Start-ups often upset established brands with new technology, only to be disrupted themselves when the next wave arrives. Lovefilm chief executive Simon Calver tells Growing Business why his company has staying power.
His collar might be open and the North Acton headquarters of his business suitably glass walled and ‘collaborative’, but Simon Calver doesn’t quite fit the archetype of the technology entrepreneur. When he speaks, it’s an unusual combination of his vast corporate experience and earthy Gloucester roots that emerges. There’s no trace of the shyness of a Zuckerberg or the unapologetic geekiness of a Gates; he’s all polished delivery and easy charm.
Even his Twitter feed looks a little unloved, with only five updates to keep his 18 followers entertained since February. Still, appearances can be deceptive, and anyway, he’s had a busy year. Lovefilm, the movie rental business of which he’s chief executive, is currently the second fastest-growing private technology firm in the UK, with sales rocketing by 239% a year, from £1.3m in 2004 to £49.3m in 2007. Last year, turnover breached £70m, and it’s expected to hit £100m in 2009.
Calver makes no bones about the fact that the idea behind the business, which started as a DVD-by-post operation, but is quickly evolving into a fully rounded multimedia entertainment service, was not original. In fact, the UK was slow to tap into the nascent market for online DVD rental.
Inspired by a $40 video store fine, arthouse cinema fan Reed Hastings launched Netflix in the US in 1996. No similar service emerged in the UK until 2002, when three rival upstarts, Video Island, Screen Select and Lovefilm, adopted the idea with impressive effects, between them claiming 20% of the total DVD rental market within three years.
“Netflix was having a huge success by having no overdue charges and pushing the online service,” says Calver. “A lot of businesses sprung up, experimenting with different propositions.”
Saul Klein, now a partner at one of Lovefilm’s numerous investors, Index Ventures, founded one of them, Video Island. He brought Calver in to head up the company’s operations in 2005, as the burgeoning industry consolidated. In 2006, a merger with Lovefilm, itself established through a series of acquisitions, made the combined entity the largest company of its type in Europe, with Calver at the helm. “Sometimes borrowed ideas are good ideas if you can execute them well,” he says.
So what made Lovefilm stand out from a fragmented crowd of start-up pretenders and corporate incumbents, including Blockbuster and Amazon? Klein points to superior venture backing, which funded the consolidation that would allow the combined expertise of the start-ups to tackle the giants. However, Calver notes that there was a balance to strike at the newly merged business.
“It’s a real right brain/left brain business,” he says, referring to the tricky brief of needing to engage customers in a fast-moving and competitive media landscape, while simultaneously managing a traditional logistics operation that now delivers more than four million DVDs every month. “Doing both things well is what makes it a success,” he adds.
Despite a significant marketing spend and consistently pursuing aggressive growth, the venture-backed firm has been careful to control its burn rate. “Early on, we focused on getting our cashflow right, so every new customer represented positive growth for us,” Calver explains. “If you keep cost control sensible, it’s the type of business where top-line revenues will mean making money. You don’t need to trade off revenue against profit.
“That meant we could put our foot to the floor without constantly eating more cash to grow the business. This gave us a real strategic advantage over some of the smaller players.”
If Calver wanted to silence the doubters, who once questioned the long-term viability of the company’s business model in the face of fierce competition from those “smaller players”, as well as more established brands, he’s done a sterling job. Last year, in a landmark deal that highlighted the company’s maturity, it took over Amazon’s UK and German DVD rental businesses and reached profitability for the first time.
Its millionth subscriber followed in January, and, impressed by the growth, Lloyds agreed to invest a credit crunch-defying £10.5m to expand the business, clear current debts and fund future technologies.