they want, but they need to survive until tomorrow to get there. In this case, it is clear that public and media enthusiasm may have blinded some investors.
We also get to see the trials and tribulations of the ramp-up period and the difficulties the company faces when they suddenly go viral. Mitch Lowe reflected on this in August 2018 when he said that he regretted lowering the price to $9.99 because it caused too many people to sign up. moviepass did not have the infrastructure to support such an influx of customers.
Most importantly, moviepass is a warning about disruption. there are plenty of old-fashioned industries among us, experiences that could be improved through technology or innovation. but solutions from one industry cannot be applied as quickly to another. When Mitch Lowe became CEO, he was heralded as the natural leader for MoviePass because of his experience at Netflix and Redbox, but the home movie market and the theater market present very different challenges.
On the one hand, you have to deal with the segmentation of the movie industry, dominant chains like AMC, and regional price variations. this made a one-size-fits-all, direct-to-consumer subscription model illogical.
There would be no way to effectively disrupt the industry without significant theater associations or a large number of subscribers (and I do mean well over 3 million). moviepass had neither and once it proved disappointing to amc, it created a powerful enemy. the movie theater business needed to be disrupted, its attendance suffered a 25-year low in 2016, but the solution was unlikely to come from outside an established player. so why amc’s a-list was doing so well before covid.
Finally, management teams are really important. At first, MoviePass seemed to be in good hands with Lowe at the wheel, but once Farnsworth got involved, he should have set off some red flags. indeed, he did in some spheres. Bloomberg and the Miami Herald wrote about Farnsworth’s questionable past in 2017, but it seems to have flown under the radar for many.
end credits
I’d like you to imagine these next few paragraphs as “where are they now?” epilogue that appears in all inspirational movies based on a true story. Each description must be imposed on an image of each character in motion and set in “That’s Life” by Frank Sinatra.
mitch lowe
mitch lowe remained on movie pass until helios and matheson filed for chapter 7 bankruptcy in January 2020.
In June 2021, he and Farnsworth agreed to pay a $400,000 settlement in California for “illegal business practices.” The FTC concluded that: “MoviePass and its executives went to great lengths to deny consumers access to the service they paid for while failing to secure their personal information.”
He is now a consultant.
ted farnsworth
Farnsworth has always been a “fall down 7 times, get up 8” type. In 2021, he founded Zash Global Media and Entertainment, “an evolved network of synergistic companies working together to disrupt the media and entertainment industry.”
again, insightful.
zash is the majority shareholder of lomotif, a US-made competitor (a complete copy-paste scam) to tiktok. he also owns a bitcoin mining company. Zash recently merged with publicly traded Vinco Ventures (Bbig).
(please no one buy this stock)
stacy tips
In March 2019, Spikes launched Preshow, an app that gives you free movie tickets for watching 15-20 minutes of commercials. It would seem the idea hasn’t caught on as the company’s website now says it helps users exchange their “time and attention for in-game currency for over 20,000 of today’s most popular games.” .
More importantly, in December 2021, a New York City court awarded Spikes ownership of MoviePass and its assets. his offer is believed to have been for less than $250,000.
according to spikes: “we are delighted to bring it back and are exploring the possibility of relaunching it soon.”
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