When it comes to innovation, it takes more than a new business model to drive commercial success. MoviePass is the latest startup to attempt to disrupt the market with a new business model, but it needs to do more to truly move the innovation needle.
A few weeks ago, I was interviewed by a reporter from Vice for an article on the winners and losers of the MoviePass business model. We discussed the viability of the future of the company and the reasons why it was 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.
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Soren Kaplan is the bestselling and award-winning author of Leapfrogging and The Invisible Advantage, an affiliated professor at USC’s Center for Effective Organizations, a former corporate executive, and a co-founder of UpBOARD. He has been recognized by the Thinkers50 as one of the world’s top keynote speakers and thought leaders in business strategy and innovation.