November 25, 2011 8:33 pm

Online movie services gear up for UK turf war

Film fans in the UK will be spoilt for choice next year as a range of new digital movie portals launch, pitting internet players against traditional retailers and media groups in a crowded fight for consumers’ wallets and Hollywood studios’ content.

Netflix’s announcement last month that it would be bringing its online subscription service to the UK in 2012 has galvanised competition in what remains a small – albeit rapidly growing – market.

Netflix and Amazon-backed rival Lovefilm are vying with British Sky Broadcasting for rights to the newest movies, while at the same time pay-per-view services such as HMV’s new On Demand site, which launched this week, and Tesco’s Blinkbox, acquired this year, are trying to lure eyeballs from movie services attached to hardware such as Apple’s iPhone and iPad, Sony’s PlayStation3 and Microsoft’s Xbox 360.

In the UK just 2 per cent of television viewing is online, according to analysts at IHS Screen Digest, with a large portion of that made up of free catch-up services. But analysts believe new devices that make it easier to watch internet video on the television will accelerate the shift to on-demand movies.

Next month iPlayer, Blinkbox and Lovefilm will arrive on the Xbox, while next year will see the UK launches of Google TV, which provides a range of internet video services, and YouView, the long-delayed joint venture between the BBC, ITV, Channels 4 and 5, BT, TalkTalk and Arqiva.

“People generally want to watch movies on the biggest device possible,” says Richard Broughton, Screen Digest analyst. “They don’t want to be watching on a small laptop screen if they have a 42-inch HD TV.”

Anticipating this shift, HMV, the troubled retailer, plans to pre-install links to its on-demand movie service offering films such as Cars 2 on to digital devices such as tablets, which it hopes will make up for falling sales of DVDs.

“Increasingly, the way that people are experiencing entertainment is bringing the technology and the content together,” says Mark Hodgkinson, HMV’s marketing and e-commerce director. “We want to make that as easy as possible.”

But HMV faces competition from Apple, the market leader, which ties its iTunes download store to its iPod, iPhone and iPad hardware through a closed, proprietary system. Microsoft has similarly bundled its digital movie service into the Xbox.

HMV’s online movie store is supplied and operated by FilmFlex, a joint venture between Sony Pictures and Walt Disney, which also powers video-on-demand services for Virgin Media and Film4oD.

Jeff Henry, FilmFlex chief executive, believes these partnerships improve the economics of the internet video business for all concerned, because its resellers have large customer bases that studios are keen to tap. Mr Henry expects to sign more partners such as HMV in the coming months.

Netflix, by contrast, will be making a standing start when it launches in the UK next year, with no existing customer base. Although it believes its personalised recommendation technology and presence on a variety of devices will give it an advantage over rivals, securing rights to the best content will be critical.

After early skirmishes with studios Netflix has come away with movies from MGM, Miramax and Lionsgate, while Lovefilm has exclusive early access to films from Warner Bros and Entertainment One, the distributor of films such as Twilight. In each case, the internet players had to bid against BSkyB for rights.

Access to such content could become easier if the Competition Commission acts over what the regulator believes is BSkyB’s dominance in the pay-TV movie market, creating significant barriers to entry (a decision Sky disputes).

After its preliminary ruling in August, the regulator is consulting on whether to allow “over the top” providers to access Sky Anytime, its on-demand movie service, and publication of contract expiry dates, which could make it easier for rivals to plan rights bids.

Winning access to more digital movies from Sky is expected to cost Lovefilm and Netflix tens of millions of pounds. Lovefilm generated UK revenues from its DVD-by-mail business of £90.6m in 2010, with pre-tax profits of £6.3m, meaning the market will have to grow dramatically to make that investment pay.

“It is definitely a long game,” says Simon Calver, Lovefilm’s chief executive. “It’s still a small percentage of people watching.”

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