MoviePass

Mitch Lowe knows a thing or two about selling movies. Ever heard of Netflix or Redbox? He spent over a decade growing their DVD businesses big enough to put Blockbuster in its grave.

Now, he's helming a company with an even more outrageous idea: $10 a month for all the movie tickets you want. For that flat fee, you get one movie ticket per day for any movie in practically any US theater, the company announced Tuesday.

How can his company, MoviePass, afford all those tickets? Is MoviePass a scam?

Those were the thoughts going through my head after AMC, the nation's largest theater chain, issued a press release Tuesday proclaiming that MoviePass isn't welcome at any of its 8,000-plus locations -- a sizable chunk of the 36,000 screens Lowe's company claimed were already part of MoviePass' "Theater Network."

According to Lowe, who spoke to us Tuesday evening, the truth is even wilder. MoviePass doesn't actually have partnerships with major theaters, or much of a relationship at all.

Instead, it has a patented technology that makes a MoviePass practically indistinguishable from a credit card -- and very hard to block. And if they figure out a way, says Lowe, he'll make it even harder.

Here's an edited transcript of our interview.

(The big four US theater chains -- AMC, Regal, Cinemark and Cineplex -- didn't respond to requests for comment.)

AMC says it's looking at ways to block MoviePass, but why would AMC need to block it? How does your system work?

Lowe: Essentially, it's a Mastercard. We send a Mastercard credit card to our subscribers.

Our patent is kind of a remote, GPS-driven credit card authorization technology. Essentially what we do is tie a credit card to the unique ID in your phone. You pick the movie, the theater and the showtime, and when you get within 100 yards of the theater with your phone, you check in.

Since your bank knows exactly the credit card ID of the machines at the theater, within two seconds, it makes that credit card work -- but only at those machines, for only about 30 minutes and only for the amount the ticket costs.

MoviePass

If you don't buy that ticket within 30 minutes, the money comes back to us.

When our subscribers go to the box office, they hand over their MoviePass credit card, [and box office workers] swipe it and they give our customers the ticket. We pay the full price of the ticket, whether our customers want to go to one movie or ten movies.

What's crazy about AMC's statement is our customers go twice as often, spend 123 percent more on concessions each time -- which is at least 80 percent margins for the theaters -- and we pay full price.

It's absolutely crazy to say, "We don't want your money." We're not asking for a discount, we're not asking for a cut of revenue. We hope over the next couple of years we'll show ourselves to be part of the movie entertainment ecocsystem... if we do that, then we want to sit down with the theaters, the studios, and figure out how we all can make more money.

We think there's a group of customers out there who've stopped going to the movies as often as they used to -- particularly between the ages of 18 and 39 -- who'd love to go to the movies more often, but have two problems. One is the risk of seeing a bad movie, and the second is they already belong to Netflix and Amazon and they can just wait and see it later.

People talk themselves out of going. "I've gotta get there. It might not be a great movie. It's going to be 10 bucks." Mitch Lowe

Usually people talk themselves out of going. "I've gotta get there. It might not be a great movie. It's going to be 10 bucks. If I'm already paying for Netflix, I'll just wait until it comes out."

We think that's hurting the movie business. By giving people the insurance... if you see a bad movie you can just walk out and trash it to your friends the next day, and not feel bad that you wasted 10 bucks. That way, it can actually be fun to see a bad movie. Or see a movie you didn't think you'd like and fall in love with it. We think we can expand people's interest in film, make it more enjoyable and result in more people going to the movies more often.

So you don't have deals with the big theater chains?

No, those are all agreements that they've done with their credit card processor, whoever they might be.

If you agree to take Visa or Mastercard, you've agreed not to discriminate between one card and another. If you're a company like AMC and you say I'll take this Mastercard but not that Mastercard, you're violating the rules of the credit card company and you've lost your ability to take any Mastercard after that.

It's almost like if I went out and said you no longer could see Warner Bros. movies at AMC. Even though it wouldn't be true, I would be damaging their business, and they would be upset. That's what they're doing to us: They're confusing customers and starting to make customers believe that MoviePass cannot be used at AMC theaters. That's not true.

Can they actually avoid serving your customers?

I'd love someone to explain how what we're doing is not legal. We're sending our customers to buy full-price tickets from them, and they're not paying us a single penny.

If they did that, I'd just switch to a different credit card company. Mitch Lowe

I ran Redbox for eight years, and we were one of the largest credit card processors... we were doing more than 2 million credit card transactions a day. I think the only way they can stop taking our credit card is by violating the rules of Mastercard, which would mean they'd have to give up Mastercard altogether. If they did that, I'd just switch to a different credit card company. If they instructed their staff to not take cards that say MoviePass on them, I'd take the logos off our cards and create multiple different colors of card.

There's very little in my opinion that they can do... and tell me why a company that's struggling, reporting that they're missing their sales goals, why would they turn away business?

They're essentially saying, "Don't get used to these low prices, because MoviePass will go out of business and then you won't be happy with the high prices we're charging." That's exactly what Blockbuster said, when they said, "Don't go to Redbox and spend a dollar a night, keep spending $5 for a rental with us," and look who's still in business.

Have they threatened legal action?

Not quite in those words... they're asking their legal council to see if they can opt out or not accept our business.

Now playing: Watch this: How the crazy $10-a-month MoviePass deal works

One thing that confused me: MoviePass advertises these theaters are part of its "Theater Network," as if they're participating in some way.

All we're really saying is if you're a MoviePass subscriber, you can go to the following theaters. We're not saying we have a deal with them. It's like Visa saying that you can only use your credit card at certain locations.

You can essentially use our card at any theater that uses a credit card; we've just chosen to support only 91 percent of theaters in the country because we don't include theaters that are IMAX or 3D, or some of the high-end luxury theaters that have superhigh ticket prices.

The White House/Flickr

If it's just a credit card, why not allow users to tack on extras like IMAX or 3D, or popcorn and a soda?

Our long-term goal is to make that card available for our subscribers to order concessions and have [those charges] appear on their monthly bill, as opposed to having to pull their credit card out.

What we really want is to build an experience where everything is done on your phone: You pick your movie, seat, concessions, and they're all waiting in the theater, all prepared for you when you walk in. A bar code pops up on your phone, you show it as you walk in and go right to your seat.

That is a multiyear process and it involves integrating with the theater's point-of-sale system. Over 6 percent of our theaters are integrated with us and are true partners. You can pick your seats, and we're working on your ability to pick concessions But that means 94 percent of our theaters are not yet at that point.

So AMC's core beef with you is that it believes you're going to fail, but not before artificially lowering the price of a movie ticket in consumers' eyes. How can you afford to do that?

Before I answer that... doesn't that sound a little bit disingenuous? That is like saying you should never take advantage of a sale, never take advantage of a company offering an amazingly low price.

It's clearly not the reason why they're coming out and making these statements.

What's the real reason?

Look at it this way: Two weeks ago, when nobody had ever heard of us, their stock dropped 20 percent. Today, their stock drops another fraction, and they come out with this statement. For a company that accounts for one-thousandth of their business, they suddenly make a big deal about us. There's clearly something else going on.

I think they're having challenges that they haven't been clear with the investment community about. Several weeks ago they lost the confidence of the investment community and now they're trying to create a distraction.

Do you think the investment community will be distracted?

When I think about the things I wish I'd done a better job with today, it's making clear we're paying full price to AMC and every other theater, except for a small group of theatres that are working in close partnership with us. Because I was startled by the impact on their stock.

We probably do as much business in a year as they do in four hours, and yet the investment community thought that somehow we were going to impact the largest theater operator in the world? It just... we've either got a lot of credibility in getting really big, or it was just one more thing to be concerned about, or I didn't make it clear that we're paying AMC full price.

AMC is going to grow as a result of this, especially given those slow months coming up. September and October are some of the slowest months in the theater business, and our subscriber base surge is going to get people to go to AMC theaters. What better time to take advantage of someone else footing your bill? It baffles me.

So, my question: How can you afford to let me have two movies for the price of one, let alone up to 31 in a given month?

I've been in the retail business for a long time, and it's a science. It's the same thing they said about Redbox... How in the world can you afford to rent a movie for a dollar a night when Blockbuster is charging $5 for a rental?

It's all about utilization, about technology, about efficiency. If we can get people to the theaters more often and make the studios more money, we believe they'll share the revenue and profits. We're putting millions of dollars on the line to prove that we can be a valuable member of the moviegoing ecosystem... and in advance we're not asking for a single cent. We're going to deliver more and more business at the same price... and when it becomes more interesting, we want to talk about sharing in your incremental profits.

When we started Netflix (in the by-mail days), we realized we had more demand for hit titles than we could satisfy, so we went to the studios and said, "Give us three times the copies for twice the price." They said, "Why should we do that?" So Netflix went out and bought its own movies at three times the norm and showed the studios that revenue sharing could maximize their returns... and now today everyone is on revenue sharing. It became the norm.

Why don't the theaters build it themselves?

They could absolutely do it. I've never been afraid of competition. When we launched Netflix, Blockbuster kept saying they could do it. We actually tried to sell half of the company to Blockbuster, and they said, "Why would we do this? We can just build it ourselves." And they did, but billions of dollars later, they closed down. Eventually, they opened 10,000 Blockbuster Express kiosks, and they failed.

They needed to build the infrastructure, though. Does it change anything that the theaters already have their own infrastructure?

It definitely makes it easier for the AMCs of the world to offer their own service. The downside for a significant number of consumers is that if you don't use AMC all the time, the service will be less valuable than a service like ours when you can go to any theater.

You didn't quite answer my question: How can you afford to offer all these movie tickets at $9.95 a month?

I've spent the last year -- since I invested in this company and became CEO -- testing out various pricing models and looking at consumer behavior, seeing who the different prices attract.

Our primary subscriber is someone who, today, is only going to between 3 and 6 movies a year, and now they'll go to between 6 and 9 instead. I think you can do that math: Divide 9 into $120. Or even divide 12 into $120, and you start to understand there's a small percentage of people who'll get an amazing deal, go to 20 movies a month and tell everybody how amazing it is, but the average consumer we're getting is going 3 to 6 times and now will go 6 to 12 times a year.

The average consumer [...] will go 6 to 12 times a year. Mitch Lowe

I could be wrong, but I've been in the video retail business for 35 years. I was one of the couple of people in the room that came up with all-you-can-eat Netflix. I was one of the two people who came up with the dollar-a-night Redbox. I think I spent 13,000 hours working behind a video store counter. I don't think there are too many people who know how consumers want to consume entertainment like me. I'm convinced, and I put my own money behind this to make it work.

If I'm wrong, I'm wrong, but I truly believe we can get people to enjoy going to the movies, to go more often and to support the artistic community. When our customers double the frequency, all the increase is on films that gross fewer than $20 million at the box office. They're experimenting with films they never would have seen if they had to pay $10 or $12.

Did you have a pilot program or some analysis to give you those numbers?

We've done a lot of testing: a combination of field testing at a dozen different price points in various markets and in various regions over the last year.

At every price point above $10, people sat and calculated whether it was worth it. At prices below that, people said they'd be crazy not to take this deal.

How do you think it'll play out between you and the theaters?

I think in the end, we're going to be a great partner with AMC and the other big theater chains, and especially the independent theaters. I think it'll take some time, but everyone will want to sit down and talk and figure out how we can share data and help each other, but it may go through a rough patch before we get there.

I hope you understand I'm not litigious, I think [lawsuits] are a waste for consumers and businesses, so I'm always looking for a way to work together. Primarily I want to deliver a great product to our customers and create value, and I hope other people and other businesses will see that.

Do you think they will?

Who knows? I think it's 50/50. The thing I feel terrible about is that their stock suffered today. That is absolutely the last thing I thought would ever happen.