Entrepreneurs

Here's what all of MoviePass's recent problems could mean for you

Cassie Langdon holds her MoviePass card outside AMC Indianapolis 17 theatre in Indianapolis.
Darron Cummings | AP
Cassie Langdon holds her MoviePass card outside AMC Indianapolis 17 theatre in Indianapolis.

It's no secret that MoviePass is facing an uncertain future — but, what does that mean for its customers?

The popular, but frequently troubled, start-up movie ticket subscription service announced a new higher pricing model Tuesday, as well as blackout time periods for some new release films. This came after customers were temporarily unable to use the service on Monday and on Thursday, reportedly because the company was short on money to pay theaters for the tickets its customers were trying to reserve. Parent company Helios and Matheson was forced to take out a $5 million emergency loan to ensure that MoviePass could afford to keep processing payments going forward, the company said in an SEC filing on Friday. MoviePass initially blamed the problem on "technical issues" in posts on Twitter last week.

The price increase — from a standard monthly rate of $9.95 to $14.95 — will reduce the amount of money the company is burning through each month by 60 percent (MoviePass was losing more than $21 million each month, according to a May filing), but the move is also the latest sign that the company simply needs more money if it wants to keep its subscription service up and running. In response to a request for comment, a MoviePass spokesperson directed CNBC Make It to the company's press release announcing the new pricing plan.

Some analysts are more optimistic than others: Advisory firm founder Eddie Yoon, told FastCompany that MoviePass may be able to survive by "pissing a lot of people off" with changes like higher prices. But Wedbush Securities analyst Michael Pachter told the publication MoviePass still has "a bad business model" because the company can't control how much it has to spend on movie tickets at theater chains.

Parent company Helios and Matheson's stock price briefly spiked on Tuesday after the MoviePass announcement, reaching $1.81 per share, before ultimately tumbling again to close at just 50 cents, leaving it down by 38 percent on the day.

What it means for customers now

So, where does all this leave MoviePass subscribers, some of whom are being charged on a month-to-month basis, while others are locked into annual subscriptions that required an upfront payment? CNBC Make It asked Omri Ben-Shahar, a professor at the University of Chicago Law School who specializes in contract law and consumer protection some of the questions on MoviePass users' minds.

What can you do about all those changes MoviePass keeps springing on users, like higher prices and blackouts?

MoviePass's latest price change (to take effect within 30 days, according to the company) and blackouts (some new release movies will have limited availability during their first two weeks in theaters) are just the latest in a string of tweaks the company has made to the terms and conditions of its subscription plan, which some customers have deemed a "bait and switch." In recent months, MoviePass also suddenly announced changes such as the introduction of "peak pricing," where users have to pay an additional fee to book tickets to certain high-demand movies, or only allowing subscribers to see each movie once.

The MoviePass terms of service are somewhat vague with regard to service outages or movie blackouts. But the contract does note that future subscription plans may include premium or "capped plans" that could limit the movies a user sees per month, and the terms also include a disclaimer notifying users that MoviePass "does not promise that the site or any content, service or feature of the site or service will be error-free or uninterrupted, or that your use of the service or site will provide specific results."

Ben-Shahar, who looked over MoviePass' latest terms of service, found that the company says it essentially has the right to change or modify its service at any time in its sole discretion, including prices "without prior notice." The law professor notes that just because that language is in the contract, that doesn't mean MoviePass can simply change the nature of its service dramatically, or without limit — courts often side against companies that change the terms of a deal without properly notifying customers or giving them a reasonable opportunity to drop their subscription.

"There needs to be some ability for consumers to either reject that proposed change or to terminate the service without undue burden or any cost," Ben-Shahar says.

Of course, MoviePass could have some protection in that case, as users are typically made aware of changes to their plans by an e-mail or a notification in the MoviePass app. However, Ben-Shahar argues that, unless MoviePass gets "express, fresh agreement from the consumer" to continue with the plan in light of any new changes, then users might have a legal argument to end their subscription early.

As far as how a company like MoviePass gets such an agreement from users, that could mean that you click "I agree" to new terms of service on a pop-up message in the app, although the MoviePass terms of use also includes a statement suggesting that users automatically agree to the company's terms simply by using the site and the service. "By using the service and the site, you agree to these terms of use. If you do not agree, do not use the service or site," the company says on its website.

"Consumers have to have a meaningful choice, in the sense that, if a consumer wants to say 'No, I don't want to do this,' then, MoviePass says, 'OK, then you can't continue.' And, the consumer has to be able to quit the service without excessive burden or cost," Ben-Shahar says.

In reality, however, if users feel they have been denied the choice to either agree to new terms of use or opt out of their plan without incurring further charges, their options are fairly limited. You can complain directly to the company's support staff (though MoviePass' customer service is notoriously unresponsive, it is worth noting the company did promise to issue refunds for users affected by a service outage on July 6) or you could even try suing the company for a refund, alleging a breach of contract or even "bait-and-switch" fraud. However, it goes without saying that any lawsuit could result in a lengthy, potentially expensive process (especially if you're seeking a refund that may only be in the range of $10, for a monthly charge, to around $90 for an annual plan) that may or may not yield any positive results.

For what it's worth, MoviePass' terms of use include a section on "arbitration and small claims proceedings" in which the company claims that its contract with users gives it the right to choose to have any legal dispute brought by a subscriber decided through an arbitration process, instead of in court, while also claiming that users waive their right to seek a class action.

Will users get their money back if MoviePass files for bankruptcy or goes out of business?

Don't hold your breath.

The law professor warns that MoviePass subscribers should not hold out too much hope for a reimbursement or some other type of settlement payment should MoviePass eventually stop operating due to a lack of funds. Obviously, that would mean the company had broken its contract with its subscribers, but it would also mean MoviePass would likely not have the money to settle its debts with anyone, including subscribers who have time left on their plans.

"If they are going to close up shop and no money is left, then consumers are screwed, the employees are screwed, the banks are screwed, the investors are screwed," says Ben-Shahar.

If MoviePass files for bankruptcy, it probably wouldn't "have any assets, and the only people who would get anything would be the bankruptcy lawyers," Ben-Shahar says.

What about all the customer service problems?

MoviePass has an "F" rating on the Better Business Bureau (BBB). The rating is based on 13 factors, including 1,837 complaints filed against MoviePass and failure to respond to 72 complaints filed against its business. It is not a BBB accredited business. To be an accredited BBB business, the business must apply for accreditation and is then evaluated on whether it meets BBB accreditation standards including, "a commitment to make a good faith effort to resolve any consumer complaints."

Among the pattern of complaints over billing and fulfillment issues, the BBB says that a large amount of consumers have alleged that they are not shipped their membership cards in a timely fashion, despite being charged for the subscription service as soon as they sign up, and are essentially ignored by MoviePass after attempting to contact the company's customer service department.

Indeed, MoviePass customers have expressed severe frustrations over the service's lack of customer response. On Twitter, customers recently aired grievances over not being able to use MoviePass for most showings of "Mission: Impossible — Fallout," which was by far the highest-grossing movie of the past weekend at the domestic box office. There is even a Twitter account dubbed "MoviePassClassAction," which is described as an account "collecting information on MoviePass business practice for an impending class-action suit."

The company's BBB profile is also plagued with negative customer reviews; 269, to be exact. Meanwhile, it boasts 41 positive reviews and one neutral review to comprise its 311 total customer reviews.

"Like many young companies, MoviePass failed to make customer service a high enough priority, and it appears that they were not prepared for the rapid growth that they have experienced. It's a good cautionary tale for hungry young businesses…you absolutely cannot skimp on customer service or you will end up with unhappy consumers, poor ratings, and bad publicity," BBB national spokesperson Katherine Hutt tells CNBC Make It. "It's not too late for MoviePass to fix this, and BBB is always happy to work with companies that want to improve their customer service."

According to law professor Ben-Shahar, while frustrating, poor customer service alone is not cause for a lawsuit, but legitimate complaints, like being billed for services that have not been provided, could form the backbone of a valid legal action.

The future of MoviePass

The recent setbacks are just the latest for the start-up that have raised serious doubts that the company could continue to survive while offering a seemingly too-good-to-be-true subscription plan (before the most recent price change, subscribers could see one movie at a participating theater each day for just under $10 per month), which fueled MoviePass' rapid jump from 20,000 users in June 2016 to more than 3 million today.

MoviePass's major monthly losses led to concerns that MoviePass would soon run out of money, as the company said in May that it only had about $43 million in available funds. A lifeline in the form of a $300 million line of credit, temporarily eased concerns, but the recent service outages and emergency again stoked fears that MoviePass might not be able to stay afloat much longer.

It remains to be seen how the new pricing will affect the company's situation.

In a December interview withCNBC Make It, MoviePass CEO Mitch Lowe was confident and enthusiastic about the potential of the service. Lowe is known in the industry as something of a disruptor, having served as an executive at Netflix in its early years, from 1998 to 2003, and later as president of Redbox from 2009 to 2011. Nearly six months ago, when asked what the number one attribute leaders need to have to invoke change within a company, he said it was prioritization.

"You've got to understand how to prioritize what needs to get done," Lowe told CNBC Make It. "Many, many times when you first start out in business, you want to do everything as well as possible and you've got to understand that some things you just have to prioritize. You have to be able to live to fight another day, and to live to fight another day might mean funding is the most important."

Now, whether MoviePass will be able to fight to see another day is one of the questions on the minds of many of its 3 million subscribers.

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