Quickflix: Searching for growth

Quickflix Ltd (ASX:QFX) , the most prominent DVD-by-mail and online streaming movie rental company in Australia, has struggled to break into the big time.

One of the early success stories of the nascent internet was US company Netflix (Nasdaq: NFLX). Surviving the crash of 1999 and 2000, Netflix proved its business model, growing to deliver US$3.2 billion in revenue in 2011.

Quickflix has a very similar proposition. With a blueprint from the US, the question for investors is whether it can share the success of its American cousin.

Here’s one we prepared earlier

Netflix began its life as a DVD-by-mail service, with no late fees. Remember, this was back in the day when suburban video stores were still going strong, and late fees were the scourge of the forgetful movie buff. The concept caught on – and how.

From revenue of US$36 million in 2000, Netflix was turning over US$500m by 2004, US$1b by 2007, and US$2b by 2010.

The reason for its early success was the ease and simplicity it represented for consumers. Being able to receive a DVD in the mail, watch it, send it back and receive another soon after made life very simple. Users would simply list the movies they wanted to watch, and Netflix worked through the list.

With such a wealth of user data, Netflix was quickly able to tailor recommendations for users, and include user feedback on its site – much as (Nasdaq: AMZN) and many restaurant rating sites do. With rapid advances in internet technology and download speeds Netflix quickly embraced movie streaming – watching movies on your computer or a TV (the latter via products like Microsoft’s (Nasdaq: MSFT) X-Box, the Nintendo Wii or Sony’s (NYSE: SNE) PS3 consoles).

The movie behemoth made a profit of US$226m in 2011, and has a market capitalisation of close to US$6 billion.

Observe and repeat

Quickflix has learnt much about strategy from its US cousin. Offering both a mail and streaming service, subscribers can pay between $6 and $40 based on a combination of the number of movies per month and whether users want their movies by mail, online or both.

In recent times, Quickflix has introduced its own streaming service, as mentioned above, and purchased the Bigpond DVD rental service from Telstra in 2011. Most recently, the company has gained a new cornerstone investor in US television network Home Box Office, itself owned by Time Warner (NYSE: TWX).

Not so fast

For some reason, Australians haven’t taken to Quickflix the same way Americans took to Netflix. Compared to Netflix’s US$3.2b in revenue in 2011, the Australian outfit delivered $13.5m. With such low turnover numbers, it’s very, very difficult to make a profit, and that’s reflected in Quickflix’s financials. The company has racked up accumulated losses of $16.6m over the past 5 years, and hasn’t broken even in any of those years.

The quickly fragmenting consumer electronics market and media consumption patterns aren’t helping either. Foxtel continues its march to attract and retain pay TV subscribers (and has its own ‘on demand’ movie service) and there is no shortage of other media to consume – from time spent on social media websites to the billions of YouTube views annually across the world.

I’m sure it’s an eternally frustrating situation for Quickflix management. Australia has (very roughly) 10% of the population of the US, meaning a Netflix-style market domination could be worth $300m or more in revenue, and consistent profitability. I’m sure that’s not a new number for Quickflix management and that they’d be doing everything possible to realise the potential.

Foolish take-away

For investors, an empathy with management isn’t enough to justify an investment. Companies expanding into China frequently repeat the potential of the country by referring to the size of the population. Unfortunately, just being able to quantify the size of the opportunity doesn’t make the opportunity necessarily easy to grasp.

I fear this might be the case with Quickflix. With no clear and certain path to sustainable profitability, the potential remains somewhat of a pipedream – and a speculation best avoided for investors.

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Scott Phillips  is a Motley Fool investment analyst . Scott owns shares in Berkshire Hathaway. You can follow him on Twitter @TMFGilla.  The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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