Summary:

Lovefilm eschewed a possible IPO option because Amazon (NSDQ: AMZN) gives it a global-scale parent with resources enough to land the rights…

Dharmash Midstry, Balderon
photo: Balderton

Lovefilm eschewed a possible IPO option because Amazon (NSDQ: AMZN) gives it a global-scale parent with resources enough to land the rights necessary to profit from the coming online movie explosion, says one of the VCs who has exited in the deal (see earlier story).

It’s a win-win all round,” Balderton partner Dharmash Mistry tells paidContent:UK. “This is a game for relatively deep pockets – you need to do deals with studios, which is an expensive business.”

Like Netflix (NSDQ: NFLX), Lovefilm’s nascent online movie subscription catalogue is only about a tenth as big as its core DVD roster, and it recently took £10 ($15.96) million in debt for the digital rights grab. The connected-TV opportunity could rocket both businesses, if they can secure A-list studio films and wrest more premium rights from subscription operators like Sky Movies.

“It started from zero movies at the beginning of last year,” Mistry says. “(Amazon) have a global footprint and relationships with the studios on a global basis, so they can accelerate that.

“Today, the majority of Lovefilm rvenue and profits come from the physical business. But we’re in a position on the transition curve to digital. That will involve buying rights, a change in rules of ownership. The winning players will be the brands with the deepest pockets to buy those rights. That won’t happened overnight.

“All the work we’ve done with Lovefilm over the last few years has been digital. We saw a radical shift of movie consumption from physical product to digital. At the end of last year, we saw 20 percent of all movies consumed in 2010 were consumed digitally. Digital consumption goes through the roof when it’s in the living room, as opposed to on a PC.

This is a global game that’s going to play out over time. It’s going to be a competition between Apple (NSDQ: AAPL) and Netflix and Amazon, but also operators like Sky Movies, too.”

News Corp.’s UK subscription movie channels currently have a lock on first-release Hollywood flicks – Lovefilm and others are trying to win concessions through an ongoing antitrust inquiry in to the situation.

Balderton (the former Benchmark Europe), Index Ventures, DFJ Esprit and Arts Alliance Media had each held a roughly equal stake in Lovefilm, with the rest of the 48 percent share held by founders of the constituent companies through which Lovefilm was formed as a patchwork over the years.

Investors’ rationale for the exit may differ across the large range of shareholders, Lovefilm chief marketing officer Simon Morris tells paidContent:UK, separately: “VCs do have finite periods of investment in their portfolios. The VCs behind us have always been very supportive.

“We think it’s the right thing for us to do to grow and develop services as quickly as possible. It was the right thing to do.” Morris says Lovefilm will retain its brand, says there is a range of exciting possible Amazon synergies but won’t go in to detail. It’s not not just about funding licenses – Mistry points to opportunities like Amazon-owned IMDB.

“The range (of our online movies) is a function of how young that industry is,” Morris says. “It’s increasing by the day. When we started, there was a much smaller DVD range than there is now.” Morris claims online rights from “dozens” of studios, including Warner, Icon, Momentum, Optimum and a “long tail” of “specialist” titles.

paidContent:UK understands the sale price was in the £200 ($319.39) million range touted in recent reports. Why no stock flotation?

“There’s lot of noise about IPOs,” Mistry says. “But another route in terms of exits is a trade sale. There have been twice as many trade sales as IPOs.

“We could have continued on the growth curve and buying catalogue. But it’s not just money, it’s the time. The buyer brings lots of synergies – there’s more value than in Lovefilm being a single entity.”

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