Home / Tech / The definitive story of how a controversial Florida businessman blew up MoviePass and burned hundreds of millions

The definitive story of how a controversial Florida businessman blew up MoviePass and burned hundreds of millions

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  • A four-month investigation by Business Insider chronicles the rise and fall of the movie-ticket-subscription startup MoviePass.
  • We tell the story of cofounder Stacy Spikes, who sought to shake up the tired movie-theater business by starting a subscription service.
  • Enter Florida businessman Ted Farnsworth, who injected much-needed cash into the company and introduced the risky idea of lowering the monthly subscription price to an impossibly low $9.95 a month.
  • The price change helped MoviePass become a sensation, but it also led to the ousting of Spikes — and the use of questionable tactics to keep the company afloat.
  • This story was published on August 6. Subsequently, MoviePass’ parent company announced the service would shut down on September 14.
  • Visit Business Insider’s homepage for more stories.

As the sun set on June 14, 2018, John Travolta stood outside Manhattan’s SVA Theatre. He’d arrived for the premiere of “Gotti,” a biopic of infamous Mafia kingpin John Gotti in which Travolta played the starring role.

Greeting Travolta on the red carpet were Ted Farnsworth and Mitch Lowe, two businessmen who’d made the release possible after they’d taken an equity stake in the film months earlier.

But if Travolta knew who they were, his blank expression in the photos he took with them didn’t show it. In fact, if the actor knew more about them, he’d likely have wondered why they were grinning ear to ear.

Farnsworth was the CEO of Helios & Matheson Analytics, the parent company of MoviePass, the buzzy movie-ticket-subscription service with ambitions of becoming the next Netflix. Lowe was the CEO of MoviePass. And “Gotti” represented their next big move: moviemaking.

But MoviePass was burning through millions of dollars to keep up with subscriber demand. Lowe and Farnsworth, meanwhile, were blocking subscribers out of their accounts and misleading investors, according to multiple former employees — desperate measures designed to keep the company alive.

Mitch Lowe John Travolta Ted Farnsworth MoviePass 4x3

There was one conspicuous absence at the premiere: Stacy Spikes, the entrepreneur who founded MoviePass in 2011.

This spring when I met with Spikes, 51, he still had the slim figure, thin-framed glasses, and big smile he had back when he was hustling to put MoviePass on the map. His dream: a service that allowed you to see everything from summer blockbusters to art-house fare at any time for a monthly fee.

For a while, amid numerous fits and starts and funding crises, it worked. Then, in January 2018, just as MoviePass added its millionth subscriber, Farnsworth and Lowe fired him.

Surprisingly, Spikes wasn’t bitter. “How we got there was messy, but innovation is always messy,” he said.

Now, 18 months after Spikes’ departure, the once high-flying company is practically dead after losing millions of subscribers in less than two years. Since July 4, MoviePass has been shut down to resolve “technical problems.”

Secrecy hangs over what remains of MoviePass, a company that misled both subscribers and investors, and, according to multiple former employees, made many employees extremely uncomfortable. Hundreds of pages of SEC documents show, in clinical detail, the gobs of money the company spent trying to keep the lights on, and just how little it was generating.

Through interviews with over a dozen sources who worked at the company or had a close association with it — many of whom spoke on condition of anonymity because of the nondisclosure agreements they signed — I learned how an idealistic founder’s desperate search for cash to keep his company alive led to its swift downfall.

Aggressive marketing and questionable practices

Stacy Spikes always loved movies. As a high-school kid growing up in Houston, Texas, he worked at a video store. In his 20s, he helped market film soundtracks at Sony. By 1994 he was vice president of marketing at Miramax. In 1997 he founded the Urbanworld Film Festival, which featured the work of diverse filmmakers, including future stars like Ava DuVernay and Malcolm D. Lee.

The festival’s success got Spikes and executives with Loews Cineplex, one of the big movie chains at the time, thinking. “You could see Netflix, Spotify, Pandora, Hulu — this whole subscription wave was on the horizon,” Spikes said. “So it was, like, why not make a subscription for moviegoing?”

MoviePass began with Spikes, a team of five scrappy 20-something developers, and a phone.

In 2005, they created an SMS-based prototype for purchasing tickets, but they couldn’t get a major chain to give it a try. Things seemed to turn around after Spikes brought on Hamet Watt as a cofounder. Together they raised a combined $1 million from AOL and True Ventures, a San Francisco venture-capital firm.

But when a launch on July 4, 2011, was scrapped because of lack of interest from theaters, Spikes had to start over.

First Spikes and his team had to find a way around the big chains. To do that they devised a prepaid credit card. Using the app, subscribers would find a theater, select a movie and screening time, then go to the kiosk and order the ticket using the prepaid card. Essentially, the company paid back the theaters the full ticket price for the movies that its subscribers were seeing.

The MoviePass team also still needed to perfect its tech to match the user with the right theaters. So the developers built a geo-location system from scratch, plugging in the longitude and latitude of the front door of every movie theater in America.

Stacy Spikes MoviePass 4x3

The 90-day effort nearly bankrupted the company. But in February 2011, an impressed True Ventures greenlighted $1.5 million in funding. Subscription numbers jumped from 5,000 in 2012 to 10,000 by 2015. But even then, the company continued to sputter after a deal with AMC fell through in 2016.

Desperate for cash, MoviePass held a series of meetings in New York in the summer of 2017 with prospective investors. Ted Farnsworth attended one of the meetings.

A tad under 6 feet tall, Farnsworth resembles an economics professor more than a cutting-edge entrepreneur. He’s balding, wears stylish thick-rimmed glasses, and often dresses in business-casual attire with the sleeves rolled up to his elbows.

“He comes off as a bumbling, lovable, sort of optimistic guy,” one former MoviePass employee said. “He wants to be your best friend. He’s always on.”

Another former staffer put it differently: “The first conversation I had with Ted I left thinking, ‘This guy is a con artist.'”

Read more: Bitter enemies MoviePass and AMC once worked together. Here’s a look inside the relationship’s epic collapse.

Over the past three decades, Farnsworth has registered more than 50 companies in Florida, including a psychic hotline started in 1998. Fronted by La Toya Jackson, the company’s name, the “Psychic Discovery Network,” appeared in a notice from the Federal Communications Commission of pay-per-call services that had received more than 50 complaints.

Numerous companies that went public while Farnsworth was at the helm were valued at less than $1 a share within three years. Only four of his companies remain in operation today. Farnsworth himself has been cited 11 times for failing to pay federal income taxes on time.

Yet Farnsworth never seemed to have a problem failing up. In 2017, he became the CEO of data company Helios & Matheson Analytics. According to its website, the company specializes in “insights into social phenomena.” But, like Farnsworth, it too had a troubled past. In 2016, its India-based former parent company was accused of defrauding thousands of investors.

Farnsworth’s pitch to MoviePass: $25 million for 51% of the company, two seats on the five-member board, and a promise to drop the monthly subscription price, temporarily, from $50 to $9.95, with the goal of hitting 100,000 subscribers. If all went well, the next step would be taking MoviePass public.

But Farnsworth’s plan worried Spikes; to him, $10 a month was too low. At that price MoviePass would start losing money when a subscriber used the service more than once a month.

Why Farnsworth settled on $10 is unclear. Several people told me he wanted a price that would grab headlines. Some simple arithmetic should have dissuaded him.

In the US, the average price for a movie ticket is about $9; if a customer ordered a ticket every day for a month (the maximum the MoviePass plan allowed), it would cost MoviePass about $270, of which the subscriber’s fee would cover just $10.

But in July 2017, the MoviePass board agreed to the deal. And on August 15, the price drop went into effect. Thanks to word-of-mouth buzz and press attention, within two days subscriptions jumped from about 20,000 to 100,000. MoviePass had transformed from a scrappy startup trying to keep the lights on to a disrupter in the making.

Farnsworth and Lowe, who came on as MoviePass’ CEO in 2016, became the faces of the company. They often made key decisions inside Helios & Matheson’s Empire State Building office without Spikes, who by then had become chief operating officer. The staff ballooned, quadrupling from 10 to 40 by the end of 2017.

To celebrate, Farnsworth hosted a company event in November at his midtown apartment. He gave an impassioned speech with one clear message, according to those in attendance: They were part of something big.

But Spikes saw a looming disaster.

The company was overwhelmed by its overnight success and couldn’t keep up with demand. A quarter-million new subscribers were signing up every month, and MoviePass customer-service lines were flooded with complaints from people who had been waiting weeks for their cards. MoviePass had lowballed the number of cards it would need after the price drop. It got to a point where the vendor making the MoviePass cards didn’t have enough plastic and had to call on its competitors to fulfill all the card orders.

“We all knew we were selling something we couldn’t deliver on,” one former staffer said.

Spikes couldn’t stay quiet. He’d often beg Lowe in private to convince Farnsworth that the $10 plan would doom them.

MoviePass CEO Mitch Lowe and Helios and Matheson Chief Executive Ted Farnsworth.

To no one’s surprise, in late December, Spikes and cofounder Watt were voted off the board. Helios was now in full control of MoviePass.

On January 9, 2018, Spikes received an email from Lowe. It explained that MoviePass, the company he’d built from scratch, no longer needed his services.

“An email,” a former staffer said. “All those years getting the company off the ground, and that’s how he’s treated?”

The same day MoviePass reached 1 million subscribers, a milestone it hit faster than Netflix and Hulu. A press release to mark the occasion included a picture of a smiling Farnsworth and Lowe, standing before the AMC marquee in New York’s Times Square, holding MoviePass cards — a dig at the biggest movie chain in the world, which had previously tried and failed to ban the service from its theaters.

As one source close to the company put it, “From then on, it became the Mitch and Ted show.”

The company falls into ‘substantial doubt’

On the night of April 14, 2018, in Palm Springs, California, Farnsworth sat in his hotel room, banging out a furious email. It was addressed to MoviePass staffers who had come to the annual Coachella Valley Music and Arts Festival to work a promotional event the company would host with iHeartRadio.

Already, the company had made an impression on the festival. A MoviePass banner flew high above the festivities. Scantily clad Instagram influencers posted pictures with MoviePass swag. Former basketball star and amateur diplomat Dennis Rodman had shown up in a helicopter bearing the company’s logo with members of Jerry Media, an online advertising company known best for its @f–kjerry Instagram account and for running social media for the doomed Fyre Festival. Now, it counted MoviePass among its clients.

Flying High 🚁 @moviepass @fly_foxtrot #helicopter #coachella #sunshine #goodvibes #glasses #nails #loveit #ogroyalty

A post shared by White Queen 🐇👑💎 (@ogbunny) on Apr 15, 2018 at 2:11pm PDT on
Apr 15, 2018 at 2:11pm PDT

The subject of Farnsworth’s April 14 email was a concert by the rapper Big Boi scheduled for the following day at The Chateau, a posh boutique hotel at Lake La Quinta. This would be the latest event at Coachella cohosted by MoviePass; only a handful of people had attended each of the previous ones. Farnsworth would not accept another dud. In the email he told his staff to meet the next morning at 8.

At the meeting, Farnsworth warned that turnout for Big Boi had better be huge. “He yelled and cursed at everyone,” a former staffer who was at the meeting said. Farnsworth also blamed his staff for the poor turnout at the previous events. (A company spokesperson did not respond to a request for comment on the meeting.)

To draw a crowd, MoviePass blasted out an invitation to the Big Boi show to its then 2 million subscribers. All they had to do was show up with their MoviePass cards, or flash their app and movie history at the door, and they were in. “OK, fine, you’re welcome to screenshot this and send to a friend if you’re not at the festival,” the invitation read.

The invitation spread on social media and Reddit, where many subscribers commented that MoviePass should be more concerned about its poor customer service than throwing a flashy party. Back in New York, MoviePass’ customer-service lines were clogged with calls from disgruntled subscribers who still didn’t have their cards.

But Farnsworth was pleased, and the company made a promotional video bragging about the Big Boi show. It featured people dancing at a sunny spot dotted by palm trees and included soundbites like “I’m actually going to go to the movies way more” and “The theater is an experience.” Months later, MoviePass staffers would learn that the festivities had cost the bleeding company more than $1 million.

On April 17, 2018, days after the Coachella event, Helios & Matheson filed its annual 10-K report to the SEC. It reported a loss in 2017 of $150.8 million, “primarily due to the acquisition of MoviePass.” Things had become so dire that Helios & Matheson’s independent auditor noted in the filing it had “substantial doubt” about its ability to stay in business.

Spikes’ prophecy that a $10-a-month plan was unsustainable appeared to be close to coming true.

Taking drastic measures to keep the company alive

One big way MoviePass covered its massive losses was by selling millions of new shares to individual investors through Helios & Matheson’s Nasdaq-listed stock, HMNY. But that wasn’t enough.

Luckily, Mitch Lowe had a plan.

Lowe’s happy-go-lucky persona marked a shift from the all-business Spikes, whom he had replaced in the company hierarchy as CEO. On the rare occasions Lowe made it into the office, staff would need almost an entire day to get him up to speed. His general attitude, as one source described, was, ‘Well, what do you think we should do?’

Lowe dreaded the company’s power users, those high-volume MoviePass customers who were taking advantage of the low monthly price, constantly going to the movies, and effectively cleaning the company out. According to the Motion Picture Association of America, the average moviegoer goes to the movies five times a year. The power users would go to the movies every day.

“Before Mitch came on it was, ‘How do we slow down those users?'” one former employee said. “With Mitch it was just, ‘F— those guys.'”

Per Lowe’s orders, MoviePass began limiting subscriber access ahead of the April release of the highly anticipated “Avengers: Infinity War,” according to multiple former employees. They said Lowe ordered that the passwords of a small percentage of power users be changed, preventing them from logging onto the app and ordering tickets.

Ahead of the release of “Avengers,” some subscribers took their complaints about MoviePass login headaches to Reddit. A few seemed to assume it was just a tech glitch.

According to a MoviePass spokesperson, shortly before the release of the new “Avengers” film, the service released a new version of the app designed to help prevent violations of its terms of use.

It “reduced the number of people who were sharing their membership card with multiple people, it reduced the number of people who were buying and scalping tickets to the high demand movies, and it reduced the number of people who were buying tickets each day to various movies then exchanging them for a single movie and bringing three or four people to the same movie,” the spokesperson said. “MoviePass purchased many millions of dollars of tickets for ‘Avengers’ as we did for other hit titles.”

It didn’t help. MoviePass was losing at least $40 million a month by the end of July 2018, in the midst of a record summer movie season. On July 26, the company ran out of money to load on MoviePass cards. Helios & Matheson borrowed $5 million in cash to get it running again, according to a filing with the SEC.

MoviePass

But the temporary loss of cash led Lowe to make “Mission: Impossible — Fallout,” among the most anticipated releases of the year, unavailable on MoviePass. He also ordered that half of subscribers be frozen out the weekend of its release, former employees said. Complaints once again appeared online, leading MoviePass to send out a tweet saying it was “working on a fix towards this technical issue.”

A company spokesperson said: “The week ‘Mission: Impossible’ was released, the merchant processor that funds 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 purchase was greatly reduced.”

Pulling MoviePass offline for some 600,000 of its customers during the release of “Fallout” revealed fragility at the heart of the enterprise.

Hui Chen, the first compliance counsel expert at the US Department of Justice, described Lowe’s actions as “certainly unethical and could be illegal.”

“If a company is essentially interrupting its service on purpose so that the customers would not be able to use it as promised, that sounds like cheating to me,” Chen said. “Without having any further knowledge I don’t want to make a legal characterization to call it fraud, but it certainly sounds like it’s cheating the customers. That kind of cheating is at least unethical and it’s easily something that would be illegal with the right set of circumstances.”

After that weekend, things would never be the same for MoviePass.

Per Lowe’s orders, big blockbusters would no longer be available on the app. MoviePass also enforced what it called a “trip wire,” an automatic shutdown mechanism for all users that would be activated if MoviePass went past a certain amount balance. If money ever ran out, subscribers would see the following message on the app: “There are no more screenings at this theater today.”

The trip wire started at a few million dollars, but eventually it wound down to a few hundred thousand.

“It was a guessing game,” said a former staffer. “There were some days we actually got all the way through without the trip wire going off.” MoviePass did not respond to a request for comment on the trip wire.

Read more: MoviePass investors tell horror stories of watching their stakes drop over 99%, with some losing more than $100,000

Meanwhile, Farnsworth was trying to play a smoke-and-mirrors game with the market.

In August, MoviePass announced it was ditching a plan Farnsworth had floated to increase the monthly subscription to $14.95. They’d stick with $9.95. A former employee involved with discussions about pricing believed the company never intended on a $14.95 price and only wanted to see if the news would cause Helios stock to climb.

The stock continued to trade below $1, eventually losing 99.99% of its value as it wiped out shareholders. Farnsworth had once again saddled a company with penny-stock status.

“MoviePass over the years has tested various price points from $8.95 to $89.95 and plans to continue to provide different options that meet different consumers’ needs,” a company spokesperson told Business Insider. “MoviePass had every intention to move to a $14.95 monthly price point when it was announced. However, shortly after the announcement, as a result of our strategy discussions, we determined to change course back to the $9.95 monthly price point.”

By the end of 2018, it dawned on most of those working at MoviePass that they weren’t working for the next Netflix.

In October 2018, the New York Attorney General’s office announced an investigation into whether Helios & Matheson misled investors. Working conditions inside the company had become untenable, unless you were part of Farnsworth’s inner circle. These folks rode on private jets and accompanied him to high-end functions.

Case in point was Bob Ellis, a longtime friend of Farnsworth he hired as a marketing consultant after Coachella. It didn’t take long for the energetic 72-year-old with a year-round golden-brown tan to clash with MoviePass’ marketing team, staffed by women in their 20s. The team often told Ellis his suggested social-media posts, which featured women sporting MoviePass merchandise while wearing revealing clothing, weren’t on brand.

Bob Ellis Getty

Ellis, in turn, talked down to the marketing team. At times, staff would hear him yelling at them, driving them to tears, staff said. Formal complaints about Ellis’ behavior were sent to human resources. Allegations that he would inappropriately touch female staff at events and call or text them during non-business hours also surfaced.

Ellis finally crossed the line at the “Gotti” premiere when he approached a female employee whom human resources had told him to leave alone. Lowe assured the staff the following Monday that Ellis had been fired. But Farnsworth’s friend kept popping up in Instagram Stories posted by executives at MoviePass gatherings, including one on Farnsworth’s yacht, the staff observed. Ellis did not respond to several requests for comment.

As morale at MoviePass plummeted, many employees quit. The exodus included product manager Eric Jeng, who left the company in January.

In a 704-word letter to the entire company on the day of his exit, Jeng accused MoviePass executives of fostering “a perilous work environment for their employees,” who were working long hours “while fearful of the financial future and stability of the company,” Jeng wrote. “It sends an incredibly selfish message to MoviePass employees that members of management are living lavishly and seemingly carefree, with no concern for the company or its employees. … It is clear to me that our work environment has become simply too dangerous and toxic.”

‘My role in it is exactly what it was supposed to be’

By the start of 2019, Stacy Spikes’ dream was dead.

So, too, was Farnsworth’s dream of becoming a star player in the movie industry. MoviePass’ distribution arm, MoviePass Ventures, has only two credits to its name: the Sundance entry “American Animals” and “Gotti,” which scored a horrific 0% rating on Rotten Tomatoes. MoviePass Films, its production arm, has been involved in only a few co-releases bought by the indie label Neon.

In February, after months of trading below $1, MoviePass was delisted from the Nasdaq. In the same month, a couple from Sea Cliff, New York, filed a class-action lawsuit alleging MoviePass was a “bait and switch” scheme.

Starting in late 2018, tens of thousands of subscribers began canceling the service. In April, after much of MoviePass management was fired or had quit, internal data that I obtained showed the company’s subscription count had fallen from over 3 million to about 225,000.

Since the July 4 shutdown, Farnsworth and Lowe are nowhere to be found, as most of the staff have yet to learn the cause of the company’s halt, one source said. At present, service has been restored to 40% of subscribers, according to a company spokesperson.

And while MoviePass nosedived as suddenly as it climbed, it will have a lasting effect on the movie-theater business.

moviepass business insider

The 2017 summer movie season saw a 25-year low in attendance. But the industry rebounded in a big way the following year, raking in a record $11.89 billion at the box office — a revival MoviePass contributed to, industry experts say. AMC, Regal, Cinemark, the three biggest movie chains in the US, now all have their own movie-ticket-subscription services. It’s as if MoviePass had to die in order for their plans to live.

Read more: Insiders say MoviePass is both a blessing and a curse to independent movie theaters

Spikes, meanwhile, has stayed positive. He even keeps the first-ever MoviePass card created on his desk. Yes, an investor ran his dream into the ground. But, he says: “There’s no such thing as a mistake. Everything is going into the next phase.”

Spikes recently launched a successful Kickstarter campaign for a service called PreShow, which allows users to watch branded content on their phones to go see movies free.

When Spikes showed me the demo, his excitement reminded me of his early days building MoviePass.

“No one would care about PreShow if what happened didn’t happen,” Spikes said, without a hint of anger.

“Things went a little sideways, so I thought talking to investors now would be, ‘Ugh, you started MoviePass.’ But it’s ‘You started MoviePass!’ It’s different than I thought … My role in it is exactly what it was supposed to be.”

Editing by Siddhartha Mahanta and Nathan McAlone.

SEE ALSO: Regal Cinemas launched an unlimited movie-ticket subscription starting at $1

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