Sale of Lovefilm: A champagne moment for UK tech?
Lovefilm, the fast-growing movie rental firm, has been sold to Amazon - and the champagne will doubtless be flowing in London's venture capital community. After all this is the most profitable "exit" from a technology start-up for some time. It is also proof that the UK is a place where you can, in the words of Lovefilm's CEO Simon Calver, take a good idea, build it into a successful business and attract the attention of a global powerhouse like Amazon.
Ìý
But should the rest of the tech sector be celebrating as another of its clever young companies decides it can only grow up under the tutelage of a giant American parent? Let's have a look at a couple of reasons to be less than cheerful about this deal.
First, the price. For whatever reason, neither Lovefilm nor Amazon wants to go public with this information but I understand the deal values the business at $312m or £200m.
It may sound a lot - but look across the Atlantic at a similar venture Netflix. It has been a huge hit with investors, and has seen its shares quadruple in value over the last year, giving it a market capitalisation of around $10bn (£6.3bn). Now it does have about 10 times as many subscribers as Lovefilm, and is much further down the road from a postal service to a digital download and streaming operation.
Nevertheless, Amazon has picked up the British business for around one-30th of the price of its US equivalent - which will look a bargain if Lovefilm does succeed in its mission to become a digital one-stop shop for movie lovers.
It also looks quite cheap compared with sales of other European tech firms to US businesses. In 2005 eBay paid $2.6bn (£1.4bn) to buy Skype. Nearly four years ago CBS paid $280m (£140m) for Last.fm, a music service which at that time had negligible revenues. And in 2008 the social network Bebo, another business which had yet to prove that it could make money, fetched $850m (£417m) from AOL.
Mind you, those purchases eventually proved either mildly disappointing or, in the case of Bebo, downright disastrous for the American buyers. So maybe Amazon is right to be cautious about over-paying for Lovefilm.
The bigger concern is the message sent out to UK and European entrepreneurs. Whereas the Mark Zuckerbergs of this world hang on in there, despite all invitations to sell up while the going is good, the founders of our smartest start-ups rarely seem to have staying power. Although you can understand the pressure from a venture capital community eager to make a return, it would be nice to see a little more patience.
But when I spoke to one of Lovefilm's founders and backers he told me it would be wrong to take a gloomy view. "We beat ourselves up a lot but this is a moment to celebrate," said Saul Klein of Index Ventures. As well as Lovefilm, he was also involved in getting both Skype and last.fm off the ground.
Mr Klein's point was that the entrepreneurs who had come out of those business were going on to start new business or to become angel investors. "To create a long-term sustainable ecosystem you need these companies that throw off talented people."
And he insisted that we should be more positive about our success stories. He pointed me towards an answer he had given to the question , the hot new question-and-answer site. It was a long list, with impressive names like ASOS, Betfair and Moneysupermarket on it.
So maybe Saul Klein is right, and it does not matter who owns our best young web firms, as long as we keep creating new ones. But wouldn't it be nice if, just for a change, one of our start-ups got big enough to march over to Silicon Valley and buy one of their firms?
I'm 
Comment number 1.
At 20th Jan 2011, MyVoiceinYrHead wrote:I doubt amazon bought this for the DVD business, indeed I expect it will be faded out in 3 years. Amazon have struggled in the on demand Market because they are associated with desktops. Lovefilm opens up the living room, already on PS3 they can easily move onto other platforms.
Complain about this comment (Comment number 1)
Comment number 2.
At 20th Jan 2011, sagat4 wrote:You guys don't have the buying power and the financial clout yet to take on the ypung and old guns of silicon valley. I do agree it was a bargain and a sly move by Amazon (who claim they want to keep Netflix out of the UK but Netflix will come to the U.K not long from know as they look to expand into europe) but they have reasons to be cautious. I remember the Myspace deal not long ago and scrathed my head at the ridiculous price (where are they know?) but i do believe that Lovefilm will succeed and open up many avenues and provide Amazon with a good ROI.
Complain about this comment (Comment number 2)
Comment number 3.
At 20th Jan 2011, cabsandy wrote:Lovefilm, and NetFlix, depend on 2 things-get them right and you have a winner
1) Good content-from what I can see on my PS3, its not that good!
2) Your target audience has decent broadband-the US users have access to fast cable much more than the UK. With a lot of the UK being on ADSL, these people (like me) will fail to support the model
So I would say the price is right for what I would say is a punt-Amazon are betting on Lovefilm as they are the most successful, of what has been up till now, a poor offering for streaming in the UK. I believe this is partly their fault (content) and the UK (poor infrastructure). Amazon will have masses more leverage with the big studios and possibly could be a player in any anti-Net neutrality carve up (sign deals with the likes of Virgin-on the new TiVo box anyone?)So they could/can force the model. The other problem is that a lot of streaming in the UK is currently free-Â鶹¹ÙÍøÊ×Ò³Èë¿Úiplayer is rampant but would you get 1.3 million views of Top Gear if you had to pay for it?
This has a long way to go and will only work if the infrastructure supports it-period.
Complain about this comment (Comment number 3)
Comment number 4.
At 20th Jan 2011, Graphis wrote:I thought that was the whole point of starting up a tech company these days? Run it for a few years, attract some attention, then sell it to one of the giants...
Complain about this comment (Comment number 4)
Comment number 5.
At 20th Jan 2011, U14179821 wrote:All this user's posts have been removed.Why?
Complain about this comment (Comment number 5)
Comment number 6.
At 21st Jan 2011, arrbee wrote:You forgot to mention that Amazon already owned a chunk of Lovefilm on the back of their deal a few years back that transferred Amazon UK's then DVD rental business (and customers) over to Lovefilm.
Complain about this comment (Comment number 6)
Comment number 7.
At 21st Jan 2011, jb70100 wrote:The Amazon takeover sounds a good thing for consumers, but Netflix arriving in Europe is an even better thing.
There is much to admire about Lovefilm but if you compare what UK consumers get from them, and how much it costs, vs the Netflix equivalent in the US, the latter is far superior. Most accutely of all, the LF offering via PS3 in the UK is so woeful it probably should not have been launched yet. Streaming is clearly the future and LF has a long way to go on that front.
Complain about this comment (Comment number 7)
Comment number 8.
At 24th Jan 2011, Vincent wrote:Hi Rory,
I think you'll find the price paid by Amazon is for the remaining stake in Lovefilm, of which they already owned approx 40% of the shares if memory served me.
Complain about this comment (Comment number 8)
Comment number 9.
At 25th Jan 2011, Phil Wells wrote:@3 I agree with you to a degree, though whether or not their existing content is good is a matter of personal opinion.
No digital content provider launches with a particularly large library - it takes time to achieve that - so LoveFilm most likely launched the PS3 service (which is obviously still very new) with content that is likely already successful via their home service. Give it a few months and the catalogue will obviously grow.
In regards to internet speeds - it is not necesserily true that the US has more access to faster broadband. In fact, the average US household has slower speeds than the UK. As it stands, with VirginMedia already offering 50mbs and now 100mbs, and BT gradualy rolling out similar speeds, the UK's high-speed broadband distribution isn't nearly as bad as the media makes out - and is getting better monthly.
A UK company is never likely to grow big enough to buy a US company. It is a simple matter of population size. Any US business has access to 2 billion people - any UK business only has access to 60 million. Obviously a US business stands to have a higher worth simply because it has a larger target audiance and is the single reason why NetFlix is larger than LoveFilm - simply put, if LoveFilm had access to 2 billion people right from day 1, I would expect that it too would be worth over 3 billion rather than 300 million.
Complain about this comment (Comment number 9)
Comment number 10.
At 25th Jan 2011, Andrew Ferguson wrote:While the LoveFilm content can be described as poor bit rate, if you compare it to what many people are happy with in terms of SD Digital broadcasts it is not that bad. Also it is a free addition to the service on top of the delivery of DVD/Blu-ray titles.
At least LoveFilm don't pretend that is is HD at all.
Hopefully they have plans to offer a HD version in the next few months, with perhaps 5Meg streams (the market for higher than that would be too small).
What is interesting is the difference between PS3 and XBox360, the XBox Live service supporting party viewing for its Sky service and the other messenger functions, allowing for 'fan/party' viewings for people around the country.
Complain about this comment (Comment number 10)
Comment number 11.
At 25th Jan 2011, m0ns00n wrote:@9 - Phil Wells
Agreed that population size obviously has a huge impact, but just wondering you get 2 billion from? The US population is around 300 million, so where are the other 1.7 billion people coming from?
Complain about this comment (Comment number 11)
Comment number 12.
At 27th Jan 2011, whatstherealstory wrote:sorry to be mr cynic here. But before spending so much time agonising about why uk dotcoms dont match the success of us counterparts how about a bit of transparency here. In a US deal like this typically we would know what investors had put into the business as well as what they got out. Whatever that multiple is is a good starting point for assessing a good deal v a good PR story on a necessary exit (the physical business of hiring out DVDs is not going to be a growth business going forward and online rental rights is a whole different (and expensive) kettle of fish)
My understanding is that Lovefilm is a consolidation of 4 dvd hire businesses including Amazon. So what can tell us if this was a good deal would be
1 Price Amazon paid . Concensus seems to be £200m but never been any official confirmation of that. Also was that the value of business i.e with Amazon share or what Amazon paid to buy the other shareholders out?
2. If we go back in time exactly how much did all those investors in LF and the other actually put in to the business.
3. What multiple of 2. is 1.
Once we know this we can assess if this was a good deal or not........
Complain about this comment (Comment number 12)