Netflix after UK 'fortress'

The big player in the US online movies business is trying again to launch in Britain, but faces an uphill battle. Nick Clark reports

Netflix knows a thing or two about U-turns, and not just because it allows customers to rent the Oliver Stone movie of the same name. Just weeks after deciding, and then undeciding, to split the company in two, it has made a move to launch in the UK, seven years after an initial attempt failed.

The surprise announcement yesterday revealed that Netflix plans to expand its online movie streaming service to the UK and Ireland next year, putting it head-to-head with LoveFilm, YouTube and a host of other players in the market.

The company has not yet released details of pricing or the catalogue it plans to offer, or even why it is returning to a market that proved too tricky to crack the first time around.

Netflix was founded in 1997, shaking up the video rental market as it persuaded customers to pay a monthly fee in return for mailing them DVDs with no late fees. It began streaming films over the internet in 2007 and as it expanded to new markets the number of customers has risen to 25 million.

The Nasdaq-listed shares peaked during the summer, but the company has suffered since. In July it raised its prices by 60 per cent, which prompted some customers to head for the exits. Then last month it said it would split the online and physical DVD businesses, the latter to be dubbed Qwikster. Two weeks ago, after a customer rebellion, Netflix chief executive Reed Hastings said it

had ditched that plan. "There was a consumer backlash over splitting the business," one industry source said. "And the price rise was badly handled."

Reports that it would launch in the UK emerged in 2004, only for the company to "delay" its plans as it looked to concentrate on its home market. The service never got off the ground. This time, instead of DVD mailing, it will concentrate exclusively on providing streamed content over the internet.

Internet users in the UK are increasingly comfortable with online video viewing. According to the latest Experian Hitwise numbers released yesterday, UK internet users spend a combined 240 million hours every month watching online video content.

In September, there were 785 million visits to online video websites, the research group said, up 36 per cent year-on-year. James Murray, marketing research analyst at Experian Hitwise, said: "There are now more visits to video websites every month than to email providers, travel or sports sites." He said people were becoming more accustomed to watching shows on computers and other devices.

While 70 per cent of the hits are on YouTube, there is a rise in consumers viewing longer programming on catch-up sites such as the BBC iPlayer. "While YouTube dominates the market, the increase in traffic to video-on-demand and more niche sites demonstrates that content is what matters most to today's Internet users and they'll go to whatever site has the content they're most interested in viewing," he said.

Simon Woodward, chief executive of the TV software group ANT, said 2012 would be a "tipping point" for the connected TV market in the UK. "We're expecting a host of services like this one to be launched in the coming 12 months," he said.

Dan Cryan, a senior analyst at IHS Screen Digest, said Britain was a "potentially interesting market" for new streaming services. "This is a ballsy move by Netflix," he said. "It could be really good for UK consumers." The company is understood to be aggressively negotiating for rights, and certainly has the financial firepower and expertise to make an impact on the market. Implementing a streaming service would also be easier than a DVD mailing service, Mr Cryan said.

The market would offer "a couple of snags", he said, especially as there was less of a tradition of paying for TV content than in the US.

For those who are willing to pay, there is already LoveFilm, which was bought by Amazon for about $200m (£125m) in January. The group has been securing deals with independent producers to show their movies first, and it is believed that the US online retailing giant is preparing to throw resources at competing for rights more aggressively.

The big shadow that looms over new entrants is BSkyB. The satellite broadcaster currently has deals with all the major studios for the first run of their new releases in the UK. This may change following scrutiny from the Competition Commission , but as one analyst said: "It is a bit of a gamble if Netflix is relying on that." BT and Virgin also offer on-demand content.

Google announced a movie rental service for Android customers last week, shortly after setting up on YouTube. Apple offers rentals via iTunes and earlier this year Tesco bought 80 per cent of Blinkbox, which offers streaming.

One industry insider said: "The UK is a fortress market. Netflix will have to work hard. The companies already operating are hardly sleepwalking."

Reed Hastings: Boss in the limelight

Netflix may just have the most hated chief executive in the US. The company, which was as much loved on the other side of the pond as LoveFilm has been in the UK, managed to squander all its extraordinary goodwill in the space of a few weeks this summer, triggering furious comments all over the internet, mocking punchlines on TV and a dramatic stock market sell-off in Netflix shares as customers deserted in their droves.

The cause was a brutal price hike. Instead of $10 a month for all the DVDs you wanted through the post and all the movies you could stream over the internet, Netflix said customers would have to pay $8 each for both. If Mr Hastings thought his subscribers would cheerfully accept his justification that the costs of getting digital content for the streaming service were soaring, then he was wrong. One million deserted and have continued to flee. Shares lost a quarter of their value in after hours trading yesterday. Instead of contrition, the company doubled down on its strategy and decided to split in two, renaming its DVDs-by-post service Qwikster. Cue more fury, and ridicule. Saturday Night Live, the comedy show, dubbed the pair Quackster and Nutflix. In the end, Mr Hasting performed a full U-turn and the services are staying together for now.

Stephen Foley

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