How card network rules help MoviePass disrupt the theater industry

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A situation brewing in movie theaters that hinges on card network rules could have broad implications for the entertainment industry.

By leaning on a Mastercard debit card, MoviePass is able to force theaters into accepting tickets purchased on a $9.95 monthly subscription model that at least one major chain would not have agreed to if it had the choice.

Under the card networks’ Honor All Cards policies, theaters must continue business as usual with Mastercard or risk a fight, putting Mastercard into the unwitting role of enabling a major upset in the movie theater business. AMC Theaters, the largest U.S. theater operator, is seeking a way to opt out of accepting MoviePass, which works in 91% of U.S. theaters.

“They can’t kick MoviePass out of AMC’s theaters because they’d have to stop taking Mastercard debit, and theaters don’t want to do that to their customers,” said Ted Farnsworth, CEO of New York-based Helios and Matheson Analytics Inc. (HMNY), which paid $27 million to take a 51% stake in MoviePass this month.

After the MoviePass price cut took effect, membership soared from 15,000 to 150,000 users in the first several days.

MoviePass pays full price to AMC and other theaters for tickets it resells at a loss, and HMNY envisions using data harvested from MoviePass to drive new revenue streams with deals, promotions and targeted advertising from theaters and movie studios to offset costs in the future, Farnsworth said.

“Most theater operators are enthusiastic about what’s happening, because we’re bringing thousands of people into empty theaters and driving fresh revenue, as people spend more on food and drinks when they feel like they’re getting a good deal on the ticket,” Farnsworth said.

The idea of using Mastercard debit as a way of forcing reluctant theater owners to go along with its lower-price strategy was mostly serendipitous, Farnsworth said.

MoviePass, launched in 2011, has long relied on Mastercard as the funding mechanism for its app out of convenience, though it’s a clunky process. Users who sign up for the app receive a plastic Mastercard debit card in the mail, which they load with value from a credit card and offer for payment at participating theaters.

When users select a movie and “check in,” their MoviePass ticket is enabled for 30 minutes on the card, which can be used only for MoviePass purchases. About 6% of U.S. theaters also support an electronic ticketing option within the app.

As the new majority owner, Farnsworth sees broad opportunity to work with theater owners to drive more overall business, targeting millennials who comprise more than 75% of MoviePass customers.

MoviePass isn't wedded to Mastercard debit, either.

“We foresee changes as we grow, because we’d like to enable whatever types of payments our users want,” Farnsworth said. “It’s probably always going to be a debit approach, but more and more payment will be tied to a phone.”

For the moment, MoviePass has AMC and other theater owners over a barrel because of its payment card deal, said Rick Oglesby, president of AZ Payments Group.

“There’s no telling how things may work out through the legal avenues that AMC is pursuing, but in the short term it’s pretty impractical for AMC to block MoviePass customers from coming to their theaters,” Oglesby said.

More significantly, as the subscription pricing continues to gain momentum, it may become pointless for AMC to fight on.

“The power MoviePass has really comes from the number of consumers participating, more so than the Honor All Cards rule,” Oglesby said, noting that Apple Inc. previously squeezed music studios for lower per-song prices, using similar leverage because of its vast consumer scale.

“MoviePass is aiming for a similar effect here. If MoviePass can build a large base of customers it will have lots of leverage, and the Mastercard approach is helping it get there,” Oglesby said.

Visa and Mastercard support the practice that merchants who accept one type of network payment card like a credit or a debit card must accept other types like it, said Stanton Koppel, an attorney with Bryan Cave in San Francisco.

But AMC may have a way out.

The Honor All Cards rule changed after the card networks lost an antitrust suit with merchants in 2003, said Tim Sloane, a director of payments innovation at Mercator Advisory Group. Merchants now can stop accepting one type of card from a network, like credit, and continue accepting debit cards from that brand, Sloane said.

For example, Walmart stopped accepting Visa credit cards in certain regions of Canada for a period in 2016, but early last year the ban ended. "One assumes (Walmart) won some concessions before they started accepting Visa again," Sloane said.

AMC was not available for comment, and Mastercard said the situation is a legal matter between AMC and MoviePass.

MoviePass is talking to Regal Entertainment Group and Cinemark Holdings, the other two big theater chains, and discussions are positive, Farnsworth said. MoviePass growth stalled under a higher-price model that went up to $50 a month for a subscription, but recent market research showed consumers were amenable to paying less for the service, according to Farnsworth.

“It made the most sense to offer a lower price across the board that was easy for consumers to understand, like Amazon Prime, and we figured $9.95 was the right price point for seeing a movie every day at the theater,” Farnsworth said.

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