Maybe MoviePass Shouldn’t Compare Itself to Uber

On Monday, MoviePass announced yet another entirely new model for subscribers. After announcing that it would be raising prices and limiting options for users of its all-you-can-eat movie theater subscription service, they reversed course. Now, users will be able to enjoy three movies per month, with limited restrictions on releases, for the same $9.95 that previously got them all of the movies they wanted to see. The move came as one of several attempts by the company to restore confidence in its service—and its investors—in recent weeks. Just days earlier, it had responded to a particularly bad week by invoking Mark Twain, boasting of its impact on a number of films, and—curiously—comparing itself to Uber in the way its disrupted the film industry.

MoviePass has been a disruptive force for theaters—and, increasingly, for its own users, who’ve been bedeviled by disappearing screening times and foiled check-in attempts while at the theater. Whether that disruption is sustainable is the question the company faces at the moment. Its stock dropped to 10 cents a share last Thursday, after apparently burning through a short-term, $5 million loan it took out a week before. Its slogan—“Any Theater. Any Movie. Any Day.”—got dismissed days earlier as it announced that it would no longer provide tickets to widely-distributed studio films in their first two weeks of release, and that it would be curating which showtimes were available to users.

Analysts suspect that the company’s future prospects should be measured in weeks, not months. And given the company’s recent woes, investors are unlikely to be convinced that only MoviePass can stop movie theaters from charging “exorbitant prices for theater tickets” and “overpriced concessions”—even as MoviePass trots out the well-worn tactic of invoking an Uber comparison when it says the theater industry is displaying “exactly the attitude the taxicab industry took when Uber entered the market.”

See, because there’s a key difference between Uber and MoviePass in that MoviePass doesn’t compete with theaters. Instead, it pays full price for their tickets. If Uber’s business model had been to pay for customers rides in existing cabs, the comparison might be more apt.

The company has been an indisputable win for consumers for much of the
past 10 months, but it’s been at the cost of $150 million.

One thing the two companies do have in common is that neither one has shown any signs of turning a profit. MoviePass has been widely mocked for its business model, which bleeds cash by selling unlimited movie tickets (which the company buys for an average of $9.16 each) for a flat rate of $9.95 per month. Its plan to overcome the obvious flaw in that model has been three-fold: It intended to sell against user data collected by the app, to negotiate deals with theaters for better ticket prices and a cut of concessions by delivering customers in volume, and to get free money from subscribers who don’t actually use the service on a monthly basis. So far, the market for user data hasn’t materialized, theater chains like AMC and Cinemark have opted to create their own subscription services rather than play ball with MoviePass, and the number of heavy users far outweigh the number of users who neglect their MoviePass subscription like it’s a gym membership (it turns out going to the movies is more fun than going to the gym!). So while the company has been an indisputable win for consumers for much of the past 10 months, it’s been at the cost of $150 million in losses during 2017 for MoviePass. Dropping $150 million in a year may not be a path to sustainability, but Uber, which posted losses of $4.5 billion in 2017, burned that much cash every 12 days.

The flaws in MoviePass’s unlimited model are readily apparent: We know exactly how much MoviePass charges customers, and we know exactly how much movie tickets cost. We also know that it can’t make up its losses in volume unless it acquires a significant base of subscribers who never actually use the service. With Uber, the reasons for the losses are more complicated.

Columbia Business School professor Len Sherman can break down the losses for Uber. In 2017, 68% of its $37.3 billion in revenue went to pay drivers (with an additional 4.5% in bonuses). A little more than seven percent went toward user discounts and other variable costs. That left $7.4 billion—and Uber spent $11.1 billion on sales, general, and administrative expenses, leaving them billions in the red.

“If you’re losing money on essentially every customer, you cannot, and will not, ever make money,” Sherman says of MoviePass. “Uber could make money, if they were willing to scale back their operations. Every customer that gets in, Uber’s gross margin is 30.1%, and that’s been growing because they keep raising prices and squeezing drivers. If they did that at an even faster rate, I think they could go from losing money to making money—but at the expense of growth. MoviePass can’t do anything, so they’re dead.”

All massive business losses aren’t created equal, in other words. But even though Uber’s model is one that could probably turn a profit—if they chose to stop losing money to chase growth—the fact that they haven’t done that is something they have in common with MoviePass. When the nature of your losses are less obvious to investors than MoviePass’s have been, it’s easier to convince them that those losses are all just prelude to an inevitable forthcoming market dominance and an Amazon-like turnaround, where huge losses over a sustained period eventually result eventually gave way to 10-figure profits. That’s what Uber is betting on, especially as it preps its planned 2019 IPO. Its explanations for exactly how it’s going to transition from huge losses to profitability can be more theoretical or general (scale back operations! self-driving cars are coming!).

“I have not heard a credible, ‘Yes, we’re losing money, but here’s how we’re going to turn the corner [from Uber],’” Sherman says. “They think it’ll be easier to sell the growth story to Wall Street than to sell, ‘We’re making a little money, but we’re not growing very fast at all.’ They’ve made the calculation that it’s easier to continue to sell the MoviePass dream—‘yeah, we’re losing a ton of money, but look at our growth rate!’”

That’s a dream Uber has been pitching for years—the company has spent more than $10 billion in the nine years it’s existed—and for much of that time, the idea that great losses precede great success has been accepted as conventional wisdom among VC-funded companies. Uber’s hardly alone in being a massive, hotshot property that’s never actually made money—Spotify, Snap, Dropbox, and more have all blown through funding for years. It’s just the one that’s lost the most money—and the one that MoviePass compared itself to in a letter intended to reassure its investors and subscribers. That MoviePass had to make such reassurances amid speculation about how much longer it’ll stick around may not tell us much about the future prospects of Uber and businesses like it—but the fact that MoviePass’s struggles have reminded people of the traditional business wisdom that companies that don’t make money are probably doing something wrong should make their CEOs and investors just a little bit nervous.

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