COGS: How I Bankrupted MoviePass

Author’s note: This is an updated and expanded analysis per my “Ima fix wolves” policy of rewriting and improving previously published essays. It came to mind because I keep seeing startups make mistakes on how to think about the costs of AI products. Please enjoy this explainer on a much-misunderstood topic. 

MoviePass is my favorite business of all time. For a brief, glorious period between 2017 and 2018, the company sold an unlimited movie-watching membership for under $10 a month. All you had to do was pay the fee and then see all the flicks your heart desired. At the time, my favorite theater in Mountain View, California, decked out with reclining leather seats, sold tickets for $15 a pop. Essentially, MoviePass was selling dollars for cents.

Unsurprisingly, people enjoy free things! Their subscriber count jumped from 20,000 to 3 million in a year. All of my friends had it. We would go to the movies at least once a week. We even went if we knew the movie was bad. MoviePass couldn’t be forever, so we felt it was necessary to cash in while we still could. After all, each of us easily cost MoviePass north of $60 a month. 

As it turns out, we were right. Giving away money for free is pretty dumb. The company burned through tens of millions of dollars and collapsed by 2019. 

MoviePass is my favorite business because I, the consumer, happily took this clueless company’s money and had a blast. It was awesome for me, but it sucked for them.

There is an argument to be made that MoviePass wasn’t a terrible idea. If they had been in the funding environment of 2021, there is a chance they could’ve pulled it off. Get the audience big enough, add advertising on top, plus a pinch of price negotiation with theater companies, and this could’ve been something. But alas, the Fed had yet to turn on the unlimited money spigot, and MoviePass ascended above to the land of dead technology businesses in the sky (this is not the cloud).

Put simply, the cost of the item MoviePass was selling (access to sticky seats) exceeded the price they sold it to me for. No matter how cheap they got their servers, no matter how much they streamlined their marketing and operations, they could never turn a profit until they got their revenue-to-cost-of-goods-sold (COGS) ratio right. Honestly, though, we can’t blame them. They didn’t have this newsletter to teach them.

Today, we are going to dive deep into COGS. While seemingly an easy concept, it has some serious complications. A thorough understanding will help you be a better business practitioner and—if something as absurd as MoviePass ever comes again—be a better value-extracting consumer. Let’s dig in. 

COGS in the machine

MoviePass failed, but there are great businesses that lose money for years and are still ultimately successful. Shoot, it took Google three years to get profitable (while simultaneously growing revenue from $220,000 to $69 million [nice]). Ergo, MoviePass just needed more time, and it obviously would’ve been the next Google. This whole argument—which is dumb, by the way—is the reason COGS was invented. To illustrate why, here is a simple example:

Imagine we are looking at the income statement of two businesses, Ding-Dong, Inc. and Galaxy Brain, LLC. You are told they both lost $2,000 in their first year of operation. 

“Ah,” you say as you sensually rub your Patagonia vest like it's an investing magic 8 ball, “these both must be the next Google.”