Earlier this month Amazon, the world largest online retailer, acquired Lovefilm which specialises in online DVD rental, either via post or through streaming films online. Even though Amazon already owned a minority stake, this still is the kind of acquisition that grasps my imagination. It makes me wonder about things like ‘strategic motive’ and next steps.

Let’s start with a possible strategic reason that might be behind this acquisition. So we’ve got Lovefilm, a 6-year old company with about 1.6m subscribers in Europe (Lovefilm is available in the UK, Sweden, Germany, Norway and Denmark).

Amazon currently only offers a video-on-demand service in the US, so one could argue that Lovefilm offers a very interesting diversification area for the European market (not to mention that it has proven to be a steady revenue generator with a solid business model).

There you have it, Amazon’s ongoing quest for (revenue) diversification seems to be the main driver behind this deal. There is more to it though:

1. These are interesting (and challenging) times for Lovefilm (part 1) – Netflix, Lovefilm’s much bigger US rival (with about 19.7m subscribers), has been looking to venture into the European market.
2. Lovefilm has been looking for funds to expand for a long time (and its investors for an exit) -Particularly under the leadership of CEO Simon Calver, the business has grown significantly through the acquisition of a range of European DVD-rental business (such as Amazon’s European DVD-rental unit in 2008) and it has been looking for the necessary funds to expand further.
3. These are interesting (and challenging) times for Lovefilm (part 2) – With a substantial increase in video-driven traffic expected in the next four years, European telcos are likely to start charging companies like Lovefilm and Netflix more aggressively than they’ve been doing thus far.

Main learning point: a while ago I attended a talk by Simon Waldman, Product Director at Lovefilm, where he expressed the business’ desire to expand, both in terms of number of subscribers as well as its product offering (and the platforms it operates on). Amazon’s financial and operational clout will give Lovefilm the firepower to battle powerful (and much bigger) competitors like Netflix and Sky Movies. It also provides the opportunity for Lovefilm to make its products accessible across all platforms, with mobile and smart phones being the holy grail …

Related links for further learning:

http://www.crunchbase.com/company/lovefilm

http://eu.techcrunch.com/2011/01/20/amazon-acquires-lovefilm-the-netflix-of-europe/

http://www.ft.com/cms/s/0/9aa7315e-2482-11e0-8c0e-00144feab49a.html#axzz1By1EcIXZ

http://blogs.barrons.com/techtraderdaily/2011/01/24/netflix-streaming-likely-boosted-q4-eps-says-caris/

http://www.ft.com/cms/s/3/a7742014-2544-11e0-93ae-00144feab49a.html#axzz1By1EcIXZ

http://www.guardian.co.uk/media/2011/jan/24/amazon-lovefilm-deal-films