What does it mean when a publicly-traded business model is knowingly “unsustainable?” As a business ethics keynote speaker, business ethics consultant and book author, it is all too clear that fraud is afoot.
Sarah Whitten, CNBC business writer (November 4, 2022) related the details of the CEOs of MoviePass schemed up a business fraud where investors were misled into believing that for $9.95 per month, there could be access to unlimited movies. It was a great opportunity.
When the CEOs (Theodore Farnsworth, 60 and Mitchell Lowe, 70) laid out the business model to investors in 2017, they pitched the unlimited movie plan “as thoroughly tested, sustainable and profitable.”
However, they knew they were offering a scam and that neither they nor the parent company possessed the technology to take subscriber data and make the plan into a monetary reality.
When the intentionally faulty plan was presented it “skyrocketed to popularity in 2017 because of its seemingly too-good-to-be-true unlimited movie pass that initially offered customers one movie voucher per day for $30 to $40 a month. “
The fitness center model
Anyone who has frequented a gym understands that many of the subscribers join in January and by March or April they fizzle out. It is the kind of model that Farnsworth and Lowe convinced themselves would happen with MoviePass. Their contention was never tested. According to CNBC:
“MoviePass subscribers began to use the service too frequently and the company started to lose money quickly. In an effort to stay afloat, MoviePass began limiting the number of titles available among other restrictions. The service underwent several iterations of price and offerings before shuttering.”
It could have never sustained itself – and they knew it.
The Department of Justice stated that “Farnsworth and Lowe are alleged to have falsely claimed that the number of tickets MoviePass subscribers were purchasing as part of their subscription was declining over time. Instead, the pair had directed employees to implement tactics to prevent subscribers from using their unlimited service.”
The CEOs coerced employees to discourage those who purchased the pass. This, of course put employees in the position of committing fraudulent actions themselves. Everyone in the company knew they were pushing a concept that could never have worked.
In fact, in 2019, the movie industry itself told MoviePass that the model would be impossible to implement but MoviePass moved forward with the scam all the same. The fitness center model could never have been successful; people like the movies more than doing push-ups!
The two CEOs of the MoviePass “are charged with one count of securities fraud and three counts of wire fraud. If convicted, they each face a maximum penalty of 20 years in prison.”
What this case illustrates
When a business model of this magnitude is flawed from the beginning and the management knowingly creates a false narrative, it is an indication that investors are being intentionally misled. The fact that the basic concept was never tested indicates that the executives only saw this as a way to line their own pockets.
Whether the need of the executives was for money or power is not known, but it was probably easy for them to rationalize they were dealing with the common people who really didn’t matter.
Business ethics requires a sense of ethical diligence, where those involved feel a sense of connection to those individuals who trust them. The MoviePass scam shows a lack of such connection and nothing more than an attempt to take advantage of a situation that was always flawed.
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