For Netflix And Lovefilm, Online Choice Pales Against DVD Business

Reality check: The prospect of Netflix (NSDQ: NFLX) and Lovefilm becoming online-first subscription businesses looks a long way off – they have online rights for just a tenth of their DVD catalogue…

As they emerge from their core business of DVD rental subscriptions, each is streaming over the web and gaining carriage on connected TVs – excellent new distribution opportunities that could rocket both companies and which have brought Amazon to the negotiating table for the 58 percent of Lovefilm it does not already own.

But it’s not going to be that easy…

When we settled down recently to watch a movie from Lovefilm via Playstation 3, we could scarcely find anything we wanted to pick, from a selection that was surprisingly C-grade.

The problem: in an industry where such distributors depend on signing rights from the all-powerful studios, necessary subscription and streaming rights are usually locked up by bigger, premium distributors. Right now, the respective value of instant-access versus disc choice is plain – but don’t expect to enjoy both choice and instant online playback any time soon.

The services have been steadily securing more digital rights – Lovefilm, which took a £10.5 million loan in 2009 to build its digital business, added Icon and Momentum. Netflix signed on Relativity Media. But each has fewer deals with Hollywood’s majors.

Studios have not yet given subscription rights to new releases,” says Michael Comish, CEO of UK movie streaming service Blinkbox. “You can’t watch Avatar online in a subscription service – you can get it on (a la carte) Blinkbox and iTunes. It can take 12 to 18 months to complete a deal with the studios.”

Lovefilm hopes regulatory reform can change that. The UK’s Competition Commission is investigating the nascent premium subscription-VOD market, after media regulator Ofcom told it News Corp.’s Sky Movies channels have a damaging lock on Hollywood rights. The European Commission last month echoed that it has “strong concerns” about the situation…

But the UK Competition Commission’s inquiry is not even due to conclude until summer 2012, by which time the over-the-top IPTV distribution prospect should be in full swing.

Comish tells us Blnkbox has the UK’s largest online library (8,000 titles) because it eschews both discs and the subscription model favoured by Lovefilm and Netflix, rights for which are harder to win. This is why Lovefilm has supplanted its core subscription offerings with a smattering of PPV movies.

Comish is confident: “The £2.2 billion DVD business is going to very aggressively move online over the next few years.” But: “Netflix and LoveFilm have been less focused on acquiring the rights in the past – this is now changing.”

Press reports keep dangling a £200 million asking price for Lovefilm in front of Amazon (NSDQ: AMZN). But Amazon would in no way be getting a ready-made top-tier online movie service; that work’s ongoing…

In fact, cash from a sell-off or IPO may be exactly what the service needs in order to win digital rights. Amazon, which already has some sell-thru and rental rights, would be gaining a full rights suite by adding Lovefilm’s subscription model.

[ * Ed note: Our figures come from the companies themselves, except Netflix’s online repertoire, which is from Instantwatcher.]