Starbucks has around $1.6 billion in stored value card liabilities outstanding. This represents the sum of all physical gift cards held in customer’s wallets as well as the digital value of electronic balances held in the Starbucks Mobile App.* It amounts to ~6% of all of the company’s liabilities.
This is a pretty incredible number. Stored value card liabilities are the money that you, oh loyal Starbucks customer, use to buy coffee. What you might not realize is that these balances simultaneously function as a loan to Starbucks. Starbucks doesn’t pay any interest on balances held in the Starbucks app or gift cards. You, the loyal customer, are providing the company with free debt.
In the beginning, MoviePass’ popularity rose quickly due to its unlimited $9.99/month plan that allowed users to watch a movie a day. Sometime in the 2018 summer, the company stopped the plan since it was bleeding cash and on the verge of bankruptcy. Of course, when you buy goods at retail prices and sell them to your customers at wholesale prices, you are doomed to empty your own bank account.
Fast forward to now, after several changes in its plans, MoviePass announced the comeback of its unlimited plan, with some changes.
2.4. MoviePass reserves the right to change or modify the Service or subscriptions at any time and in its sole discretion, including but not limited to applicable prices, without prior notice. MoviePass reserves the right to change the rules of movie-going attendance and ticket availability to subscribers in connection with the Service at any time.
2.5. MoviePass makes no guarantee on the availability to any particular theater, showtime, or title that is presented in our app. MoviePass ticket inventory may vary from specific theater ticket inventory. MoviePass reserves the right to adjust its inventory to maintain fair access and usage to its full customer base. MoviePass may utilize its proprietary data and algorithms to impose restrictions on individual users based on their location, day of movie, time of movie, title, and the individual user’s historical usage. This means that MoviePass has the right to limit the selection of movies and/or the times of available movies should your individual use adversely impact MoviePass’s system-wide capacity or the availability of the Service for other subscribers.
2.6 You agree to choose the movie title, theater, and showtime up to no more than three (3) hours prior to the selected showtime, through the MoviePass App.
To be fair, writing an encompassing Terms and Conditions text is a standard in the service business. I wouldn’t be surprised if MoviePass had the same terms one year ago. But how could one person “negatively impacts system-wide capacity”? MoviePass has this clause in place to leave some room to wriggle itself out of blockbuster movies that attract moviegoers and inflict losses. Furthermore, it is different now than it was a year ago.
I personally used the original unlimited plan in the last month before it was terminated. I could book any showtimes at any hour that I liked. There was no restriction on the selection of movies. Nonetheless, MoviePass started to remove the unlimited part of the plan and added restrictions on showtimes and movie selection. It’s very likely that they would do it again this time. Plus, users can only book movies 3 hours before the showtime. It’s very limiting and didn’t exist one year ago.
If you call a plan uncapped, yet have some unpleasant surprised in store for users, odds are that users will be greatly disappointed. Disappointed users are not what you want in the subscription business, especially given that the business model is inherently flawed in the first place and that there is great competition in AMC or other streaming services. There seems to be ample ingredients for another failure by MoviePass.
A few days ago, I read an article on WSJ on the subscription service from AMC, the biggest theater chain in the US. I was intrigued by this market. So I took a look at the three players in the sphere: MoviePass, Sinemia and AMC. Below are my findings.
Last July, I was one of the lucky ones to enjoy the crazy “one movie a day for $10/month” offer by MoviePass before the plan was cancelled. Fast forward, the company changed its pricing to move its business model closer to reality, not dreams. Here are its 3-month and 12-month subscriptions
For the sake of simplicity, I only looked at the one that would allow users to watch movies in 3D and IMAX. After some calculations, a user is expected to pay at least $8.21 and $8.30 for a movie, with 3-month and 12 month subscriptions respectively, provided that such a user will go to theaters 3 times a month. It’s a bit surprising that it costs more on average per movie to have a longer subscription. Nonetheless, multiple yearly subscriptions will bring the average ticket price per movie down to around $7.5.
For Sinemia, prices are structured a little bit differently. There is an initiation fee of $20, depending on whether the subscription is monthly or yearly.
As you can see, subscription prices don’t change, but whether the initiation fee is added depends on the level of commitment you have with Sinemia. If we look at the same number of movies and the possibilities of 3D and IMAX as we did for MoviePass, Sinemia’s holiday plan is much more affordable. Each movie costs around $5.33. However, without the holiday plan, a movie will cost around $11.67. Their family plan is more or less the same.
It’s worth noting that consumers are willing to pay from $15 to $20 for services such as MoviePass or Sinemia. As a result, most of their prices (not all) are out of the surveyed preference range.
The pricing structure with AMC is much simpler and more straightforward. For $20 a month without any commitment, you can watch 3 movies a week, in any format
If you maintain the AMC A-list subscription for a year (52 weeks) and go to theaters 3 times a week, each movie ticket will average out to be around $1.54. It’s much lower than what MoviePass and Sinemia are offering. I suspect the significant difference comes from the fact that each ticket’s marginal cost by AMC is much lower than that of MoviePass or Sinemia. AMC is a theater chain. They already have to pay for the rights to show the movies anyway. Sure, each ticket sold through the subscription comes at the opportunity cost of a normal ticket, as WSJ pointed out:
And though the service is growing AMC continues to face questions over whether the service will cannibalize its existing customer base, as patrons simply sign up as subscribers to lower their ticket costs.
But if a screen slot isn’t full anyway, I figure it’s better to put more bums on seats. The appealing price seems to gain popularity among moviegoers. Per WSJ:
AMC Entertainment Holdings Inc.’smovie-subscription program has grown faster than the theater chain expected, giving the company a predictable revenue stream as it battles other movie-theater operators and streaming services like Netflix Inc. for consumer attention.
The company said Wednesday more than 100,000 people signed up for the AMC Stubs A-List program over the past six weeks, sending the service’s subscriber count past 600,000 since it launched in late June. Company officials had set a target for the service to have 500,000 subscribers after its first year in operation.
The company now believes between one million and two million people may become A-List subscribers, up from an earlier projection of 500,000 to one million, AMC Chief Executive Adam Aron told analysts last month.
It’s clear that the subscription plan is welcomed by the end users, but does it contribute to or affect AMC’s financials? The answer is the latter, so far. According to AMC’s latest quarterly earnings report:
The decline in average ticket price was primarily due to discounted pricing for our AMC Stubs members, increased attendance from our A-list loyalty program, and declines in IMAX and 3D related attendance.
AMC’s U.S. film exhibition costs increased 7.4% to $289.0 million compared to last year’s pro forma results, representing 53.6% of admissions revenue as compared to 50.6% in the same quarter a year ago primarily due to a combination of strong box office and higher attendance from A-List. AMC continues to incur film exhibition expense on each ticket presented for admission, but the revenue associated with increased AList attendance does not currently offset the increase in film exhibition expense.
Hence, don’t be surprised that AMC will increase their prices after 12 months. If AMC increases the subscription price by $3/month, we are talking about a boost of $21.6 million more in revenue for 600,000 current subscribers. If the increase is by $5/month, the revenue addition will amount to $36,000,000.
The median willingness to pay, based on our algorithms, puts MoviePass at $14.89, which is about 50% higher than their actual price. What’s interesting is how similar these two services are when comparing on this metric. Willingness to pay for each flexes between approximately $5 and $20 per month, and almost up to $25 for AMC. Where MoviePass is definitely going after the volume play, AMC is priced higher than the median, at $20 a month for three movies per week.
Zoom Out to the industry
Theaters have been under pressure from streaming services such as Hulu, HBO or Netflix. It’ll only get more intense given the investment race into original content by the incumbents and the upcoming arrival of Disney streaming service which will likely bring, you guess it, Star Wars and Marvel movies – the usually big draws for moviegoers. The theater attendance in the US increased in 2018 compared to 2017 after a downward trend for the past years
Hence, it’s important that customers have a great experience at theaters to justify the inconvenience of commuting instead of relaxing on the couch at home while watching all the new releases. Theaters like AMC must continue to invest to make watching movies an enjoyable experience for customers. Regarding the ticket subscription services such as MoviePass or Sinemia, their hope to compete may rest more on the availability of theaters across US. In cities, especially rural and smaller ones, or cities where AMC theaters may not be conveniently located, perhaps consumers may be more motivated to pay for the more expensive subscriptions. Nonetheless, if all the box office right owners have their own streaming services which are likely to be priced around $15 a month, it’s going to be tough for Sinemia or MoviePass to attract subscribers.
If you live in the US and are a fan of watching movies at cinemas, chances are that you have heard of a company called MoviePass. It is famous for its unprecedented business – $10/month for one ticket every day. The company has suffered a great deal financially and operationally for its business model, including an urgent financing round to keep its servers running, downtimes, unimpressive customer services and frequent changes to its pricing.
In the subscription world, the mandate is that once a user subscribes, the more the subscriber consumes services/content, the better and marginal cost is trivial. Take Netflix for example. After a successful subscription, a user can watch as many movies and for as many times as possible. Netflix takes in minimal marginal costs (probably for servers, storage and networking) for every time a movie is watched. In the case of MoviePass, it’s not the case. Every time a ticket is dispensed, MoviePass pays the cinemas either the full amount of the ticket or the majority of it. Slap on it the cost of marketing, financing and operations and the business loses money.
How does MoviePass make money in that case? I suspect that MoviePass prioritizes growing its user base to the point that it is big enough for the company to convince cinemas to cut its a much better deal. Advertising can be another avenue.
The failure of MoviePass is also from the customer segmentation perspective. We moviegoers differ from one another in our consumer behavior. Some go to cinemas every week, some go for only blockbusters and some only do so once in a while. The difference in behavior requires multiple offerings from MoviePass. The less frequent users don’t feel motivated to keep a subscription every month. Movie junkies who go as many times as possible will bleed the company dry. There are some users who look at the release schedule, subscribe for only one month in which I can watch movies I like and then unsubscribe, myself included. Such users don’t offer much value to MoviePass as they don’t, ironically, consume enough to contribute to MoviePass’s value as a company.
The “one-size-fits-all” model that MoviePass is famous for doesn’t take into account any user behavior. Unsurprisingly, it failed.
Sinemia today announced an unlimited plan. For $30 bucks, users can get a ticket every day and advanced bookings are allowed (not possible with MoviePass). The difference obviously is a higher price tag that comes with the plan. I suspect that even at $30/month, it is still a money-losing deal for Sinemia but it is less damaging than a $10/month plan. Moreover, Sinemia has 5 different plans now. Each appeals to a different segment of users.
To discourage users from unsubscribing early, Sinemia enforces an initiation fee for monthly-based plans. That way, users care more about the subscription and are motivated to stay longer. If users unsubscribe, Sinemia gets more revenue in return. If users want to avoid the initiation fees, the only way is to be locked in for a yearly bill.
Even though Sinemia has multiple plans and higher pricing points, Sinemia will try to enlarge its user base and leverage it for a better deal with cinemas. What I think will be appealing to cinemas is that Sinemia can prove that it attracts moviegoers in unpopular times during a day. Movie slots are perishable. Once it goes by, there is no way to recover it. Hence, cinemas would be interested in putting butts on their seats during low-traffic hours. If Sinemia can prove that it is able to deliver that, its position will be stronger. Anyway, its business model is saner than MoviePass’.