Curtain rises on Netflix in the UK

US giant faces battle with LoveFilm and Sky as it tries to break into the competitive video streaming market. Gideon Spanier reports

The battle for online movies and TV on demand just got interesting. Netflix, the leading player in the US with 24 million subscribers, yesterday launched its new, £5.99-a-month streaming service for the UK and Ireland. Subscribers will get access to a raft of content, thanks to deals with Hollywood studios such as MGM, Miramax and Momentum as well as British TV providers such as the BBC, ITV and Channel 4. So viewers will be able to watch almost anything from Pirates of the Caribbean to The Inbetweeners.

Netflix is bidding to replicate its success in America, where it is listed on the Nasdaq with a stock market value of nearly $5bn (£3.24bn). But the UK market is highly competitive and, unlike in the US, it does not enjoy first-mover advantage. So Netflix is offering a free month's subscription to all UK users in an attempt to woo subscribers.

Reed Hastings, chief executive, who flew into London for the launch, claims he doesn't see LoveFilm, the established homegrown online player, as a rival. However, like the sharp-elbowed Silicon Valley veteran that he is, Mr Hastings then proceeds to spend much of this interview with The Independent knocking LoveFilm.

"A lot of people want to say this is all about LoveFilm versus Netflix," Mr Hastings says, sitting in a suite at the May Fair Hotel in London. "But LoveFilm is really a DVD-by-post company that has just started streaming. They and Netflix are competing with Sky Movies and Sky Atlantic."

He makes a fair point when he argues that Sky is a bigger competitor. It has 10 million UK customers and Mr Hastings estimates half are movie subscribers. In contrast, LoveFilm has just announced it has hit 2 million subscribers across Europe, mostly in the UK.

But the Netflix boss is being cheeky when he claims LoveFilm is just a "DVD-by-post company". LoveFilm has been offering online streaming since 2009, and has struck a string of well-publicised digital deals in recent months with studios and TV firms such as Sony, Warner Brothers and ITV. What's more, Mr Hastings, who co-founded Netflix in 1998, built his own business model as a DVD-by-post company.

He also makes no mention of the disaster that befell Netflix during summer 2010, when he tried to hike prices for online streaming and spin off the physical DVD rental business into a separate company, Qwikster. The share price halved as more than 800,000 Netflix subscribers quit.

But he is certainly right to suggest that the market for movies and TV is changing fast. "The era of broadcast TV is going to evolve to click-and-watch with the internet," he says.

Netflix is launching on a string of devices in the UK – from the internet-enabled smart TV sets and personal computers to smartphones, tablets and games consoles. A user can access Netflix through the web or via an app and can switch seamlessly between devices mid-programme. Content is personalised and there is a recommendation service.

Appropriately for the social age, subscribers don't even have to go through a lengthy enrolment process on the Netflix website. If they choose, they can log in with their Facebook details. This means that when a Netflix user watches a movie or TV show, it automatically alerts their Facebook friends, posting a message to their ticker feed on the right-hand of their Facebook page. A Netflix user can also see what their friends have been watching.

The UK may be a tough market for Netflix to crack but it has an impressive record. In the first half of 2011, it added 5 million susbcribers in north America. Mr Hastings declines to set any public targets for the UK.

There is no doubt that LoveFilm, which was bought by Amazon for around £200m last year, sees Netflix as a threat. The British firm chose to announce for the first time yesterday that it is launching a streaming-only service, priced at £4.99 a month – £1 cheaper than Netflix. Previously, LoveFilm only offered online streaming and the rental of physical DVDs together in a variety of bundled price packages.

Mr Hastings uses that as another opportunity to knock LoveFilm.

"They're just launching the £4.99 package today. It's not even on their website yet," he says, grabbing an iPad and pulling up the LoveFilm website.

LoveFilm insists that details of its £4.99 package are well displayed on its website.

BSkyB probably has less to fear from Netflix in the short term. Sky's premium subscribers typically pay £30-£40 a month for movies and sport, so Netflix would appear to be appealing to more cost-conscious consumers.

The movie studios are quietly very pleased at the rise of LoveFilm and the arrival of Netflix after years when Sky was practically the only game in town. The on-demand firms have been engaged in a bidding war for movie rights for exclusive time periods – known as the pay-TV window. Such investment is not cheap. Netflix has admitted to investors it could take as long as two years for its UK service to be profitable.

So the stakes are high as Netflix tries to conquer Britain.