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If Amazon likes LoveFiLM, then wouldn’t it LOVE Netflix?

Not many people have spent a long time analyzing out the move by Amazon last week to take over LoveFiLM in the UK and Europe

By PETER WHITE

Published: 27 January, 2011

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Not many people have spent a long time analyzing out the move by Amazon last week to take over LoveFiLM in the UK and Europe. The purchase price was leaked to the Financial Times as £200 million for the entire company, around $316 million, although that was not officially given out. But this doesn’t surprise us – LoveFiLM is potentially the Netflix of Europe – unless of course Netflix is.

LoveFiLM is an agglomeration of multiple startups from right across Europe, which all began to copy the Netflix original business model of rental DVDs through the post, but ordered online.

Most of these businesses were founded around 2005, and Video Island in the UK was the core operating company that snapped up most of the rivals in its wake, backed with about £15 million in initial venture funding. It bought ScreenSelect and DVDs365 in the UK and then Brafilm the market leader in Sweden and Norway. Later it bought a major rival LoveFiLM, and took on its name.

That deal brought it into a relationship with LoveFiLM shareholder the Arts Alliance Media, which spent its time licensing movies. Video Island’s backers were Benchmark Capital, Index Ventures, Cazenove Private Equity, and European Venture Partners. At one point the business had White Label deals or marketing deals with AOL, CD Wow, Channel 4, Dixons Store Group, easyGroup, Guardian Newspapers, ITV, MSN, News International, Odeon, Sainsbury, Tesco and Vue Cinemas. Some of these have now lapsed, but the supermarket chain Tesco still has a strong relationship.

There were further acquisitions, mostly not with cash, but with shareholdings, including more deals in Scandinavia at Digitarian and Boxman and it devised a Germany offering working with Deutsche Post World Net Group.

All of this activity took LoveFiLM from perhaps 150,000 paying members in 2005 to 1.6 million today. Its offers go from £5 a month for just one posted DVD at a time and no online film time to around £19 a month for three DVDs out at any one time and unlimited online viewing. So if we guess that revenue per customer is around £8 a month or a very convenient £100 a year, that gives it revenues of about £160 million and the purchase value is a little better than one times revenues. The business has said it has been profitable from around 2006 on, but has had periods when the churn was immense compared to Netflix.

The online side of the business launched in conjunction with AOL in 2006, and began as just a few hundred films licensed for online distribution, but rapidly evolved to quite a bit of content.

In 2006 Amazon bought a company called CustomFlix back in the US and began to be interested in this business. CustomFlix was more about burning a customer DVD with the film you wanted on it and posting that. But the same line of thinking rapidly moved Amazon to build licensing partnerships with all the major studios and begin to experiment with Online DVD rental and where better than in the UK, up against LoveFiLM.

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