Lots of people thought MoviePass's ambitions to Netflixify the movie theater experience by offering users unlimited movies for less than $10 a month would never last. Now it seems those naysayers were right.

On July 26, MoviePass--founded by Netflix co-founder Mitch Lowe--couldn't afford to pay for the movie tickets of its subscribers. According to a regulatory filing, MoviePass's parent company, Helios and Matheson, borrowed $5 million in cash to pay its merchant and fulfillment processors. Before that day, it had been burning through $21.7 million a month to honor its subscribers' ticket purchases, forcing the company's share price to drop below the $0.19 mark earlier in the month, down from its zenith of $39 a share in October.

While subscribers were notably annoyed, the news was not at all surprising to analysts like Michael Pachter. As a managing partner at Wedbush Securities, where he covers the company, he has been waiting for the ax to fall for MoviePass since last August, when the company dropped its monthly subscription fee to $9.95 from $50. But rather than pick on that company in particular, Patcher takes aim at its business model.

This all-you-can-eat strategy, which Slate columnist Jordan Weissmann described as "creatively lighting money aflame," has never been sustainable, says Pachter. "It doesn't make sense for MoviePass to be in this business in the first place," he says, explaining that having third parties like MoviePass provide this sort of subscription model is doomed to end in disaster. (Lowe didn't return a request for comment.)

That condemnation would seem to be borne out by recent company news. There's Spotify, the Stockholm-based music-streaming company, which has yet to turn a profit and has seen its share price wax and wane since its IPO in April. Similarly ClassPass, a fitness subscription service, recently pivoted to a credit-based system after responding to subscriber feedback. And while Netflix appears to be on solid footing, in its latest earnings report, the company disclosed it attracted fewer new subscribers than it had anticipated for the quarter. 

Even so, entrepreneurs remain bullish on subscriptions. But to make them more sustainable, they're making some key tweaks--chief among them, eschewing the word "unlimited."

Better tech, tiered pricing 

New York City-based startup Jukely--"the MoviePass for concerts"-- has found the path to profitability tricky. Founder Bora Celik​, who launched his company in 2013 promoting unlimited concerts for $25 a month, explains how he's had to change the model over time. 

"It's been quite challenging to figure it out," he says. "But we've managed to find the path to sustainable subscription economics." Celik points to the company's proprietary technology, which offers promoters dynamic pricing for tickets based on the demand for performances. The algorithms allow Jukely to acquire ticket inventory more economically, which helps the company retain better margins. 

"A company like MoviePass pays face value for most of its tickets, while we get them at a discount," says Celik. 

Using machine learning and moving its business model away from the unlimited service--offering instead three subscription levels ranging from $25 to $65 a month--Celik says he's managed to find a balance between the novelty of the MoviePass model and the conservative economics Jukely needs to survive. The service is currently available in 14 major U.S. cities as well as Toronto and London, and has several cities on its expansion list for the coming months. 

Credits for services

Former Goldman Sachs analyst and third-time entrepreneur Solomon Liou made this a priority in his latest company, KidPass, a service for finding nearby kid-friendly activities.

KidPass, founded in 2016, works on a credit system: You pay a monthly fee of $50 and receive 10 credits that you can use to book activities for children, such as art classes, day trips, and indoor playspaces. "We made sure we didn't have this crazy, unlimited model that just wasn't sustainable," he says. "In some ways, we've taken the exact opposite approach of MoviePass and ClassPass."

And so far, so good. Since its start two years ago in New York City, after which it expanded to Washington, D.C., the company has gained 10,000 subscribers with more than 200,000 activity bookings--a membership five times larger than last year's. KidPass has 25 employees, and big plans to expand to 10 cities by the end of the year. 

ClassPass is similarly adopting a credit-based system. After launching in 2013 with an unlimited model and scrapping it in 2016, the company, founded by  Payal Kadakia, experimented with a tiered pricing model that allows users to pay more for more classes, but eventually settled on the credit-based system it has today because the program offers users more value for their money, says current CEO Fritz Lanman. Previously, he notes, the more popular suppliers were charging more while lesser-known classes fell by the wayside.

But even in its rockiest moments, ClassPass didn't reach MoviePass lows. "We have very strong unit economics," says Lanman, who in a recent interview detailed ClassPass's plans for global expansion within the next couple of years. The New York City-based company is already in 50 cities and four countries. "In fitness, the subscription serves a real purpose," he says, noting that ClassPass motivates people to go to the gym, an issue that doesn't exist with movies. Also, unlike MoviePass, which relies on a limited subset of movie theaters, he says ClassPass benefits from a more widespread fitness environment. "We think our market works really well for aggregation because the supplier ecosystem is heavily fragmented."

To be sure, MoviePass's fate is hardly sealed. Whether the business model itself will live on is also anyone's guess. Clearly, there are ways to run this all-you-can-eat business model sustainably, but it has to be all-you-can-eat with a kitchen that closes. 

Published on: Jul 31, 2018