For Brit indies, VOD ignites class warfare

LONDON — With Amazon launching its Kindle Fire tablets in Europe, and Netflix reaching a rapid million members in the U.K., the battle to control Europe’s emerging subscription video-on-demand (SVOD) business is on. But while the two U.S. companies have made the international market a priority, Warners’ decision earlier this month to renew its U.K. output deal with BSkyB shows just how tough it will be to acquire content, and lure the majors away from their existing pay-TV relationships.

Given their deep pockets, and how much each company has at stake, it’s unlikely either Amazon or Netflix will reconsider their international strategy any time soon, suggesting the emergence of a lucrative new revenue stream for the U.S. majors and local indies.

Warners was the first studio whose Sky deal came up for renegotiation since Netflix arrived in Blighty. But Netflix execs say it may take two or three years before they can pry a Hollywood studio away from the satcaster’s iron grip.

“We have said that we are going to try and compete with Sky to get one or two of the five major studios, but it’s about what makes sense from a strategic and economic perspective,” says Netflix spokesman Joris Evers. “We’re looking closely at the mix of what our members are watching to judge what we need.”

The setback follows a promising debut for the company in Blighty, since it arrived in the U.K. nine months ago. Netflix bowed its subscription streaming service in January, in competition with Amazon’s existing Lovefilm brand, which spans both streaming VOD and DVD-by-mail.

Since then, Netflix has reportedly grown twice as fast as its rival, racing to one million members; Lovefilm advanced from an estimated 1.3 million to 1.8 million subs in the same period.

The next move is Amazon’s: It will release its Kindle Fire tablets in Europe in October. This could provide a platform for the Seattle-based giant to make a more aggressive push into digital video across the continent.

The battle will move to Scandinavia this fall, where Netflix has announced plans to debut by the end of the year. Lovefilm already has a small presence in Sweden, Norway and Denmark, and distribs say that several local pay-TV players are planning to launch their own SVOD services.

In the U.K., Netflix and Lovefilm are engaged in a bidding war to sign up content and subscribers, and to get themselves onto as many platforms as possible.

But as well as competing against each other, Netflix and Amazon must also contend with Europe’s pay-TV powerhouses like BSkyB and Canal Plus for exclusive first-run deals with the Hollywood studios, creating a sellers’ market for studio product.

Lovefilm originally started out, like Netflix in the U.S., as a DVD-by-mail service, then added streaming options in 2009, and was acquired by Amazon in January 2011. The arrival of Netflix prompted Lovefilm to launch a streaming-only option, undercutting the upstart’s £5.99 ($9.63) monthly fee with an $8.02 offer.

But the novelty of Netflix, and the relative clarity of its branding as a pure streaming service, has clearly proved to be a marketing advantage. Lovefilm still has nearly twice as many subscribers, but these are still largely using the DVD-by-mail service, with Netflix reportedly generating far more Web traffic.

The swift growth rate of Netflix has delighted its U.K. suppliers, with the creation of a substantial new SVOD market that didn’t previously exist.

However, with distribs suggesting that the break-even target for Netflix and Lovefilm is 2.5-3 million subs apiece, there’s still a long way to go before SVOD proves itself to be a sustainable business in Blighty.

That challenge has only become tougher with satcaster BSkyB’s decision to launch its own internet movie service Now TV in July, aimed at the 10 million U.K. homes that don’t already subscribe to satellite or cable.

Now TV enjoys the advantage of Sky’s first-run pay-TV deals with all the Hollywood studios, so it offers bigger and fresher movies than either Netflix or Lovefilm. But it’s also more expensive, at $24.10 a month. It’s unclear how aggressively Sky plans to market the service, given it doesn’t want to tempt any of its existing 4.5 million movie subscribers to cut the cord and sign up for Now TV instead.

In theory, Netflix and Amazon both have deep enough corporate pockets to challenge Sky’s monopoly on firstrun pay-TV deals with the Hollywood studios. Netflix toppers have publicly stated their ambition to do so, whereas Lovefilm is more guarded.

Meanwhile, both Lovefilm and Netflix have contented themselves with signing exclusive multiyear deals in the first-run pay-TV window with the U.K.’s leading indie distribs, who have never gotten much joy out of Sky.

Netflix recruited Momentum and Lionsgate, plus MGM and niche doc player Dogwoof, while Lovefilm took Studiocanal and eOne. Distribs say those deals can be worth $1.5 million-$4.5 million per film, depending on box office, which at least matches what the majors get from Sky.

“For the independents, it’s definitely found money, because we could never exploit the pay TV rights before,” says Studiocanal chief operating officer Robb Smith.

Lovefilm has also signed exclusive deals with several Hollywood studios for second-run pay-TV, a year after the Sky window, begging the question how important it really is for Amazon to secure newer studio films.

And while Netflix has already vowed to target newer films, it is already enjoying strong U.K. growth without fresh blockbusters, with usage skewing 60%-70% toward TV shows. Overpaying to secure the trophy of a Hollywood film deal could endanger the financial viability of the company’s U.K. operation without adding significantly to its appeal.

Indie distribs in the U.K. are skeptical whether the SVOD market will ever grow enough to sustain their own output deals, let alone a more lucrative studio deal.

“Privately we say to each other, let’s take the money while it’s there,” confides one indie exec. “We really hope (Lovefilm and Netflix stay in the market), because it’s new money for us, and who else pays advances these days? But we worry that going for a Hollywood deal could be a killer for them, because even getting one or two studios is never going to be enough to compete against Sky.”

But even if their U.K. growth stalls before they reach their breakeven target, there may be too much at stake for either Netflix or Amazon to quit.

“What would happen to Netflix’s stock price if they shut down(in) the U.K., given that they have said international is their growth area?” asks another indie rhetorically. “And Amazon is so big that it can fund Lovefilm forever, and it won’t make a dent (in their finances).” Given Amazon’s strategy in Europe concerning digital devices, it makes sense for the company to keep plugging away, the exec says.

The European launch of the Kindle Fire heralds a new phase in Amazon’s international expansion. It is already challenging Netflix in the U.S. with its Amazon Prime Instant Video service, and a similar rollout across Europe is on the horizon. The Kindle Fire will come bundled with a free Lovefilm trial for U.K. buyers, although it’s unclear whether Amazon plans to retain Lovefilm as its European SVOD brand in the long term, or switch to its own name, as it has in the U.S.

Amazon’s video topper Anthony Bay told the Mip-TV audience in April that it would be signing Euro deals for film and TV content. In July, Amazon set up a major new digital development hub in London, by merging the teams from Lovefilm and digital design specialist Pushbutton. It launched its App Store in Europe’s five biggest territories in September, with the Kindle Fire to follow in October. It feels like the battle for Europe’s SVOD market is only beginning.