Friday, May 25, 2018

MoviePass, Bundling and Adverse Selection

The Wall Street Journal reports that MoviePass is offering subscribers the opportunity to see an unlimited number of first-run movies in theaters. Since the marginal cost of another patron is about zero, this sort of bundling can really increase value to consumers. If implemented appropriately, MoviePass could extract some of this additional value. But there may have been a couple problems with the implementation.

First, the monthly subscription is just $9.95 per month. Since the average movie price is just shy of this amount, a customer who sees two or more movies per month comes out ahead. MoviePass reimburses theaters at face value, meaning that they lose money if customers view more than one movie per month. The plan was to generate additional revenue through targeted advertisements, but this does not appear to have filled the gap.

Second, the type of customer who would take advantage of this deal is likely to be an enthusiast who views well over one movie per month. That is, adverse selection may be severe. One investor quipped:
"I'm saving $70 a month going to the movies and losing thousands investing in the company that's letting me do that," lamented Mr. D'Ariano.

The end result is that the parent company has lost a lot of market value, "... MoviePass lost $98.3 million on $48.6 million of revenue in the quarter ended March 31 ..." Ouch!

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