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Four Lessons from the Demise of MoviePass, Part 1

At the end of 2017, MoviePass was taking over theatrical films. With a subscriber count eventually topping 3 million, it was a disruptor, a movement, the “Netflix of theaters”. Its $9.95 a month, one movie a day plan proved that soon all tickets to movies would be sold through an app on your phone. Subscriptions were the future.

Well, things didn’t go according to plans. As 2018 wore on, MoviePass nearly bankrupted its parent company. It became the subject of multiple lawsuits and investigations. In December, it changed the pricing on its subscription plans. Again. After previous changes in July and August, and then another one speculated about in January of this year. (Though I could have easily missed one. Or twelve.) On March 6th, MoviePass told the Wall Street Journal it planned yet another strategy reboot.

The MoviePass stock now trades for around a penny.

Before we get too far in to 2019, let’s pause to understand what went wrong with MoviePass. I have four lessons that the TV folks of the world can learn from the fall of MoviePass. As a bonus, I’m throwing in four companies who may be making similar mistakes.

Lesson 1: Beware the Inactive Subscribers

My theory is that subscriptions come in one of two forms: subscriptions where customers lose and companies collect huge margins; or subscriptions where customers win, but the companies lose tons of money. If you think of cable, cell phone, insurance or healthcare companies, they’re all examples of the former. (Doesn’t everyone hate their cable company?) If you think digital media, well that’s mostly the latter. (Doesn’t everyone love Netflix?)

The key trick for subscriptions is either having a service customers must have (like insurance), localized monopolies (like cable companies) or digitized goods so the marginal cost of additional users is low (like streaming video or music). Otherwise, as a subscription service, your goal is to get people to pay you regularly for something they aren’t using. Or that they wouldn’t keep paying you for if it wasn’t automatically debited from their accounts.

MoviePass was an example of a subscription customers love, but to survive it needed to become one customers would begin to hate. This—more than the epic cash burn—was why MoviePass failed. It needed inactive customers to make money. Here’s a table that illustrates that (with back of the envelope calculations) for hypothetical customers:

Table 1: Economics of MoviePass by Movies Seen

Essentially, MoviePass offered a stark choice: use the service frequently, and cost MoviePass lots of money, or forget to use it entirely, which means you shouldn’t have subscribed in the first place. Over the long term, this means that MoviePass’s most valuable customers are the ones who aren’t using the service. That’s an adverse incentive, isn’t it? (There’s some evidence that the current “subscribers” to MoviePass fall into that bucket and now see 0.7 movies per month.) Since MoviePass averaged between 1.7 and 2.2 movies per customer, it meant they lost about $5 to $10 per subscriber:

Table 2: Economics of MoviePass by Average Movies Seen

To be profitable, they needed consumers to give them $4 per month, on average. Frankly, it is a tough long-term business model to need customers who don’t use your product.

Current Example: MoviePass Replacements

Do any companies feature business models designed around people NOT using the service? Sure, the replacements to MoviePass. Sinemia offers a similar business proposition: sign up for a fixed price, and see a set amount of movies. The difference is that Sinemia offers a wide variety of tiers to choose from. That said, at the end of the day, the ideal customer for Sinemia is one who signs up, uses it for two months, forgets about it and never uses the service again.

Even now, Sinemia is showing signs that its business model may end up as mucky as MoviePass. Instead of one low tier, right now they offer seven, for varying rates, with tons of promotions. Meanwhile, Sinemia’s 2018 was spent variously adding fees to purchases, adding restrictions like asking for an ID, or kicking off subscribers who use the service too frequently. In the long run, selling subscriptions without becoming a service customers hate will be tough, unless you are the theater itself.

Lesson 2: Beware the Aspiring Monopolist

MoviePass didn’t just have plans to increase their revenue, they had an ingenious way to lower costs: once they achieved a dominant market position, they could force theaters to negotiate cheaper prices for tickets. Stated cynically, they aspired to monopolize ticket selling. By January of 2018, they believed they had started to gain this advantage with 1.5 million subscribers and they picked  a fight with AMC by asking for a $3 cut from ticket sales and another percentage of concession sales.

The logic isn’t new—many companies are able to negotiate cheaper prices due to their size—but the audacity was still more than a bit bold. MoviePass hadn’t actually figured out a way to acquire their core product for less, but wanted use their size as a tool to force down prices. This isn’t “adding value”, it’s taking value from the theaters. Here’s a table showing the same economics as above, with theaters included, and MoviePass lowering their ticket prices by 1/3rd:

Table 3: Economics of MoviePass, with Theaters Included

This is “rent seeking” at its finest. In other words, instead of creating value, you find a way to insert yourself in the value chain and insist on a cut of the profits, even though you don’t deliver either value, or more value than you actually keep. Being explicit about that is definitely a gutsy move.

Even ignoring the legal implications, it’s also risky because not many firms wind up as the largest firm in their industry without any competition. Usually monopolies take years to grow into an entrenched position. MoviePass needed to do it in months before they ran out of money. They ended up losing their fight with AMC, who bet that MoviePass would run out of cash before they would. AMC was right.

Who else could this apply to? The FAANGs

Not in every case, but the current trend in Silicon Valley is taking a dominant market position and relying on network effects to beat off all challengers. Felix Salmon at Slate summarized Netflix’s approach better than I could with his headline, “Netflix Can Either Become the Dominant Media Monopoly of the 21st Century or Go Bust” and that pretty much captures it. But I don’t want to pick on Netflix alone:

When it comes to ride-sharing, scooters, office space, short term rentals, flight booking, dating sites, food delivery, music, search, email, payments, and countless other industries, often the goal of tech via disruption isn’t just a place at the table, it is the entire table.

 

Tomorrow, I’ll discuss two more lessons we can learn from MoviePass.

 

(The Entertainment Strategy Guy writes under this pseudonym at his eponymous website. A former exec at a streaming company, he prefers writing to sending emails/attending meetings, so he launched his own website. You can follow him on Twitter or Linked-In for regular thoughts and analysis on the business, strategy and economics of the media and entertainment industry.)