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posted: 8/24/2013 7:17 AM

In Britain, grocer Tesco takes aim at Netflix with Blinkbox

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  • Adrian Letts, chief operating officer of Blinkbox, pauses Monday during a Bloomberg Television interview in London, U.K.

      Adrian Letts, chief operating officer of Blinkbox, pauses Monday during a Bloomberg Television interview in London, U.K.
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FRANKFURT, Germany -- As it expands abroad, Netflix, the world's largest subscription video service, has yet to make a profit from its international operations. Britain's Tesco wants to make Netflix's life overseas even more difficult.

Britain's biggest retailer is boosting investment in its digital download service, Blinkbox, which offers thousands of movies and TV series and will soon also feature e-books and music. The programs are streamed to computers, tablets, televisions and Sony PlayStation 3 consoles.

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With Blinkbox, Tesco joins the growing ranks of retailers shifting their focus from in-store sales in the battle for a digital download market that's growing about 17 percent annually and will be worth $20 billion globally by 2018, according to consultancy Technavio.

Wal-Mart Stores bought video-on-demand startup Vudu in 2010, and British grocer J Sainsbury has its own online entertainment service. Unlike Netflix, the retailers have the built-in advantage of millions of customers who visit stores weekly and carry loyalty cards that let them earn points, which can be cashed in for merchandise.

"If you can watch a film and get money off your groceries, petrol or extra Clubcard points, then Blinkbox may begin to look more appealing" than Netflix, Amazon.com's Lovefilm, and even Apple's iTunes, said Michael Perry, a Verdict Research analyst based in London. "Blinkbox definitely poses a threat."

Netflix and Lovefilm charge British streaming subscribers 5.99 pounds ($9.36) a month for unlimited content. Blinkbox's 1 million customers rent or buy each movie or TV show they want to watch, similar to iTunes.

While renting older movies costs as little as 99 pence, newer releases such as Denzel Washington's "Flight" cost 3.49 pounds to rent and 10.99 pounds to buy. Season three of HBO's hit TV series "Game of Thrones" costs 17.99 pounds to buy.

"The customer's the big winner here because there is such a huge range of choice, all at competitive prices, all with great content available," said Russ Shaw, an analyst at Tech London Advocates.

Film studios release blockbusters to pay-as-you-go services earlier than to all-you-can-eat subscription offerings, typically about four months after they first hit cinema screens.

"We are able to offer the latest movies when they come out on DVD, over a year ahead of Netflix and Lovefilm," said Michael Comish, Blinkbox's co-founder and chief executive officer, who sold his company to Tesco in 2011 for an undisclosed sum.

In March, Comish chided Netflix's chief content officer Ted Sarandos after the Los Gatos, Calif.-based company claimed it had secured exclusive online distribution of "The Hunger Games" in Britain. Blinkbox had offered the movie since September, Comish said via Twitter, adding that "other thrilling events have happened" since then, including the re- election of President Obama. Netflix declined to comment on the exchange.

Blinkbox's approach allows it to "get much newer titles, unlike the subscription services," said Fernando Elizalde, an analyst at technology researcher Gartner Inc. in London.

That model has won converts like 32-year-old Londoner James Steele, who says he doesn't buy DVDs anymore. He chose Blinkbox because it had the second season of "Game of Thrones" before other services, and being owned by Tesco means "they are not going out of business any time soon."

Steele exemplifies the entertainment industry's online migration. Digital video downloads now account for 23 percent of Britain's 2 billion-pound video entertainment market, and they grew by 43 percent in the first half of 2013, according to the British Video Association. By 2017, about 40 million Britons will watch video content online at least once a month, a 23 percent increase from 2012, according to researcher eMarketer.

Netflix, so popular in the U.S. that its streaming videos have been blamed for slowing traffic on the Web, has found success abroad more elusive. Netflix added 610,000 international subscribers in its second quarter, bringing the total to 7.75 million across Latin America, Canada, Britain and Ireland.

Revenue at the unit more than doubled to $166 million in the period, comprising about 15 percent of total sales. Still, it has rung up some $340 million in losses over the past year, and Netflix Chief Financial Officer David Wells has said that "you'll see another couple of years of international losses as those markets mature."

In Britain, Netflix and Lovefilm face a "hypercompetitive market" that includes powerful broadcasters like Sky, owned by Rupert Murdoch's 21st Century Fox Inc., which control much popular content and have their own movie streaming services, according to Adrian Drury, an analyst at consultancy Ovum. Blinkbox can compete if customers are drawn to the combination of a supermarket loyalty program and an entertainment service, he said.

Drury likens Comish to Netflix CEO Reed Hastings, in that both men have a knack for understanding how people consume home entertainment. Comish, a 48-year-old Canadian, says that while other suitors offered more for Blinkbox, Tesco had the clearest vision of "where we would fit with their plans."

The deal is part of a broader online push by Tesco CEO Philip Clarke, who followed the Blinkbox purchase by acquiring digital book platform Mobcast, social media startup BzzAgent, and digital music platform WE7. Blinkbox plans to introduce an e-book and music streaming service later this year, and has also unveiled Clubcard TV, a free Internet television service with kid-friendly shows for the 16 million members of Tesco's shopper loyalty program. Tesco may start selling its own tablet computer in time for Christmas, the Sunday Times reported yesterday.

While shoppers may not immediately think of the supermarket as a hub for digital entertainment, that will change, said Richard Broughton, a director at researcher IHS Screen Direct.

"Over the next five or ten years they can exploit a large customer base that's going to get more digitally savvy," he said. "In the long term they have a reasonable chance of holding their own."

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