What's happening at Netflix?

Image via Wikipedia

You'd expect me to follow Netflix closely - and indeed they have always been a beacon of the on-line revolution. Disrupting the established methods of distributing movies to consumers in a significant way - leading to the inevitable demise of Blockbuster (once the brief on-line battle had been won) their dedication to great customer service has been a constant theme.

Our own founding of Video Island - later to become LoveFilm after a series of mergers - has meant a more intensive tracking than normal of a much admired business. Listening to Reed Hastings, Netflix, outstanding founder and CEO and comparing his metrics with our own every quarter has been an education.
The Netflix stock-price has always suffered the overhang of those who believe that the DVD's days are numbered and that digital streamed delivery would render Netflix's obsolete or at least would open up significant more competition than it has experienced hitherto.
Netflix has consistently come up with the answers - first by explaining that DVDs would be around for a lot longer than people thought - then by offering streamed movies themselves and agreeing that DVDs would indeed die at some point not too far in the future. Mostly however, Netflix has delivered results. Consistently meeting and beating the street's forecasts.
After music, then books, newspapers and magazines, movies are bound to be the next digital 'goods' to be widely distributed over the new platforms.
So, is Netflix in a very vulnerable position? Or is it perfectly placed, with a fiscal relationship with 12m subscribers who pay them each month. Its relationship with the movie studios - who will ultimately decide how and when their product is distributed is clearly another factor.
There are a handful of digital companies (outside of the main utilities) with such a close, regular and continuing  transactional relationship. Netflix is a more than a "DVD by post" business, they are an entertainment distribution platform.

Is this realisation behind the recent exceptional surge in the Netflix share price? It has trebled in the past year despite the continuing stream of news heralding new competitors. Walmart's acquisition of on-line movie service, Vudu is the latest. Hulu, Apple, YouTube, BestBuy the list is long and powerful.
The battle for movies will start soon.

Not even Reed Hastings sale of 10,000 shares last week has dented its apparent strength.

For all Facebook and Google's power, neither of them has a direct financial relationship with consumers. Though clearly they will move in that direction.

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Graze, Naturally Viral

Nature Delivered Ltd (trading as Graze) has just announced a funding round of £2m led by Octopus Ventures.

We wrote about Graze in February
drawing attention to the truly innovative and potentially disruptive approach that Graham Bosher and his co-founders have taken to the distribution of food by post. Graham doesn't have deep food technology or distribution experience but he has leveraged his intimate knowledge of significant experience of designing, developing and running complex operations which give customers complete control and provides great customer service.
This was acquired in his initial development of DVDs on tap and later LoveFilm.

The business is experiencing very rapid growth and strong loyalty to the service.
Graze is naturally viral, with people showing others their Graze box at the office and handing out trial coupons.
All web marketers strive for virality or a way to promote it. In this case (like with Moo) the product itself is naturally viral - in the real world. Of course, Graze are pouting petrol on the viral flames and encouraging the blaze.

Now delivering over 80,000 boxes a month, Graze has the backing it needs to build a serious business. William Reeve is taking the Chair and the shareholder register includes DFJ Esprit, Arts Alliance and ourselves.

Certainly one to watch in my view.

If you are in the UK and want to try the service quote this code QKX412R and get a free box.
[from 20th to 24th July, 2009]

Another founder creating a potentially great business by thinking completely differently about an established way of doing things - and not being an insider in his industry - is Errol Damelin at Wonga.

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DVDs by Post ..... why not Food?

The LoveFilm, VideoIsland, ScreenSelect alumni have come together to back Graham Bosher and his team to launch Graze.

Graham was one of the co-founders of DVDs on tap.

They sold the company to Arts Alliance who created LoveFilm who merged with Video Island who had merged with ScreenSelect ...you following?

Anyway, Graham latest venture is Graze - an ingenious new way of getting healthy, quality food direct to your desk.

The product and packaging and business model has been designed with superb attention to detail, leveraging the wonderful next day service of the Royal Mail and its newish tariff - pricing in proportion. The Royal Mail, which is currently delivering over 100 million DVDs back and forth for LoveFilm, must be hoping that Graze can similarly change the way Britain gets its lunch time food!

Image via Wikipedia

Graze delivers a full letter-box-sized box of healthy food (nuts, berries, dried fruit etc) straight to a desk. Prices start at £2.99 delivered. Users rate the range of over 200 products and choose from 4 different types/sizes of package. Highest rated products get included most often. Delivery frequency, package type and delivery address are controlled through a well designed interactive drag and drop website.

The team has significant experience of designing, developing and running complex operations which give customers complete control and provides great customer service.

The service is still in beta mode and TAG have negotiated an offer for UK readers of this blog: enter code QKX412R - It offers a free box and the 2nd one for half price.

Make that 24/7/365 except when it snows!

LoveFilm hits 1m subscribers

As hoped for, the credit crunch has given a boost to home entertainment.
LoveFilm already had significant momentum having added 100,000 new subscribers during 2008, but January has continued this trend.
In addition to announcing the 1m subscriber number, LoveFilm also announced an injection of £10.5m in Bank Debt which it plans to invest in new on-demand technology as well as repay existing debts. [Who says banks aren't lending?]

Lovefilm became profitable last year having achieved revenue growth of around 50%.

Mergers back on the agenda

Mergers are really difficult transactions to bring about and even more difficult to make work post-merger.
The rewards for doing so properly and well can be significant.
In these times, we are likely to see a number of mergers taking place between companies which will find it really hard on their own to raise cash to lengthen their runways or for those for whom the commercial logic is overwhelming.
Looking back, one can see some mergers which had they not happened may well have led to the demise of both companies (or at least a protrated and far more capital intensive journey) whilst what emerged was a real powerhouse.
I'm thinking particularly of the Betfair and Flutter.com (remember them?)merger in December 2001. Current Betfair revenues in the order of £250m and PBT over £40m.
Image via CrunchBase
I'm also not forgetting the LoveFilm and VideoIsland merger of April 2006, creating Europe's dominant on-line DVD rental service now turning over some £70m profitably.

We will be encouraging TAG companies to look at their markets carefully and consider whether getting together creates more value for everyone in the long run.
The difficulties are - fairly obviously - a) arriving at relative values and
b) resolving the question of who runs the combined entity and how.
It takes some skill, no little suppression of ego, sensitivity and far sightedness to achieve a good result.
The benefits can be huge. Aside from rationalisation of overheads, marketing can be made so much more efficient and effective (less competition for those keywords, greater clickthrough rates from natural and paid search)and its far easier to do those all important business development partnerships.

Commentators need to focus more on what value has been created, rather than on who 'won' and who 'lost'. In the case of the great mergers, everyone's a winner.

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OFT Clears LoveFilm Amazon merger

Yesterday the OFT gave the go-ahead for LoveFilm and Amazon to merge their DVD rental operations. Whilst most people expected this, it was by no means a 'slam dunk'.
The OFT said that while it had competition concerns about the merger, which will control 90% of the online DVD market, it concluded that LoveFilm had no incentive to worsen its customer proposition because of the competition it faced from an array of other providers of video content.
LoveFilm in the UK and Netflix in the US have once again demonstrated the power of the web to disrupt well established and entrenched business models - in this case the Video Rental stores.
Lovefilm's CEO Simon Calver says the high street film rentals market has "completely imploded" with 50 per cent fewer stores trading today than two years ago as consumers continue to flock online to hire their movies.
Speaking at the First Tuesday 'Retail Revolution' event in London this week Calver said there are simply more attractive options online for film fans, with the internet now accounting for 45 per cent of the total rentals market, as it provides a platform for more choice, greater convenience and better value-for-money.
Although LoveFilm will have 90% of the DVD on-line rental market after the merger, the OFT clearly recognises that the next disruptive wave could be coming from downloads and other VOD channels.

Read previous TAG posts connected with LoveFilm