Simon Calver: Lovefilm
The Lovefilm chief executive on his journey from blue-chip exec to entrepreneur
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.
The Amazon deal saw the internet giant sell its online video rental service in the UK and Germany to Lovefilm in exchange for a cash investment and an equity stake, which made it the largest shareholder in the company. Calver says the agreement represented a step change and a resounding vote of confidence in Lovefilm’s business model – it’s very rare for Amazon to exit a market that it targets. The deal was also the catalyst Lovefilm needed to catapult its growth.
“The key part has been its customers,” says Calver. “More critical mass has brought us to profitability, which means we have much more flexibility on how we can borrow money, raise funds and use it in the marketplace.”
Calver can hardly be surprised if Lloyds’ anachronistic investment cemented a vogue for labelling Lovefilm’s growth as counter cyclical, but the interpretation makes him nervous. The logic is sound enough: credit-crunched consumers are renting more DVDs just like they’re ordering more pizza deliveries. They’re simply staying in more. But won’t that put the brakes on when the upturn arrives and behaviours change?
“We’re recession resistant rather than counter cyclical,” Calver insists. “In the UK, we have about 4% household penetration. I can’t see any barriers to stop us getting to 10% with the type of service that we offer.”
The view that Lovefilm is merely a recessionary success also ignores the diversity and adaptability Calver is working hard to drive into the business. Incumbent video rental stores failed to anticipate the threat from online DVD-by-post operators, and he’s determined the same won’t happen to Lovefilm as consumers turn to digital download and streaming subscriptions. The disruptor, he insists, will not be disrupted.
When it comes to the threat and opportunity posed by new technologies and platforms, it’s tempting to adopt screenwriter William Goldman’s famous assessment of the Hollywood hit-makers, that “nobody knows anything”, but Calver believes it’s just a question of prescient timing. “It’s easy to overestimate how quickly technology will be adopted by consumers, but it’s also easy to underestimate the long-term impact it will have on the marketplace,” he says. With digital, Lovefilm is neither dithering nor jumping in too quickly.
The subscription model for the physical business – where you can borrow DVDs for as long as you like from £3.91 a month with no late fees, getting the next disc on return – makes even more sense online. In fact, it could even eventually remove the need for a forbidding logistical operation.
“We have spent a lot of time over the last five years building a brand name, getting customers and forging a relationship with them,” explains Calver. “Now our goal is to get them to use our digital service and try streaming and downloading.”
Competition will be renewed and fierce, with the likes of Apple, Sky and BT offering similar alternatives. “Some big brands are going to compete against us,” Calver acknowledges. “But if you go back six years, you would argue Blockbuster was a pretty big brand. We’ve beaten them off once.”
Calver estimates that download and streaming uptake will remain relatively limited against DVD rental for as much as five years, but wants Lovefilm to be at the “bleeding edge” of any changes in consumer habits. In the immediate future, a blend of a ‘long tail’ focus that pushes a hugely varied physical inventory of more than 65,000 titles and a more limited, but immediate, digital one is a powerful consumer proposition.
He believes that the strength of the company’s brand will offer some protection in a fickle market and guide customers through any transition. “I’m expecting that there will be an offering of hybrid-type services this year for people who want physical and digital, so they can choose whether they want it immediately or sent in the post,” he says.
However, if Calver gets what he wants, internet users will see Lovefilm as more than just a place to rent, stream or download movies. “We’re going to be a combination of three things: how people are watching film, from rental to retail, cinema and downloads; how people select films through recommendations, algorithms and search; and finally, a community aspect,” he explains.
It’s tempting to groan at this final ambition (often the last resort of flagging brands that have run out of ideas), but the company has already successfully integrated cinema listings, reviews and interviews with actors and directors, making it the third most visited entertainment and movies website in the UK. It has also generated more than 68 million film ratings and in excess of 750,000 member reviews. So, for once you could justifiably claim that extending the community aspect of the site is a “natural extension”, as Calver puts it, without cringing. “We’re constantly adding facets onto our business,” he says.
Baptism of fire
When Klein hired Calver as Video Island’s chief executive in 2005, he felt his extensive and varied corporate experience made him the right man to take the venture-backed start-up to the next level.
“Simon’s experience in direct selling, e-commerce, consumer marketing and high-volume operations will be invaluable,” said Klein at the time, referring to the e-commerce and logistics expertise Calver honed as general manager and vice-president of Dell’s UK and Ireland operations, and the undoubted marketing nous that comes with hiring a man who launched Pepsi Max.
Four years later, Klein admits there was some trepidation at board level over whether Calver could translate his sparkling blue-chip track record into an entrepreneurial environment.
“We first met Simon in 2003 when he was at Dell,” he recalls. “We felt he had a perfect CV for what we wanted, but wondered if he could deal with the extra craziness and uncertainty of an early stage company.”
Thankfully for Klein, Calver left Dell for a two-year stint as chief operating officer at mid-sized firm Riverdeep, a venture-backed software company. “He was thrown in at the deep end, with restructuring and refinancing. That taught him a lot and got rid of some of the things we had anxieties about when we first met him,” says Klein.
Any remaining doubts were dismissed when Klein and the company’s backers observed Calver’s handling of a crisis, which threatened the very future of the business just two months into his tenure, when the company’s distribution centre in Acton burnt to the ground.
“I got a call at 10 o’clock at night telling me it was on fire,” Calver remembers. “I lived down the road, so I went along to see it. I watched the flames licking out the top of the building.”
Fortunately, 75% of its discs were out with customers, but the lack of a distribution centre still poses a gigantic problem for a DVD-by-post operator.
“That night, at midnight, the team got on a call and decided on an action plan. By seven the next morning, we’d worked through all the scenarios and were ready to go,” says Calver.
He kicked his marketing team out of the head office and replicated distribution activities there, with customers refunded for any breaks in service. Within 24 hours, they were receiving discs, and within three days, distribution was fully operational again.
Calver salutes a “phenomenal achievement by the team”, but the new chief executive’s handling of the episode hugely impressed the company’s investors and consolidated faith in his leadership. “It was literally a baptism of fire,” says Klein.
“Simon dealt with it incredibly well. He used a terrible occasion as an opportunity to bring the team together and drive a new kind of culture at the company.”
If he wasn’t so affable, Calver’s carefully chosen words and fondness for sound bites would make him seem more like a politician than an entrepreneur. When he’s telling me about the positive feedback he’s been getting from customers recently, for example, he says: “Every [positive] customer interaction like that is the energy that fuels this business.”
If you were feeling harsh, you might call it marketing speak, but if it’s a remnant of all those years spent in the boardrooms of the likes of Dell, Pepsi and Unilever, it only emphasises how remarkably well Calver has adapted to life in a small, fast-growth firm.
When he says he doesn’t think a lot of people could make that transition and it requires a “low ego”, it sounds ironic, but actually, his self-assessment is spot on.
“You have to be prepared to roll up your sleeves,” he says. “I tighten the toilet seat if it’s loose. It’s a question of mucking in to get things done. The longer you spend in corporate life, the further away you get from that.”
Of all the business owners I’ve interviewed, Calver is probably the most accommodating. When we need to adjust one of his meeting rooms for a video profile we’re doing with him, he’s up on his feet shifting the chairs and tables to make space. He sits open plan, and when I jokingly I ask him when he’s getting his corner office, his response is telling. “When I do that, you’ll know I’ve lost the plot,” he replies.
For all his corporate achievements, Calver says he’s most proud of what he’s currently achieving at Lovefilm. “Taking a small, entrepreneurial VC-backed start-up and turning it into a consumer brand has been an amazing transition over just four years,” he says.
“There’s nothing more exciting than having a business that you can influence, control and pull the levers on to see how big you can make it.”
As for the company’s original founder, he couldn’t be more delighted. “I respect the way he operates,” says Klein. As a partner at Lovefilm backer Index Ventures, he’s also impressed with how Calver handles the company’s band of venture investors, which also includes Arts Alliance Media, Benchmark Capital and Esprit Capital Partners.
“He gets real value from all his board members,” Klein adds. “He can make this a bigger and bigger business. Here’s a guy who’s managed a $1bn P&L and 1,000 people – and we’re not there yet.”
Like it or not, it sounds like that corner office might be beckoning.
In his own words
On good advice
“Michael Dell taught me to fix a problem as soon as you find it. In a small business, you don’t have the time to carry people or constantly work through mistakes and issues. Find the problem, fix it and move on. That’s a mantra that anyone in business should follow”
On brand development
“Three or four years ago, I’d go to a reception in an office and say: ‘Simon Calver, Lovefilm.’ They’d look at me strangely as if I was involved in some shady business. Now, they say: ‘Great, I’ve just signed up for that’”
On borrowing ideas
“I’m not too proud to say we’ll look anywhere we can to get good ideas to grow our business”
On customer complaints about scratched discs
“When you’re dealing with an external system and customers, discs get scratched, they get broken, they get lost in the post. We have marmite, dog hair, jam – you name it, we find it on discs that we need to clean. We have to ensure we’re constantly analysing what’s working and what isn’t”
On working with Amazon
“Their business is absolutely manically focused on a good customer experience. Before we could do an acquisition of their customers, we had to demonstrate we had the same philosophy”
On making the transition from blue-chip to start-up
“I was fortunate that I worked for a mid-sized company before I made the move. I was able to learn a lot of small-company skills, such as how to grow the business if you haven’t got cash”
It’s the perfect time to be investing in advertising. The industry’s on its knees in terms of getting revenues, so you can negotiate pretty good deals and they can make it more effective for you. It’s a great time to try it, test it and see how it works”