Amazon takes full control of Lovefilm

Amazon today took full control of DVD rental and online video company Lovefilm, in a deal to buy the 58% of the business that it does not already own for an undisclosed sum.

The world's largest online retailer has been gearing up to bid for a full stake in Lovefilm for some time, and today's deal is thought to value the business at about £200m.

Amazon bought a 42% stake in Lovefilm in 2008.

"Lovefilm has been innovating on behalf of movie rental customers across Europe for many years and with the advent of the Lovefilm player, they are further delighting customers by streaming digital movies for their immediate enjoyment," said Amazon's vice-president of European retail, Greg Greeley. "Lovefilm and Amazon have enjoyed a strong working relationship since Lovefilm acquired Amazon Europe's DVD rental business in 2008, and we look forward to a productive and innovative future."

Lovefilm remains a leading player in DVD rentals since launching in the UK in 2004, and has 1.4 million subscribers across Europe. The company tripled its sales in 2009 to almost £100m, and in March last year launched its digital streaming service, enabling viewers to rent and watch movies over the internet.

The acquisition will be subject to European regulatory approvals, and is expected to close in the first quarter of 2011.

The Lovefilm chief executive, Simon Calver, said: "The deal is a winner for the members who love Lovefilm because of its value, choice, convenience and innovation in home entertainment

"With Amazon's unequivocal support we can significantly enhance our members' experience across Europe."

Within the past 12 months, Lovefilm has stepped up its movie streaming business, while leaving its physical DVD rental service to continue its growth. In 2009, Lovefilm declared that online was now its "primary" business – despite online rentals representing a 10th of DVD and Blu-ray rentals.

Lovefilm customers can now also stream films over a number of internet-connected living room devices, including Sony and Samsung TV sets, and the PS3 games console.

Takeover talks between the companies are understood to have been hastened when Lovefilm was reported to be nearing an initial public offering. Investers in Lovefilm include European venture capital firms DFJ Esprit, Balderton Capital, Arts Alliance Media, and Index Ventures.

Dharmarsh Mistry, a partner at Balderdon Capital, today said the acquisition was a "great deal" for both companies. "Lovefilm is the Netflix of Europe and it will be central to Amazon's European and global strategy."

The rise and rise of US movie rentals firm Netflix – which has a market capital of $9.97bn (£6.23bn) – is thought to be another chief reason for Amazon's move. Netflix has announced its intention to expand globally, with Europe and the UK a natural next step. Netflix's movie library is thought to be almost twice the size of Lovefilm's.

Lovefilm was formed by the merger of two European DVD rental firms, Arts Alliance Media and Video Island, in 2006. Two years later, the privately held Lovefilm acquired Amazon's UK and German movie rental business, with the online retail giant taking a stake in the business as part of the deal.

The company now operates in five European countries: the UK, Germany, Sweden, Denmark and Norway.

Saul Klein, a partner at Index Ventures and the co-founder of Video Island, said the deal opens the door to a range of "mouthwatering" integration opportunities with Amazon's existing assets, including the movie database IMDB.

"When you get to the scale of business of Lovefilm – doing £100m in revenue, being profitable and growing, not just in the UK – you end up having a lot of [future business] choices," Klein said.

"Amazon, being one of the best ecommerce companies in the world has an incredible platform, including IMDB, to take Lovefilm to the next level and accelerate its growth.

"The great thing about Lovefilm is that it's got a stable and growing core business in DVD by post, and however fast [internet] streaming arrives most people would say there's still a pretty good long-term business in sending people DVDs through the post."

"It's the customers who decide whether to go for digital or physical rentals – that's why we're developing a hybrid proposition," Calver told the Guardian. "We see no change in our strategy or approach, the fundamental thing will be accelerating growth. There's lots of opportunities, but it's still early days so there's no concrete plans and both companies see opportunities."

Calver said Lovefilm has seen "very, very strong" uptake in streaming from games consoles, which it introduced in March last year, but that physical rentals were also performing "confidently" and "continuing at pace".

Amazon's initial plan for Lovefilm is to continue to expand its presence on internet-connected devices, Greeley said, with Lovefilm's European base complementing Amazon's existing US-only video on demand (VOD) offering.

Physical DVD rentals will remain an important part of Lovefilm's service under its new owner, he told the Guardian: "As long as we're offering a service across three fronts [streaming through game consoles, physical rentals and internet viewing], we're not concerned about cannibalisation."