How MoviePass changed the movie industry and still lost
AMC‘s subscription-based program may signal the end for MoviePass.
AMC decided that they will launch a subscription-based program to rival MoviePass. While the two are different in both price points and limitations, they are both a departure from the traditional pay-per-ticket business model. MoviePass tried to fix the movie industry, and while the business is far from profitable, there is evidence that they have created a lasting impact. Pricing can change customer behavior and expectations, so it may just be that MoviePass has changed movie-watching for good.
The MoviePass Value Proposition — what is MoviePass?
As an introduction, here’s what problem MoviePass aims to solve and how it currently operates.
The company provides a service which allows you to watch an unlimited number of movies at >90% of domestic theaters for just $10 per month.
CEO, Mitch Lowe claims that ticket price is strongly deterring people from going to the movies today and the data shows that price has consistently climbed even with alternatives like Netflix providing a lower-cost alternative to movie-going.
In this MoviePass world, consumers are able to pay $10 per month for up to one movie per day instead of the national average of ~$9 to watch a single movie. This actually works out to a pretty simple model as summarized by Lowe:
The company works by buying movie theater tickets for its subscribers directly from exhibitors at whatever price they offer.
As an illustration, if you were to watch two movies per month, MoviePass would charge you $10 that month and they would pay ~$18 to whichever movie theater you purchased from. These economics explain how the company lost nearly ~$100M in the first quarter of 2018. Clearly not sustainable, so let’s examine what would need to be true for this to be a long-term viable business.
MoviePass Strategy — what did they think would happen?
The traditional pricing model is on a pay-per-ticket basis, but now MoviePass shakes things up and says that maybe a subscription model is better. We can simplify the types of people using subscription services into two groups:
- the high volume movie go-er: This person is milking the subscription model and getting a good value from MoviePass. They probably prefer this to the alternative where they were paying for each ticket and going to many movies. As a result, MoviePass takes a big loss by subsidizing the ticket cost for these customers. Movie theaters rely on this type of customer are are making more money on them than MoviePass can.
- the low volume movie go-er: This person doesn’t really go to that many movies, so they are generally better off sticking to buying tickets individually. The very interesting possibility is that these customers are converted to a high-volume movie go-er. What if people who used to watch 2–3 movies a year are now watching ~10 and paying more? If that was the case, MoviePass is valuable to theaters because they are bringing in new revenue.
So let’s look at the most compelling way in which MoviePass can become profitable. They would have to start taking a cut of the additional profit that movie theaters are now getting. Here’s a quick illustration of what I think MoviePass hopes will happen:
Consumers are now going to more movies than before because it is less expensive for them to do so. Depending on how elastic demand is, this may or may not result in more revenue. Each time they go to the movie, they grab a popcorn, beverage, or maybe they even opt for a dine-in experience adding to the average revenue per seat.
The movie theater is ecstatic because they are bringing in more people and more high-margin concession revenue (not sure when we decided popcorn could be sold for $10, but it is).
According to Lowe, if they can prove this value to movie theaters, then he hopes MoviePass will be cut in on the profits.
As a new business in the movie-watching ecosystem, if MoviePass could interject itself and provide value to both consumers and theaters, then there is money to be made. Movie theaters have taken a beating in this new era of on-demand content streaming and affordable home entertainment. They could clearly take any help that they can get to get people out of their homes and off Netflix.
However, here’s the actual stock performance of MoviePass’s parent company over the last 6 months.
Not great.
MoviePass Downfall— what went wrong?
The news this week that AMC is launching a subscription-based option on top of their existing loyalty program was a reminder of what MoviePass really is.
MoviePass is just a pricing model. They don’t have content, they don’t own theaters, and they don’t have customer loyalty without extremely low prices.
They don’t have any leverage over movie theaters.
They essentially launched a series of expensive, nation-wide pricing experiments for the benefit of theater chains. The only conclusion I am drawing is that MoviePass’ success in customer acquisition signaled the possibility that a subscription model is appealing to consumers.
Let’s not forget that the movie theater business has some pretty large players: AMC, Regal, and Cinemark. Together, the three account for about half of all movie theater screens in the US (source). So even if MoviePass did add a ton of value for movie theater chains, then it doesn’t seem incredibly difficult for three large, well-resourced chains to adopt a MoviePass-based model exclusive to their chains.
It’s only natural that a big player like AMC would want to cut out the middleman and look to adjust their own pricing based on the successes and failures of a company like MoviePass. Given that AMC has criticized MoviePass for their unsustainable prices, it’s no surprise that AMC is charging a steeper $20 per month. MoviePass took it quite personally:
With a major player like AMC experimenting with this model, I think it opens the gate for Cinemark and Regal as well. If that ultimately happens, I predict MoviePass will get squeezed out of business altogether.
Closing Thoughts
There is a lot going on in the world of movies and content creation.
On one hand, you have multiple players moving to a on-demand subscription offering which hurts movie theater chains because people would rather stay home to avoid high prices at the theater.
On the other hand, movie theaters are amping up their offering to be more of a premium experience by offering reserved seating, comfy leather chairs, dining, and so on. The hope is that they are more in the “experience” business than the “movie watching” business.
The ecosystem of content creation, streaming, and viewing is clearly changing. I think it’s good news for consumers, but the future seems less certain for companies like MoviePass.
Please clap if you found this article interesting and comment any thoughts you had on the piece! I’m always interested in learning more about business strategy, marketplaces, and technology.