Why MoviePass is failing
MoviePass seems like the perfect invention for an age of entertainment gluttony: an all-you-can-eat buffet of movies in theaters for one cheap monthly subscription. Why does the company seem to be teetering on the edge of bankruptcy?
Theory one: The people at MoviePass aren’t too bright, and got themselves into a business model that couldn’t possibly succeed.
Bringing disruptive innovation to pricing movie tickets must have seemed like a smart move. Movie seats are in a class of businesses— like airlines and hotels—that produce strange pricing incentives. A room in a hotel or a seat on a plane or in a movie theater is a rapidly wasting asset: As soon as the next day dawns or the flight takes off or the movie begins, you’ve lost any opportunity to sell it. Moreover, while it is expensive to operate a hotel, to put a plane in the air or to build a movie theater and rent films from distributors, it costs very little extra to add one more customer.
Ideally, you’d sell out every room or every seat, even if those last few customers aren’t willing to pay much more than the expense of cleaning up after them. But if you sell tickets too cheaply to those last few customers, the other customers are bound to notice and demand the same price. That way lies bankruptcy.
Airlines get around the problem by offering cheap fares to customers who shop strictly by price, but provide a wide array of options—from more leg room to first-class travel—for higher fees.
Movie theaters haven’t really done this; for a long time, to the puzzlement of economists, they’ve charged basically the same price for popular movies and unpopular movies, for hot new releases and old ones, for Friday nights and Tuesday afternoons.
In theory, MoviePass could solve that problem from the other end: Entice price-sensitive customers to go to more movies by making additional movies essentially free. The details of the deal have varied over time; earlier this year, $7.95 monthly let you see one movie a day. The idea should have appealed to movie-theater owners because more customers mean increased concession sales at little additional cost. Once MoviePass had demonstrated proof-of-concept, theaters could have been expected to sell tickets to the company in bulk, at a discount. Which brings us to . . .
Theory two: Discount customers aren’t necessarily good for businesses.
Notice that this business model—“We’ll bring you a bunch of new customers you can up-sell on extras”—was essentially the pitch that the e-commerce company Groupon made to businesses. New discount-loving customers flooded in, but owners soon complained that the customers were essentially up-sell-resistant cheapskates who often ended up costing the businesses money. Which is why Groupon no longer offers such great deals and why the stock now trades at a sad fraction of its price at its initial public offering.
Deep discounts can also cannibalize a profitable business. Who was most likely to use MoviePass? People who go to the movies a lot! If theaters had supplied MoviePass with the deeply discounted tickets that its pricing model required, the theaters would have been passing up the opportunity to sell more full-price tickets to loyal customers. No wonder theaters balked.
And since a single movie ticket in the largest markets costs more than a monthly MoviePass subscription, the MoviePass business model ended up as a version of the old economics joke: “We’re losing money on every unit—but we’ll make it up in volume!”