Based in New York and founded by technology and entertainment entrepreneurs Stacy Spikes and Hamet Watt in 2011, MoviePass allows users to purchase access to a movie a day for a single monthly subscription fee. It was originally funded by major investors including True Ventures, AOL Ventures, Lambert Media, and Moxie Pictures. In June of 2016, the company named Mitch Lowe, a former executive of Netflix and Redbox as its CEO. In short, it has had significant heavy hitters creating, backing and running the company.[1]

Further, it seemed to understand an important segment of its market – movie loyalists who frequently go to the movies. As a result, the MoviePass subscriber base grew quickly (to more than 2 million in February of 2018) as its $9.95 per month fee for one movie a day (as of August 2017) was a great deal.[2]

However, since its launch, MoviePass has faced objections from major cinema chains. AMC Theaters has been one of the more vocal critics, saying that MoviePass “would not be welcome” at its theaters in late 2017 (AMC has recently launched a subscription service at its own, one valid at only AMC Theaters). Many of the objections relate to concerns about the sustainability of the MoviePass business model. There is merit in these concerns: in July

2018 Helios and Matheson Analytics (who purchased a majority stake in 2017) filed to raise $1.2 billion just to keep MoviePass solvent, while auditors doubted its ability to sustain operations.[3] Its viability as on ongoing enterprise remains uncertain.

On the face of it, the objections seem odd since the theaters get revenue from filling their seats (seats are perishable after all – a seat that goes unsold for a movie showing is revenue lost forever) and higher occupancy means additional concession revenue as well. Further, the movie theater gets full price for the ticket from MoviePass. Again, on the face of it, one wonders why there is resistance from the theaters; filling seats that might otherwise go unsold is, surely, a good thing.

The Folly: A Startup’s Scale must support the business model – in this case, scale actually hurts the business, leading to an unsustainable business model.

Since MoviePass pays theaters full price for tickets, here are two possible effects on theater pricing, neither good for the theaters or the sustainability of MoviePass:

• Upward pricing pressure due to demand effects. Any startup knows that “speed to scale” is important – scale usually brings lower costs and potentially “network” effects that make rival entry more difficult. This is the ironic twist that leads to sheer folly in this case: here, such scale actually hurts the viability of the business. As the number of MoviePass subscribers increase, the demand for tickets increases.[4] This increase in demand exerts upward pressure on ticket prices. Further, theater owners know they have a base (now over 2 million strong) of MoviePass subscribers who are entirely price insensitive (MoviePass pays full price while demand is generated by their subscribers who have an incremental ticket cost of $0). Thus, while most startups are able to reduce costs as scale grows, MoviePass is likely to experience significant increases in costs as scale grows. In a world characterized by seating scarcity in theaters (e.g., during an economic growth period, in select geographic markets, for high demand movies, etc.), the effect will be even more pronounced.
• Perceived value of theater tickets erodes. For MoviePass, as the number of subscribers grow, the perceived value of a theater ticket is likely to decline since more and more people are paying significantly less than full price for each movie they attend (why pay over $10 for a single ticket when my neighbor or person sitting next to me is paying $9.95 for the entire month?!). This would naturally face resistance from the theaters (no firm ever wants the perceived value of their market offering to decline; this is almost invariably fiercely protected), likely resulting in reactions from outright bans (as by AMC and Landmark) to competitive launches aimed at MoviePass (as occurred in August of 2018).

In building a strategy, we try to build strategies that are robust to future states of the world, i.e., strategies that do not depend upon our forecast of the future being correct. We also try to build business models that are self-reinforcing (e.g., Amazon’s “Flywheel of Growth”).[5]

Unfortunately for MoviePass, this was turned on its head. Every possible scenario leads to its demise. As their subscriber base grows, MoviePass costs are likely to increase, while understandably facing fierce resistance from theaters.

This is sheer folly: a classic example of an unsustainable business model at work.

How the investors could not see this is the biggest – and most vexing – question!

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[1] Key sources: https://en.wikipedia.org/wiki/MoviePass , https://www.slashfilm.com/amc-theatres-banning-moviepass-probably-not-possible/

[2] Operationally, the company signed a deal with MasterCard that provides users with a special credit card linked to an app that allows people to check in to a movie and pay for the ticket using either the app or the card.

[3] https://www.nytimes.com/2018/07/29/business/moviepass-service-outage-finances.html

[4] This increase in demand happens in two different ways: via existing individual subscribers (movie-goers are paying substantially below market prices) and via the new subscribers that are added.

[5] See, for example, https://www.inc.com/jeff-haden/the-1-principle-jeff-bezos-and-amazon-follow-to-fuel-incredible-growth.html