The worst business idea you’ll see all year

Mitch Lowe set out to disrupt the cinema business. And he had reason to think he’d pull it off.

He had a track record. He’d co-founded Netflix. And he’d been president of RedBox, a DVD kiosk business which at its peak had 51% of the US rental market.

In 2016 he took over as CEO of a company called MoviePass. The idea behind MoviePass was simple: users pay a monthly subscription which allows them to go to unlimited films at the cinema.

It was a bit like Spotify, Netflix or Audible — a technology-focused company, with a novel subscription-based business model, muscling in on an old media business.

What followed was “one of the most glorious burnouts in corporate history, defined by arrogance, pure foolishness, disappointment, and frothing schadenfreude.”

Make it up on volume

MoviePass had muddled along for five years before Lowe took over. He decided on a bold new strategy: MoviePass was going big. It cut the cost of a monthly subscription from as high as $50 a month to $9.95 a month.

A reminder: MoviePass was offering unlimited cinema trips. For $9.95 a month. The average single visit to the cinema costs $15-20.

On the day it cut prices, MoviePass brought in 50,000 subscriptions. Speaking in the Ringer, Lowe said “It was 150,000 in three or four days. By the end of the [first] week, it was like, ‘Holy cow, what have we got here?’ And all of that, in my mind, was incredibly positive.”

Within a year, MoviePass was at three million subscribers.

Broken model

Companies whose business model relies on subscription use something called a “breakage model” — one where people subscribe, but don’t use the service very often. Like a gym.

In a gym, the equipment staff and machines are already paid for. They’re a fixed cost. So an extra visit by a member doesn’t cost the gym anything.

The problem with MoviePass is that it didn’t own the cinemas it was offering access to. When a MoviePass subscriber went to see a movie, MoviePass paid the cinema full retail price for the ticket, and gave it to the subscriber.

So it had a subscription model… one which incentivised heavy use… but one in which every additional trip incurred extra costs.

You’re starting to see the problem. The whole thing might have worked if a MoviePass subscription cost a lot of money. But it only cost $9.95 a month

Soon MoviePass was shelling out for millions of tickets per month. Users were getting their value from the subscription. And then there were the ones sharing it with others, or re-selling their tickets.

It went on for 11 months. MoviePass kept trying in vain to tweak their broken business model, and it kept bleeding money.

In August 2018, MoviePass finally pulled the plug.

Not Neflix

On a superficial level, Netflix and MoviePass have a lot in common. They’re technology companies, breaking into the entertainment business, using a subscription model. But MoviePass is a disaster and Netflix is a £115bn giant. What’s the difference?

Netflix used the same strategy as MoviePass— it cut subscription fees right down, and brought in millions of customers.

The strategy worked for Netflix because Netflix’s costs don’t go up in proportion to its user base. Netflix owns its content (or else the rights to stream it). So it can stream to as many customers as it wants without increasing costs. Whereas MoviePass had to pay more to the cinemas, the more customers it had.

Netflix also made itself the “front door” for the streaming video business. Users accessed streaming content through Netflix’s slick app and website. This meant Netflix effectively owned the relationship with the customers. People were more loyal to the app itself than the content the app was populated with.

MoviePass did have a direct relationship with its subscribers. But its relationship was much less loyal than the likes of Netflix (or Spotify, or Uber) because it was only acting as a middleman. Users went on MoviePass to get their voucher, then went to the cinema for the experience.

Square peg

This a parable about internet business models.

Internet businesses come in many shapes and sizes, but they tend to have one thing in common: they prioritise growth. Most internet businesses aim to grow as quickly as possible. Short-term profits be damned.

That’s a smart strategy for most of them. If you can attract a lot of users quickly, you can make money from them over time. The user relationship is what’s important. Treat users well and there’s usually a way to make money from them.

The caveat is that a business should go for growth provided its unit economics are profitable; that is, provided its costs don’t go up in lockstep with its user numbers.

Mitch Lowe and MoviePass misapplied the Silicon Valley technology growth playbook. They burned through a lot of money in the process.

But at least the three million movie fans had a good run.

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