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Final Deadline: May 22

Apply Now The MoviePass Business Model

Just Imploded. Here's Why Four
SPECIAL EVENT lessons about business model innovation we can learn
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New Town Hall on May 15

BY SOREN KAPLAN, AUTHOR, 'THE INVISIBLE ADVANTAGE' @SORENKAPLAN

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A few weeks ago, I was interviewed by a reporter from Vice for an

BEST WORKPLACES article on the winners and losers of the MoviePass business model. We
Introducing Inc.'s Best Workplaces
discussed the viability of the future of the company and the reasons why it was
of 2020
or wasn't a truly disruptive innovation. At the time of the interview,

MoviePass was about to run out of money. Last week, that happened -- its

service crashed, and the company had to get an emergency $6 million loan to

keep the lights (and servers) on.

For a while, many touted MoviePass as the next big startup disrupter, just like

Netflix and Amazon. The company was going to change the entertainment

world by creating an all-you-can-watch monthly subscription to any movie in

any U.S. theater -- for $9.95 a month. Not a bad deal, especially given some

theaters charge more than that monthly fee for a single ticket. No wonder two

million people eventually subscribed to the service.

If you look at the evolution of MoviePass's business model, it's clear the

company has been struggling to find one. On the one hand, experimenting

with how to make money is a natural part of the innovation process. On the

other, the runway for creating a scalable business model is finite, and lasts only

as long as one's cash in the bank.

Since its founding, MoviePass has modified its pricing model many times. But

business models are about much more than just pricing. To create a winning

business model, you need to find the right mix of your value proposition, your

differentiated offerings, your cost structure, your distribution channel, and

your profit margin, among other things. Most critiques of MoviePass have

focused on the company's pricing changes and shifting terms and conditions.

If you look more deeply, there are other dynamics at play that have posed

significant challenges to the company's viability, and which provide valuable

lessons for anyone wanting to avoid similar struggles.

Here are my top business-model innovation lessons from what we've seen

from MoviePass:

1. Aggregate fragmented markets into a marketplace

business model.

The business models of companies like Airbnb, eBay, Amazon, and OpenTable

succeeded because they connected buyers to sellers in a robust marketplace.

The "suppliers" of the products or services (e.g., sellers on Amazon or hosts on

Airbnb) needed the platform -- to market and sell their solutions -- as much as

the consumers trying to buy them. The MoviePass business model looks like a

marketplace, but it's not. Only a handful of theater chains exist in the U.S.,

which may keep the ultimate influence and power out of the hands of

MoviePass.

2. Don't build "breakage" into the core business model.

In the loyalty card industry, the term used for customers who never redeem

their earned miles or points is called "breakage." MoviePass touts that 88

percent of its subscribers use the service only one or fewer times per month.

That means many of its customers are paying for a service they're not really

using. Having a "breakage" business model isn't usually viable long-term, since

customers will ultimately realize they're not receiving value from the service.

In MoviePass's case, its model raises questions about why the company has run

out of money given that only 12 percent of its subscribers are "over users" per

se and the rest should be either breakeven or profitable.

3. Control the experience.

One of the biggest challenges for MoviePass is that the highest-value

component of the customer experience is something the company doesn't

fully control: going to the physical movie theater. While the MoviePass app

delivers the front-end user experience related to finding and purchasing

tickets, the ultimate value of seeing a film happens outside the company's

technology. In essence, the company is beholden to theaters, which ultimately

control the highest-value element of MoviePass's offering, which puts its

business model at risk.

4. Avoid early channel conflict.

In many industries, it's common to sell through multiple distribution

channels while also offering products directly to customers. Dell and HP, for

example, both sell direct and compete for sales with their distributors like Best

Buy. Apple sells its phones through its own stores and through Verizon.

Channel conflicts are often the norm in long-standing industries where

competitors partner and partners compete. But when you're an early-stage

company, channel conflict can significantly limit your ability to get established

or scale the business. When it comes to movies, one of the main theater chains,

AMC, recently introduced a competing alternative to MoviePass called AMC

Stubs A-List. AMC's subscription service provides customers with an equally

powerful value proposition (12 movies a month for $19.95) that is probably

more economically viable as a long-term business model since AMC already

owns the end-customer theatergoing experience.

The original MoviePass pricing model was a real innovation. It turned heads.

It woke up the industry to the power of digital disruption. Although the

company says it's going to sell its treasure trove of user data in the future,

it's still debatable whether MoviePass can turn an innovative pricing model

into a disruptive business model. The clock is ticking and the runway short, so

we may know the answer sooner than later.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.
JUL 30, 2018

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