The pitfalls of being a first mover

As the entertainment revolution gathers pace, pioneer Quickflix is learning the hard way that it’s tough being first. By TIM TREADGOLD

Summary: As the entertainment revolution gathers pace, pioneer Quickflix is learning the hard way that it’s tough being first. Especially when you are competing with a “big elephant” like Telstra.

Tackling Telstra has been too tough for some of Australia’s biggest companies but Quickflix, a small Perth-based start-up with rich friends, is determined to carve out a niche in the fast-growing business of home movie delivery.

Lachlan Murdoch, son of News Corporation boss Rupert Murdoch, is a believer in the Quickflix model of mail-order movies and its future growth as an online internet business. He snapped up a 9.6% stake in the ASX-listed company last August.

For $500,000, petty cash by Murdoch family standards, Lachlan bought himself a front-row seat in what promises to be an entertainment revolution – when Australia eventually sorts out its broadband internet rules, and consumers embrace “on-demand” movies.

Currently, a Quickflix customer can select movies under a variety of rental (and purchase) plans off the company’s website but delivery is by Australia Post mail.

“Growth hasn’t been as quick as we had hoped, but we’re certainly on the right track,” says Quickflix founder and chief executive Stephen Langsford.

“We’ve faced three main challenges; the slow roll-out of high-speed broadband; accessing (movie) content from the studios; and understanding customer behaviour.”

He might have added that there’s also the question of competition because Telstra is a keen player in the emerging business of movies-on-demand via its BigPond internet division, and through its 50%-owned Foxtel cable television business – which has News Corporation and the James Packer-run Publishing & Broadcasting as 25% shareholders.

Challenges

The challenges faced by Quickflix are seen in the company’s share price which doubled to 24¢ in the weeks after Murdoch bought his shares, but has since slipped back to around 18¢, capitalising Quickflix (ASX: QFX) at $9.1 million.

Despite the challenges, Quickflix has posted impressive sales growth, lifting revenue from $797,950 in 2004-05 to $1.9 million in 2005-06. But, the extra sales came at a price, with Quickflix’s loss rising from $1.8 million to $2.6 million.

Langsford’s immediate priority is to grow the customer base from its current 12,500 to a first objective of 20,000.

At the higher number another big shareholder and marketing partner, the rural television broadcaster WIN Corporation, has agreed to convert an option it has on a parcel of Quickflix shares at a price of 35¢.

Langsford knows all about the importance of catching and keeping customers. He is a “second-timer” in the world of e-commerce, having built, and then sold a website development business called Method + Madness to Sausage Software in 1999, the year before the dot-com crash.

Growth trajectory

He says Quickflix, which has a movie library of 20,000 titles, is on a solid growth trajectory and should break even in another 12 months.

“The deal we’ve struck with WIN is the first true mass media activity we’ve engaged in,” Langsford says. “They’ve got reach in a market, which really is a sweet spot for us. Regional Australia is being squeezed by high fuel prices and pretty lacklustre (entertainment) alternatives.

“Outside of WIN we’re doing some interesting in-store promotions with Australia Post, and we’re launching a Hoyts at Home, which will see us promoted in cinemas.”

Langsford says the key to any subscription business is “how much you want to open the marketing throttle”.

“Deals like WIN are good for us because they deliver subscribers,” he says. “The more deals we can do that align us with a partner means we get the subs without the marketing costs.”

Langsford says Telstra is his biggest rival and although he doesn’t have “a firm handle on their numbers”, he is very much aware of Telstra’s marketing push to sell home-delivered movies.

In a cute twist of marketing logic, Langsford argues that Telstra’s marketing is good for Quickflix. “It generates awareness of the sector.”

Broadband

Shifting the mail-order phase of Quickflix to broadband delivery potentially represents a major boost.

“We see broadband as scope for additional engagement with consumers and ability to broker other transactions,” he says. In plain English, that means selling extra “stuff” to the all-important customer base.

“These things take time. There is an infrastructure deficiency in Australia that needs to be fixed. In the meantime, we’ve got the most efficient delivery method (via Australia Post).

“What we’re doing now is a hand-holding exercise for consumers to help them get used to the full range of content with an on-line selection process, and when all the bugs are shaken out for broadband delivery, we’ll be there.”

Apart from broadband speed and consumer behaviour, understanding movie studio rules about online product delivery is an issue for Quickflix.

“Hollywood is still a conservative place and making content available online is an issue for the studios, which we’re watching very closely.”

A clue to the future of Quickflix lies in Langsford’s 1999 sale of Method + Madness to Sausage Software.

It shows that success can be measured in a variety of ways: Either Quickflix succeeds in becoming an Australian leader or it becomes well positioned for a high-priced exit if a bigger rival decides it needs more customers … perhaps making Telstra more than just a competitor.