Why the internet will beat the downturn

The silver lining for Quickflix in the economic downturn is the “lipstick effect”, where people indulge in cheaper at-home recreation. Founder Stephen Langsford tells AMANDA GOME how the evolving online world has changed his business, and how it could cha

Stephen Langsford is 46 and is the executive director and founder of Quickflix, the online movie subscription company.

Langsford has started several successful start-ups and talks about how Quickflix is going, looks back on his other two business, and the changes are that are coming online for us all.

Amanda Gome: You have founded two companies and you sold both at boom times, Change Corporation and Method + Madness. How much have you made from building and selling businesses?

Stephen Langsford: I’ve made a good amount of money.

You sold Change for $20 million…

…some several million dollars, and both businesses have been in the high growth internet and information technology.

Before that I was with Arthur Anderson, a management consulting group.

You moved into the internet in 1996 and founded Quickflix in 2004. Has it met your expectations? The idea of getting your movies online and renting them online is a big change.

I think everyday, Quickflix is like groundhog day. The market opportunity is huge, we’re well positioned in that market and we now have over, well approaching, 28,000 subscribers.

I guess I thought I would hit that number in our first year, so it has taken longer than I had anticipated. But that said, I guess one learning is that these things take longer than you do expect; the important thing is to persist and hang in there.

Now of course one main challenge is educating the market.

That it is hard work!

What do you do? Do you have to hire a particular type of sales people who have a different approach?

When we started our business Quickflix, it was a very rudimentary, prototype service and it was quite clunky. The best learning is to perfect your product or service, and really wow your customers, and they become the strongest advocates for your product or service online. So it is really delivering on the promise around the service and naturally then your customers will activate and start to evangelise your service to other customers.

How have you marketed? I noticed that you have got a new marketing manager in, who is very much focused on partnership and channel. How has your marketing strategy changed?

I think in fact our approach has always been to partner, so over the course of Quickflix we have entered a number of partnerships, working with other major consumer brands, be it Optus, Woolworths etcetera.

And that is by necessity because of access to limited capital; we don’t have a huge amount of capital to blow on traditional advertising. But also because we’re an online business and you are obviously looking for marketing strategies that are performance based. I think having, now some years on, we now believe we have a great service and we’ve arrived and out-survived some of our competitors and some very significant competitors at that.

You’ve raised one there, EzyDVD; what did they do wrong?

EzyDVD were a very dominant online retailer of DVDs. Where they came unstuck was through the credit crisis they got themselves into too much debt, and in fact their physical stores with the physical inventory was their undoing.

So I have put that down to managing your balance sheet. In the early days of Quickflix of course, when we launched our service, we were up against Telstra, that also launched a service at the same time, and a Packer-backed competitor called HomeScreen. So we were up against two very well funded competitors, and we were able to move and acquire HomeScreen and consolidate to be the number one independent player against Telstra.

I look at some of my peers online where the last 12 months has been tough going. Who’s the online digital agency that sort of buggered up? BlueFreeway. Then Destra, being the listed new media aggregator, has also gone under. So the last 12 months, we’ve out-survived some other high profile players and believe that we’re coming now into very favourable trading conditions for Quickflix.

Why do you believe that? What’s favourable about this period when everybody’s clinging to the deck?

The silver lining in the economic downturn is that more consumers will be spending more time at home. It’s what some refer to as the “lipstick effect”. Entertaining yourself at home with Quickflix movies is giving a little respite to the otherwise gloomy news and, accessing our service via the internet and having it home delivered, we think that the downturn will mean that we’ll benefit.

Whereas out-of-home entertainment services such as cinema and even more expensive services like Foxtel in which you have to commit to a year’s contract will struggle. And we know that in the US where our counterpart Netflix, which pioneered online DVD rental, has had a real surge in subscriber growth. Of course they have been in the economic downturn much longer than Australia has, so we think it lines up very well. And the other thing is movie consumption does very well as history has shown through depression and recession times.

What about the online part of your business, how is that changing?

That question points to new delivery formats such as digital delivery. So what Quickflix is building is an online brand and online subscriber base, and today we’re able to offer over 35,000 titles, which is 15 times greater than the range of titles that you’ll find at the local video store, growing at a rate of 500 new titles a month.

And we’re well positioned and you will see over the next 12 months Quickflix will introduce a complimentary digital delivery service. But the bulk of Australian homes, 90% of homes with a DVD player and access to the internet, will consume movies via high quality DVD and high definition Blu-ray format.

We think that internet consumption increases as true broadband penetrates in Australia. So regardless of the ability to be able to deliver movies and streaming of movie content, consumers just do more online as always-on, always-available broadband increases. And that’s demonstrated in the US, and Quickflix and other e-commerce sites should be a beneficiary of the increasing use of the internet.

And of course we’re going to see the increased use of the internet just generally through the downturn.

I absolutely believe so. I think the big win out of the downturn, if you can call it that, is the internet, because efficiencies and cost savings will be a big driver.

You’re revenue’s still quite small, $1.72 million.

That’s for a quarter. Our revenues are up 20% on this time last year and at a run rate of revenues of approximately $7 million a year. And we believe that we’re set for being able to double that over the course of the next 12 months. It’s not an insignificant online business and that’s off a relatively small but healthy subscriber base.

We think that Quickflix has a potential to reach, if we follow the behaviour of US, that 10% of households in the US currently subscribe to online DVD rental. So 10% of households in Australia today would be 800,000 as an addressable market. So we see certainly the prospect of multiple of hundreds of thousands of subscribers to Quickflix, which makes it a very, very significant business indeed.

Can I just ask about the customer profile? Are younger people more likely to subscribe?

Certainly the sweet spot for our subscriber base is 20 to 45 year olds. That’s the rump of our subscribers. Given that we offer the universe of titles, Quickflix is really for everyone that has access to the internet and a DVD player.

But the profile of our customer base today obviously represents a relatively savvy, early adopter base. We offer a range of subscriptions from relatively low watching of DVDs, a couple DVDs a month through to those that might watch several DVDs a week.

How’s your profit gone?

Since commencing Quickflix, we’ve invested some $12 million towards building our operating infrastructure and our library and our website and all the technology that supports that as well as marketing and developing our brand.

So as with any start up, you occur accumulated losses in the early days of your business but the last 12 months we’ve achieved a turnaround there as our paying subscriber base has reached now in excess of 25,000 subscribers.

And as key indicator there our operating cash outflow for this time last year, for the quarter ending December 2008, has moved from three quarters of a million dollars outflow to about $90,000.

So we’re very excited about the fact that we’ve reached a sustainability milestone and we are now in a strong position as the leading independent player in the space.

Now, it hasn’t really moved your share price though.

Our share price has gone backwards.

How do you explain that?

I think that our share price has never been hyped up, so we’ve only ever traded as high as 27 cents and we’ve seen our share price, like many micro caps, hit by the global financial crisis; and we’re down now to a couple of cents.

The point I would make is that I’ve bought shares at 20 cents, at 27 cents and most recently in May last year when we did a rights issue, myself and other investors invested at five cents, and more recently we were able to acquire more shares from the receiver of Destra, so we are obviously very big believers in the outlook for Quickflix.

What percentage have you got now?

I have 20%.

Lachlan Murdoch has sold out. Why did he sell and should he have stayed in?

Well I don’t know why Lachlan sold but he did, at the time, trade his holding in Quickflix for shares in Destra that was already a shareholder in Quickflix. So Destra at one point held 20% of Quickflix’s stock. Unfortunately Destra went into receivership at the end of last year, and myself and other shareholders were able to acquire Destra’s former 20% holding.

Lachlan should have stayed in!

Time will tell.

What is your personal biggest challenge for this year going forward?

I think a key message for us is to stay focused and stick to our knitting. So it’s easy in running a high gross business to get caught up in a whole bunch of diversions, but we just have to stay focused on delivering a great service to customers and getting the message out there, and things like share price will look after itself. So staying focused on building a great brand and service is what we’re on about.

Now the micro caps have been hit hard. Is it very hard now to get the message out there about micro caps?

I think Quickflix actually has a good profile; we punch above our weight, and we’re an exciting story and the growth prospects are very high.

We haven’t spent any time with brokers or analysts, particularly over the last six months, and even when we did spend some time with brokers and analysts, it was fairly minimal because we don’t think that there’s much point in going about attempting to hype up your story and share price.

The fundamentals of our business and our growth will take care of our share price and our recognition as a stock. Clearly we think it’s great value because we continue to provide the investor support for it.

On a personal level, having sold those two businesses, have you ever thought about another life on a beach somewhere?

Never once. I can’t imagine anything better than what we are doing at the moment with Quickflix. The home entertainment business is a multi-billion dollar business, we’re disrupting the old traditional world of Foxtel delivery and traditional rental stores, and we like a challenge.

And we think we’ve built a great team and a great little brand and a great service that should provide plenty of excitement ahead – so I think that beats being on a beach any day. Although sitting on a beach now and again…