Netflix and Lovefilm begin price war

Netflix said it plans to invest “a couple of billion” dollars in new content deals as it challenges Amazon’s Lovefilm and British Sky Broadcasting in the UK, starting the year on a bullish note following a difficult 2011.

The hefty outlay comes as it enters a much more competitive market than its native US, as it also faces competition from pay TV providers British Sky Broadcasting, BT and Virgin Media as well as retailers such as HMV and Tesco, analysts say. The company has said the cost of entering the UK will push it into a loss in the first quarter of 2012.

Netflix chief executive Reed Hastings said that he was focusing on the company’s long-term success and would rely predominantly on word-of-mouth recommendations to drive uptake in the new market.

“We are focused on getting to multiple millions of members in the UK over the next few years,” he told the Financial Times. “It doesn’t really matter how much in the short term. Our first focus is on member satisfaction not on quantity.”

Ted Sarandos, Netflix’s chief content officer, said licensing costs in the UK were “high relative to the size of the market” but that more shows would come online over the course of the year.

“I don’t mind that it’s not easy to get content because it creates some barrier to entry for others,” he said. “We will spend a couple of billion [dollars] on content in the next year, from hundreds of suppliers all over the world.”

However, after launching in Canada and Latin America since 2010, Netflix plans to ensure existing markets are nearing profitability before expanding further. “We have got quite a bit of work to do to get the business back to global profitability,” Mr Sarandos said.

Netflix’s UK and Ireland launch was undercut by an immediate price war with Lovefilm, as the Amazon-owned DVD and web video service undercut its new US rival’s £5.99 monthly price for unlimited online streaming by a pound. Lovefilm, which now has 2m subscribers in the UK, also plans to counter Netflix’s arrival with a new TV advertising campaign.

The two companies have been competing fiercely for content deals in recent months, although analysts at IHS Screen Digest say both rely heavily on older TV and films.

Netflix has secured “tens of thousands of hours” of content from movie studios. However, it has no plans to launch its DVD rental service in the UK, which thanks to the success of the BBC iPlayer is seen as fertile ground for Netflix’s “over the top” video streaming.

Netflix’s service is available on a wide range of smartphones, smart TV sets and games consoles, including some platforms from which Lovefilm is currently absent, such as Apple TV and Nintendo’s Wii. It also offers integration with Facebook to share what users are watching with friends and receive personalised recommendations, based on their own viewing habits and what their Facebook friends have seen.

Netflix will be hoping to put a torrid 2011 behind it after a 60 per cent price increase prompted a customer exodus and an aborted attempt to rebrand its DVD rental service as “Qwikster”.