Quickflix’s cautionary tale: how to lose $40m in just five years

With Quickflix facing a bleak future after calling in the administrators Nic Christensen chronicles where it all went wrong for the Australian streaming service.

QuickflixI remember going to the launch event for Quickflix’s streaming service in 2011. It was clear the Aussie DVD rental business had spent a lot of money on the lavish party, held at the Ivy Hotel in Sydney, designed to show it as the Netflix of Australia.

Actor and DJ Ruby Rose was billed as the headline guest. However, she never showed (claiming to be sick). It would turn out to be an apt analogy for the fledgling operation.

Quickflix dedicated much of last week arguing that rival streaming service Stan has held it over a barrel regarding the redeemable preference shares the Fairfax/Nine joint-venture owns in it – which it claims is putting off potential new investors.

But rather than blaming Stan for its plight, Quickflix founder Stephen Langsford may instead want to ask: How Quickflix burned more than $40m of shareholder money in just over five years?

With the company stuck in a trading halt with a share price of $0.001 – that’s one-tenth of one cent – and administrators running the show, is it time to pull the plug?


Founder Stephen Langsford

The start up

Quickflix was founded in 2005 as a DVD rental business out of Perth.

Stephen Langsford had a solid business track record having run a successful web development business in Method and Madness, which he sold to Sausage and Software ahead the dot com bubble of the late 90s, and he also ran systems integration business Change Corporation, alongside Quickflix.

Initially, Langsford was a major investor in Quickflix, investing $1m of the $3m asked in its initial public offering.

At the outset it was just a small cap start-up debuting at $0.15 on the ASX, but it would, over time, draw big name investors such as billionaire WIN Corp owner Bruce Gordon, who retains a stake in the business, media mogul Lachlan Murdoch, and prominent Australian businessman Domenic Carosa.

The company rode the wave of the burgeoning DVD postal rental market, becoming the dominant player in the space after Bigpond Movies withdrew, and while its market capitalisation at one point reached $70m, the decision to move into video streaming was one the company would ultimately came to regret.

Bad omens and a bad deal: HBO comes knocking

Things actually started off fairly positively for the streaming arm of the business with a major content deal with US giant HBO. At the time, headlines trumpeted how HBO had also invested $10m in the business and taken an equity stake, but what many missed is that this was actually a contra deal in which the US cable service traded streaming rights to its content in return for Quickflix equity.

Much of the media coverage missed it was essentially a contra deal.

Quickflix and HBO: A contra deal hiding behind big figures

Key to this deal, which gave HBO 83m preference shares, was that it got a warrant which saw the owner entitled to a $10.5m payment in the event of “a disposal of substantially all of the Company’s assets, a merger or takeover, a person other than the shareholder acquiring a voting power of more than 51% in the Company, or any change in the majority of the members of the Board of Directors unless the replacement Directors were nominated by the majority of the Company’s Board.”

In plain English, if someone other than the current shareholders buys a majority stake in the company they have to give HBO $10.5m.

What Langsford and his executive team failed to realise is that HBO was going through some challenges in its relationship with its major Australian partner at the time, Foxtel.

In hindsight HBO appears to have used the Aussie streaming service as leverage against the pay-TV operator. The Quickflix deal required little if any capital from HBO, and it gave the company an upside if Quickflix suddenly took off.

Screen Shot 2016-04-29 at 10.34.06 am

HBO established its brand in market: is that what it really wanted from Quickflix?

It also gave them the leverage they needed to get what they wanted from Foxtel, which appears to have been the establishment of the HBO brand in its own right in Australia.

Industry insiders note that two years later HBO dumped its stake in Quickflix, and months later announce an extension of its partnership with Foxtel where it was suddenly paid a premium for its exclusive rights and the pay-TV operator agreed to rebrand Showcase as “the home of HBO”. That deal also locked in the streaming rights for Foxtel.

In the wash up, Quickflix would come to realise its mistake was not necessarily in giving HBO the preference shares, but in making the shares transferable with those same rights. It is a decision Quickflix’s management would come to regret.

Quickflix continually taps the capital raising well 

What is fascinating about the Quickflix collapse is how many times the company returned to its investors to ask for more money.

As business commentator Alan Kohler noted last year – over a decade Quickflix would have raised more than $60m. Today it has very little to show for it.

Just over a year after it made the push into the streaming space the company almost hit the wall for the first time, facing a cashflow crisis amid major board ructions with four of its six board members quitting and CEO Chris Taylor departing.

It eventually emerged from that crisis, but time and again the company had to go hat in hand to shareholders and by 2014 investor patience appeared to be wearing thin, with a major rebellion and a push to restructure Quickflix and ditch its DVD mail-out business.

That proposal was voted down, but as the graph below shows the share price the value of its shares and market capitalisation continued to slump before flatlining as shareholder equity continued to be diluted (it should be noted that Langsford was among the major investors, and continued to put his own money into the venture).

Quickflix share price over a decade. Source: Google Finance.

The Quickflix share price rollercoaster over a decade. Source: Google Finance

Today the company has a market capitalisation of just $2.2m with net loses over the past five years of:

  • 2011: $2.96m
  • 2012: $13.97m
  • 2013: $6.42m
  • 2014: $10.15m
  • 2015: $8.54m

That’s more than $40m gone in a little over five years. Quickflix could have tried to raise this money in one go, and had it done so at its peak, in 2012 – around the time of the HBO deal – it could have made a go of it and potentially established itself as the main Australian player, second only to Netflix.

Instead, by continually going back to the stock market asking for small amounts it failed to gather the momentum it needed, started to draw attention from the press for the wrong reasons, and wear out the patience of investors.

Waiting for the streaming wave – the challenge of content and technology 

So what went wrong with Quickflix and why didn’t its business model work?

Quickflix was poised to surf the wave of mainstream video streaming which was rising across the Pacific in the US. But when that wave eventually arrived last year Quickflix was sucked under and pinned to the bottom until it drowned.

The problem? While it launched streaming in 2011 its product offering and technology was considered by many as lacking.

Game of Thrones was one of Quickflix's few major selling points.

Game of Thrones was one of Quickflix’s few major selling points.

In the streaming space, the content offering is vital to achieving customer acquisition.

If you read online reviews about the Quickflix library they’re somewhat lacklustre – its HBO content, which it lost the streaming rights to in 2014/15, was the major selling point. While Quickflix still holds HBO rights on a pay-per-view basis it has to wait on the sidelines for Foxtel’s first run rights to expire before it can use them.

The launches of Presto and Stan at the beginning of 2015 and then Netflix’s arrival in Australia that March drove a wave of consumer awareness for streaming with millions of dollars thrown at marketing campaigns by those three well-funded players. That rising tide should have been Quickflix’s saviour, but its subscriber numbers have been flat (at around 100,000) – and in some quarters down –  as it lacked the cash to launch a competitive marketing campaign of its own.

It should also be noted the SVOD service was boosting its subscriber numbers by counting anyone who bought content in a quarter as a subscriber along with users of its New Zealand DVD rental business.

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Then a year ago Quickflix surprised many in the market by announcing a deal with Presto to become a reseller of its content.

The deal appeared to have been carefully structured to avoid triggering the warrants which had been sold by HBO to Stan back in 2014.

Stephen Langsford told the room at the 2015 Mumbrella360 conference in June he was excited about the deal and what it meant for his business.

Other panel members claimed the online streaming war between Presto, Stan, Quickflix and Netflix would claim its first victim “within 12 months” but Langsford said: “A lot of people are yet to discover streaming, especially out in the ‘burbs.

“I probably don’t agree it’ll play out in the next 12 months, but I think it’ll be an interesting 12 months as it is an interesting month, week, day in this industry.”

For Quickflix that 12 months timeline may prove to have been bang on.

By August the deal with Presto had collapsed. And Presto was quite clear it wasn’t to blame (the warrants likely to have been the issue).

But now Quickflix had a new plan where it would enter into a deal with an unnamed Chinese language film and TV company and then acquire the Shanghai-based company.

For a company that was struggling to keep its head above water the announcement was unexpected and there was speculation that the company would pivot and attempt a move into a niche Chinese language SVOD service for this market.

However, this too was aborted, and by 2016 Langsford was talking about focusing on e-commerce and transactional business.

“We have been in a situation where we haven’t been able to spend money on marketing and the like, and if we are saying we are only going to keep to the business model around SVOD that would be a different matter but already we are playing in TV on demand, EST (electronic sell through), SVOD and DVDs still,” he told Mumbrella in February.

An imminent death?

The company also signalled it would again go looking for more capital, but these attempts have failed with the management of Quickflix blaming Stan and the structure of the warrants for its failure to raise capital.

This week it was revealed that Stan was giving its rival Quickflix one of two options in return for relinquishing its shares: 1. A $4m payment; or 2. A payment $1.25m and the transfer of all of Quickflix’s streaming customers.

Either option would essentially see the end of the SVOD business, which in its most recent update had cash in hand of approximately $659,000.

In the end, Quickflix is a tale of a successful DVD rental business that became hamstrung by a lack of capital, the challenges of doing content deals with global studios and emerging technology in its staggered shift to online streaming.

Asked if Quickflix’s biggest mistake was in making the deal with HBO in 2012, Langsford rejected that as a theory, telling me: “The investment by HBO was friendly and assisted QFX with funds and quality content. In the hands of Nine and Stan it has been used to throttle us.”

While the HBO investment may have started out as “friendly” it is difficult to see the sale of the shares for just $1m – a tenth of their value two years before – as anything other than the act of a business aligned with rival Presto and seeking to destroy the Aussie SVOD player.

Langsford has been active in the media touting how 2,000 people in April bought the pay-per-view of movie Star Wars: The Force Awakens, but that itself is not a sign the business has a viable future.

Quickflix may be dying a slow death, but it’s less like strangulation and more like death by a thousand cuts. If Stan eventually kills Quickflix it will be the company’s own management that handed them the sword.

Nic Christensen is the media and technology editor of Mumbrella


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