Australian online video subscription company, Quickflix has signed a Memorandum of Understanding (MoU) to acquire a China-based content production company subject to satisfactory completion of further due diligence. Launched in 2003 as a DVD-by-post service, Quickflix launched a Subscription Video on Demand (SVoD) streaming service in Australia during October 2011 followed by the expansion of its streaming service to New Zealand in May 2012. As such, the foray into China marks a new direction for the company.
The undisclosed Shanghai-based target company produces original Chinese language film and TV content in co-production with local and international studios. The acquisition would see the companies combine their businesses to form a global streaming platform for distribution of Chinese film and TV content into China and the international market.
The non-binding MoU will remain in effect until Quickflix completes its due diligence, which the company expects to complete on or before 20 August 2015. The companies are yet to disclose financial details of the transaction that once agreed will require shareholder and regulatory approval for completion.
The acquisition takes Quickflix in a new strategic direction and repositions the business toward the burgeoning Chinese market. The move to reinvent itself promises an improved outlook given the company now faces a fiercely contested market for video streaming services in Australia and New Zealand. The repositioning strategy follows shortly after the arrival of new entrants into the Australian and New Zealand SVoD markets. Presto Entertainment by Foxtel/Seven West Media and Stan by Nine Network/Fairfax launched in Australia during January 2015 followed by the arrival of global online video streaming giant Netflix in Australia and New Zealand on 24 March 2015.
Increased mainstream advertising, promotional free subscription trials and heightened media interest around the new services helped boost consumer awareness and demand for SVoD services in Australia during 1Q 2015. This helped drive a 6% increase in Quickflix paying customers to 123,553 in Q1 2015 compared with the previous quarter.
However, the arrival of Netflix and impact of free trial promotions by competitors was felt by Quickflix at the beginning of 2Q 2015. Demand for competing services generated through the media and other publicity resulted in customers churning from the Quickflix service in 2Q 2015. Paying customers fell 13% to 107,969 in 2Q 2015 compared with Q1 2015, whilst total customers (including trials) declined 14% to 121,127 over the same period. Revenue dropped 15% to A$4.2 million ($3.1 million) after an average of 5,000 customers a month churned from the service.
In response to new competition and the rapid decline in business, the company needed change. Quickflix announced it would be a reseller of subscriptions to rival Presto in May 2015. The Presto deal was a way to free the company from expensive content licensing costs, substantially boost its content offering, and ultimately get the company closer to profitability. Nevertheless, Quickflix cites conditions of its agreement to resell Presto were not met in early August 2015 and the deal collapsed.
A day after announcing the collapse of the deal with Presto, Quickflix announced its plan to enter China, a market of nearly 1.4 billion people. Tapping into China may be a good move for Quickflix given the fierce competition now in play for Australia’s 24 million people. Quickflix indicates the target company is profitable and generates free cash flow, which is in stark contrast to its own performance, having not posted a profit since launch in 2003.
Importantly, Quickflix looks to have developed technology for scale that will cater for this far larger global audience. The acquisition will also bring original content to its service, an important driver to gain traction among China’s 430 million TV households. An original content offering gives the company a way to move away from a zero sum game by providing customers with strong reasons to subscribe to their service, which is similar to moves by HBO, Starz and Showtime in the US. If successful, the strategy shift may provide significant value to Quickflix and a way out of its domestic troubles. If not, the company will continue to face stiff competition in a bid to survive. Failure will likely result in a potential fire sale of assets to its surviving SVoD rivals.
UPDATE ON CHINESE CONTENT COMPANY ACQUISITION
Following completion of further due diligence and advice received in relation to Chinese regulations and restrictions, Quickflix will not be proceeding with the acquisition. Quickflix is now pursuing opportunities for licensing and operating its platform as a white-label service in other international markets. In addition, the company announced a restructure programmed on 31 August 2015. The focus of the programme is to reduce costs and restructure debt.