When Netflix revealed it will launch in the UK next year, many wondered what took the ambitious online streaming and DVD rental service so long.

The UK boasts a fast-growing online audience, declining DVD consumption and a number of hungry, well-capitalised indie distributors frustrated by diminishing returns from broadcasters and a lack of competition in the pay-TV window.

With 23 million customers, Netflix is the market leader in subscription video-on-demand (SVoD) in the US. It has moved fast since the October announcement, aggressively pursuing content deals. And Lovefilm, the UK’s incumbent SVoD kingpin, has also been locking up a string of high-profile partnerships.  

“The entire landscape is shifting very rapidly. We all have to be proactive,” says Alex Hamilton, director of film at Entertainment One. “The deals being done in this window will set the tone for the next few years,” suggests the head of another UK distributor.

The flurry of activity means the traditionally limited pay-TV window options for UK distributors have dramatically altered, with the independents in particular profiting from the added competition to BSkyB-owned Sky’s long-held monopoly (Sky Movies has up to 5 million UK subscribers compared to Lovefilm’s 1.7 million across the UK, Germany and Scandinavia).

‘The entire landscape is shifting very rapidly. We all have to be proactive’

Alex Hamilton, Entertainment One

For now, both Netflix and Lovefilm are focusing on securing lucrative deals with the territory’s big independent distributors and the US studios’ local distribution arms. Lionsgate and MGM have both signed exclusive multi-year output deals with Netflix. In addition to a vast array of library titles, films including both parts of Peter Jackson’s The Hobbit, the hugely anticipated The Hunger Games, The Expendables 2 and Kenny Ortega’s Dirty Dancing reboot will be available via the service’s streaming option during the UK pay-TV window.

“Netflix’s arrival in the UK adds some much-needed competition to the pay-TV market,” says Zygi Kamasa, CEO of Lionsgate UK. “Their model and subscriber growth has been so strong in the US that I really believe their UK service will emulate that success here.”

Netflix has also closed a significant library deal with Miramax, giving it access to library titles from Pulp Fiction to The English Patient, and a deal with Momentum is believed to be in the pipeline.

In the summer, Amazon-owned Lovefilm closed an exclusive long-term streaming deal with eOne, which includes all films in the Twilight franchise, and a further deal with StudioCanal in September, which includes Tinker Tailor Soldier Spy.

Entertainment Film Distributors, which is the only independent distributor believed to have a significant pay-TV deal with Sky, has yet to commit to either service.

The hefty MGs offered by both Lovefilm and Netflix have surprised and delighted UK distributors. While each contract is structured differently according to content volume and the strength of individual titles, the lucrative output deals have in some cases trumped Sky offers. One big indie was offered an output deal in the region of 12.5% (which would be capped) of the gross theatrical box office of each title as well as a base commitment to take direct-to-TV titles.

But some studio distributors (all of which have deals with Sky) see Netflix’s arrival in the UK as a further threat to DVD retail revenues. If they do sign deals, it is likely they will be for mid-range titles rather than tentpoles. In 2009, Universal pulled its titles from Lovefilm after concerns the service was damaging its retail DVD revenues. It has subsequently seen those revenues rise.

The exception to date is Warner Bros, which last month signed an exclusive streaming deal with Lovefilm for most of its recent and upcoming catalogue including Harry Potter And The Deathly Hallows: Part 1 and 2, and Christopher Nolan’s The Dark Knight Rises following their first run on Sky.

“Netflix’s arrival in the UK makes for a more competitive UK subscription video-on-demand market,” says Josh Berger, president and managing director of Warner Bros Entertainment, UK, Ireland and Spain. “The impact of that competition is good for consumers, producers and distributors.”

Warner Bros describes the deal arrangement as an “exclusive second-window subscription pay-TV deal”. At the same time, Warner Bros has pushed back the window for its titles on DVD rental-by-post to 60 days from its existing 28 days to allow DVD retail and VoD to thrive.

“The big question is whether it’s a big bubble that will burst in a few years,” says one distributor. “Netflix and Lovefilm are similar models in the same arena. They are offering huge amounts of money but can they both be in the same space in a few years’ time?”

Speed bumps ahead for Netflix?

Slow broadband speed and a relatively healthy retail DVD sector could pose problems for Netflix in the UK. Andreas Wiseman considers the issues

It is not yet clear exactly what service Netflix will be offering to UK consumers. In the US, demand for Netflix’s streaming service far outpaces its physical postal-rental service. As Lovefilm has already cornered the physical rental market in the UK, it is understood Netflix will offer only a streaming option in the territory.

Putting all its eggs in the streaming basket makes internet speed and consumer appetite for streaming essential to Netflix’s success. However, although the government aims to introduce superfast broadband throughout the UK by 2015, the UK presently has a slow broadband speed compared to the US and many other international territories. This frequently leads to complaints about interrupted streaming of videos across digital platforms. Many high-quality videos from Netflix are encoded at a bit rate of more than 2mbps, but in the UK only an estimated 13 million homes have a broadband speed exceeding 2mbps.

Also, while the subscription video-on-demand (SVoD) and transactional video-on-demand (TVoD) markets are well insulated from each other, Netflix is nevertheless joining a congested market for online video retailers. In addition to its main competitors Sky and Lovefilm, the UK includes successful TVoD outfits Virgin FilmFlex and Apple iTunes as well as Tesco-owned Blinkbox, BT Vision, YouView, MUBI and others, as well as soon-to-be players such as high-street retailer HMV (on FilmFlex) and Blockbuster. Independent distributors Curzon Artificial Eye and Dogwoof also operate their own TVoD services.

In Netflix’s favour are changing UK consumption habits. Consumers want premium content sooner and across multiple devices. Connected TVs and tablets are becoming increasingly popular means of watching film, a trend which aids Netflix, whose streaming service is available across multiple devices, including connected TVs, tablets, consoles, computers and mobile phones — as is Lovefilm’s service via its Lovefilm Player and related apps.

The cloud-based digital rights locker UltraViolet, also on its way, is intended to make it easier for consumers who want to watch the same film across a number of devices. Netflix, Lovefilm and most distributors are members of the US UltraViolet consortium DECE and both SVoD services could gain from a healthy take-up of the library system if they commit to it.

Yet UK and European consumers have a long way to go to meet US habits. According to Screen Digest, only 36% of European TVs are connected to a pay-TV platform, compared to 90% in the US. Retail DVD is still hugely popular in the region. According to a recent Futuresource Consulting survey of consumers in the US, UK, France and Germany, people in the UK buy the most DVDs, an average of 6.5 discs each over the last six months.

Pay-TV subscriptions are still not the norm: 80% of respondents to the Futuresource poll said they do not pay for any online video content. At least 10 million UK viewers still only see films in their homes on free-TV.

However, paid-for transactional and subscription online video spend in the UK is on track to reach $113m (£72m) this year. Next year it is forecast to reach $152m (£97m). Growing consumer demand for SVoD and VoD platforms is there for distributors and retailers to exploit.