The MoviePass Saga: What Startups Can Learn from MP's Failures
I have been following the intrigue surrounding the movie subscription startup* called MoviePass. The Company holds a fond place in my heart as I am a frequent movie-goer and I love the financial convenience the service has provided me. There are definitely functional issues that I have experienced as a consumer, such as the recently introduced “surge pricing” or the complete lack of customer service. However, one thing that has kept me glued to the MoviePass story is my curiosity surrounding its business model. On Thursday, July 26, MoviePass had to halt operations because it could not pay for any tickets. It was reported that the Company needed a $5 million loan just to stay afloat. Clearly, something was busted.
As I use this service myself, I frequently wonder “how could this company stay in business?” There were claims made by the management team that the Company was harvesting user data and that they were going to magically turn that data into profit. Whenever I heard that, I couldn’t help but think of this steal underwear and profit meme. At the end of 2017 and beginning of 2018, there was a lot of chatter about how data is the new oil, but I think that MoviePass’ recent struggles show that that is not always the case.
To be clear, I am not ready to ring the death knell on MP just yet, but there are a lot of things to be concerned about. Its user growth has reached over three million subscribers and it still expects to achieve five million subscribers by 2019 (if it is still around by then). It’s user growth rate has also slowed slightly, which could be a sign of several different issues: a limited addressable market, failed marketing plans, or very public battles with large theater chains. Another possible explanation for the Company’s slowed user growth is that they don’t want to grow too quickly too soon. MP’s ticket buying mechanism has always been the loss-leader in their business plan. I don’t think they ever intended to make any real money in this manner – it has always been a way to gain users and to gain their data.
But the problem with MoviePass’ business plan is it does not appear that they know what to do with users once they are captive. They have a ton of data regarding movie habits for their users, but how relevant is this information? Does MoviePass have some sort of predictive analytics that can tell a large advertiser something about a movie-goers future buying habits? Movie studios don’t need to know who has already been to their movies, they need to target people who MIGHT go see their movies in the future. Theater chains don’t necessarily care about what kind of movies people see, they just care that people see movies at their locations. And large consumer advertisers might care about this specific consumer group, but the real problem is that it is not nearly big enough to drive returns. A model like Facebook works so well because when you multiply 1 billion by any number, it is still a large number. Three million users are not enough of a captive audience to sell general consumer goods.
One might think that theaters are thrilled at all of the revenue that MoviePass is driving their way, but then why is AMC launching its own product that is a direct competitor? If MoviePass is driving so much revenue to theater chains, how is their business struggling so much? The best hypothesis I can come up with is that MP put the horse way in front of the carriage and got way too many users before it had a viable business partner. Theater chains are not as interested in the utility of the service as MP was anticipating. As a result they are bleeding cash and they don’t have a good enough story to sell to investors (let alone the fact that they went public way too early and have to raise capital through much more rigorous public markets). It would also appear that they don’t have good enough data-based insights to sell to advertisers.
A concern that I have is that MoviePass is using this data to try and determine what movie-goers like to see and then try and create that product / make their own movies. The problem is that this data is fairly readily available (check out boxofficemojo) and it is a model that is very tough to crack. During college, I briefly worked for a movie studio, and one thing I learned is that it is very hard to be analytical when determining what makes a good movie. At the end of the day, the cinema is still a place for art, not science (for now). MoviePass does have an arm of their business (Movie Pass Ventures) that was designed to co-acquire films with traditional distributors. MPV has released two movies, American Animals and Gotti, both of which were financial disappointments. MoviePass claims that between 25-40% of ticket sales for those films were from MoviePass subscribers. MoviePass clearly still has a lot to learn from its own data.
Along that same vein, there is a lot that startups can learn from the MoviePass saga. A company needs to have a viable market in which to sell it’s product. Part of the startup experience is having a hypothesis for a market and then testing to see if that market exists. But even before a startup tests out a new product on a hypothetical market, the hypothesis needs to make a modicum of sense. A startup cannot claim that they will have a bunch of data and thus will be able to monetize this data simply because. A startup still has to be able to sell this data to an interested party who can actually do something with it. Startups who are trying to monetize data need to realize that they need to have an end-user in mind.
Another take away from MoviePass is that a startup doesn’t necessarily need to grow as fast as possible. This might seem counter-intuitive in the world of “move fast and break things”, but there’s an old adage that giving something away for free really isn’t a business plan, that’s just charity. MoviePass so far has given away movies for free and has nothing to show for it. They grew so quickly that they have burned too much cash before they could validate their business model. Sure, they have a ton of users, but to what end? It should be a startup’s goal to grow as quickly as possible once they discover the business model that works for them. There can be changes and tweaks to that business plan while growth is happening (the famed pivot), but only to a certain extent. Unbridled growth without any clear direction will just end up in an imploded enterprise.
To go back to the metaphor that data is the new oil, a startup founder needs to keep in mind that oil that comes out of the ground is not exactly ready-for-market. There’s a reason that oil refineries make so much money. The stuff you put in your car is not the same as the stuff that some oilman in Texas pulls out of the ground. Make sure that when you are harvesting data, you know a refinery nearby to sell it to. MoviePass might not be a complete failure yet, but startup founders and operators should take notes from MP’s current calamities.
*MoviePass was acquired by a public company, HMNY, in 2017, but still mostly acts like a startup in a lot of different ways. Although the funding cycle has been broken a little bit here by its way-to-early public listing, MoviePass is still really trying to break even and find it’s product-market fit as well as complete business model.