MarketLine Case Study

MarketLine Case Study

PLAY.COM CASE STUDY ML00001-043/Published 01/2012

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MarketLine Case Study

Play.com The rapid rise of an online retailer Reference Code: ML00001-043

Publication Date: January 2012

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Overview Catalyst Play.com, is a Jersey-based, privately owned online retailer. Its main product lines include DVDs, CDs, books, gadgets, video games, DRM-free MP3 downloads, and other electronic products, as well as clothes and accessories.

Amongst the largest e-commerce retailers, Play.com was the one recording the most rapid growth, since its establishment in1988. Starting with a focus on selling CDs and DVDs mainly to young, tech-savvy men, the company quickly evolved into one of Europe’s most successful e-commerce retailers. Since the acquisition in second half of 2011, Play.com is a part of Rakuten Group.

Summary  The UK is Europe’s leading e-retail economy, estimated to reach GBP40 billion (approximately $61.7 billion) in

2015. The market has enjoyed a period of double digit growth mainly due to entry of new shoppers into online spending. E-retail market keeps rising at a much faster pace than the overall retail market and it still accounts for only a small percentage of total retail sales, presenting possibilities for new players.

 Internet business is thriving in the Channel Islands due to a legal tax loophole. Goods on Channel Islands- based sites sold for less than £15 (£18 before November 2011) can legitimately be shipped to customers in the mainland UK without incurring any sales tax. The conservative estimates of the UK Treasury revealed that it is losing about £130 million in revenues per year because of Channel Islands-based VAT avoidance websites.

 Play.com was one of the first online retailers targeting the UK and a rare survivor of the dotcom boom and first to take advantage of the legal tax loophole. The business was an overnight success, taking huge market share from other traditional retailers. Today, Play.com is one the UK’s biggest e-retailers, with estimated annual sales of about £427.4 million (approximately $660 million). It has 14 million registered users, 8 million listed products and a staff of 500.

 In 2011, Play.com was sold to Japanese group Rakuten for a seemingly low price of $25 million. Considering controversies around LVCR tax exempt, allowing goods to legitimately be shipped to customers in the mainland UK without incurring any sales tax, and the suspiciously low price of Play.com’s recent acquisition, boosted by the lack of transparency of Play.com profit, the company may not be as profitable as expected and in need of a change in strategy.

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TABLE OF CONTENTS Overview …………………………………………………………………………………………………………………………………………………………. 2

Catalyst………………………………………………………………………………………………………………………………………………………… 2

Summary ……………………………………………………………………………………………………………………………………………………… 2

Table of Contents ……………………………………………………………………………………………………………………………………………… 3

LIST OF TABLES……………………………………………………………………………………………………………………………………………… 5

TABLE OF FIGURES………………………………………………………………………………………………………………………………………… 6

Analysis …………………………………………………………………………………………………………………………………………………………… 7

CHAPTER 1 ONLINE RETAIL MARKET IN THE UK…………………………………………………………………………………………..7

Europe’ leading e-retail economy ………………………………………………………………………………………………………………….7

Double digit revenue growth as new shoppers enter online spending…………………………………………………………………8

Better revenue possibilities in e-retail …………………………………………………………………………………………………………….9

Electricals are most in demand but books and music & video are advancing at a faster pace ……………………………..10

CHAPTER 2 GROWTH OPPORTUNITIES………………………………………………………………………………………………………11

Slowdown on the horizon……………………………………………………………………………………………………………………………11

Growth opportunities in customer satisfaction and enhanced shopping experience ……………………………………………11

Internet business thriving in the Channel Islands …………………………………………………………………………………………..12

Business advantages of offshore fulfillment…………………………………………………………………………………………………..13

Revenue boost through instant tax benefit ……………………………………………………………………………………………………13

£130 million loss on tax revenues………………………………………………………………………………………………………………..13

Breach of the Principal VAT Directive…………………………………………………………………………………………………………..13

Crackdown on internet VAT avoidance effect on future UK e-commerce revenues…………………………………………….14

Amazon is the most popular e-retailer despite increasing competition from bricks and mortar retailers …………………14

CHAPTER 3 SUCCESS STRATEGY………………………………………………………………………………………………………………15

Play.com …………………………………………………………………………………………………………………………………………………. 15

Survivor of dotcom boom ……………………………………………………………………………………………………………………………15

One of Europe’s biggest e-retail businesses………………………………………………………………………………………………….15

CHAPTER 4 FACTORS OF RAPID EXPANSION …………………………………………………………………………………………….16

Online shopping driven by lower prices and customer satisfaction …………………………………………………………………..16

Competitive prices ……………………………………………………………………………………………………………………………………. 16

One of the top 10 most popular retailers in the UK…………………………………………………………………………………………17

Wide product range and ease of navigation ………………………………………………………………………………………………….18

Simple payment process and reward scheme ……………………………………………………………………………………………….19

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Free delivery service………………………………………………………………………………………………………………………………….19

Integration with social media and enhanced shopping experience……………………………………………………………………19

Online focus and big labels for affordable prices ……………………………………………………………………………………………20

PlayTrade competes head-on with Amazon and eBay ……………………………………………………………………………………20

CHAPTER 5 PLAY.COM’S PROFITABILITY IS IN QUESTION AFTER A CONTROVERSIAL TAKEOVER……………..21

£400 million business…………………………………………………………………………………………………………………………………21

Legal tax exemption facilitating Play.com rapid expansion?…………………………………………………………………………….21

Play.com acquisition – another step in Rakuten’s global expansion …………………………………………………………………22

Brand’s success questioned after £25 million takeover …………………………………………………………………………………..22

Conclusions……………………………………………………………………………………………………………………………………………………. 23

Change of strategy needed ……………………………………………………………………………………………………………………………23

Appendix ……………………………………………………………………………………………………………………………………………………….. 24

Definitions…………………………………………………………………………………………………………………………………………………… 24

Further Reading…………………………………………………………………………………………………………………………………………… 24

Ask the analyst ……………………………………………………………………………………………………………………………………………. 25

About MarketLine ………………………………………………………………………………………………………………………………………… 25

Disclaimer …………………………………………………………………………………………………………………………………………………… 25

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LIST OF TABLES Table 1: Selected online retail markets in Europe…………………………………………………………………………………………………..7

Table 2: Online spending 2004-2010 ……………………………………………………………………………………………………………………8

Table 3: Online spending 2010-2015 ………………………………………………………………………………………………………………….11

Table 4: UK National Customer Satisfaction Index ……………………………………………………………………………………………….17

Table 5: Play.com revenues 2004-2010 (estimate) ………………………………………………………………………………………………21

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TABLE OF FIGURES Figure 1: Online sales share in total retail (%) ……………………………………………………………………………………………………….9

Figure 2: Breakdown of online spending by sector (%), 2010…………………………………………………………………………………10

Figure 3: Channel Islands geographical location ………………………………………………………………………………………………….12

Figure 4: Most popular websites 2010 ………………………………………………………………………………………………………………..14

Figure 5: Play.com ………………………………………………………………………………………………………………………………………….. 15

Figure 6: Top 10 reasons to buy from one site over another 2000-2010 ………………………………………………………………….16

Figure 7: Play.com website ……………………………………………………………………………………………………………………………….18

Figure 8: Play.com payment card ………………………………………………………………………………………………………………………19

Figure 9: Play.com’s digital download platform …………………………………………………………………………………………………….20

Figure 10: Play.com revenues 2004-2009 (estimate) ……………………………………………………………………………………………21

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ANALYSIS CHAPTER 1 ONLINE RETAIL MARKET IN THE UK Europe’ leading e-retail economy The UK e-retail market is estimated to reach GBP40 billion (approximately $61.7 billion) in 2015, from GBP23.1 billion (approximately $35.7 billion) in 2010.

The UK is Europe’s leading e-retail economy and now has around 150,000 online retail businesses. According to the UK e-retail industry association Interactive Media in Retail Group (IMRG), about 730,000 British jobs are either directly in or support e-retail.

Table 1: Selected online retail markets in Europe

Country Market Value ($ million) Market Share (%)

United Kingdom 38,267 23.5%

France 35,004 21.5%

Germany 24,242 14.9%

Italy 11,676 7.2%

Netherlands 6,146 3.8%

Spain 8,971 5.5%

Belgium 5,673 3.5%

Czech Republic 1,111 70.0%

SOURCE: Datamonitor: Online Retail in Europe Industry Profile, 2011 M A R K E T L I N E

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Double digit revenue growth as new shoppers enter online spending In 2010, the UK e-retail market value grew by $4.9 billion or 15.8%.

The UK e-retail market has enjoyed a period of double digit growth in recent years, despite the economic uncertainty which has affected traditional bricks and mortar retailers.

Table 2: Online spending 2004-2010

Total online spending Y-o-Y growth Share in total retail spending

Year £ million $ million % %

2004 6,026 9,396 28.5% 2.3%

2005 7,847 12,188 25.4% 3.0%

2006 10,394 16,052 30.9% 3.8%

2007 13,880 21,435 32.5% 4.9%

2008 17,177 26,527 23.8% 6.0%

2009 19,936 30,787 16.1% 7.0%

2010 23,091 35,660 15.8% 8.0%

SOURCE: Verdict UK e-Retail 2011 M A R K E T L I N E

The UK e-retail market developed rapidly, with compound annual growth rate (CAGR) for the 2004-2010 period reaching 25.1%. The surge in sales growth was mainly caused by the entry of new shoppers into online spending.

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Better revenue possibilities in e-retail E-retail continues to present revenue possibilities for new players globally; while it keeps rising at a much faster pace than the overall retail market it still accounts for only a small percentage of total retail sales.

In 2010, UK e-retail sales accounted for only 8% of total retail sales; this share is expected to continue to rise in the forecast period, to reach 12.1% in 2015.

Figure 1: Online sales share in total retail (%)

7,0

8,5

10,0

11,5

13,0

2010 2011 2012 2013 2014 2015

Share (%)

SOURCE: MARKETLINE M A R K E T L I N E

In the current economic climate, price conscious customers are turning to the internet in a search for lower prices and the ease of price comparison online. This trend is set to continue for the next few years.

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Electricals are most in demand but books and music & video are advancing at a faster pace Electricals was the largest segment of the UK e-retail market, accounting for 26.8% of total e-commerce revenues in 2010. However, this segment of the market is mature and its growth rate is expected to slow down gradually over the coming years.

Figure 2: Breakdown of online spending by sector (%), 2010

SOURCE: Verdict, UK e-Retail 2011 M A R K E T L I N E

At the same time, the music & video and books segments, despite their low share in the UK e-retail market revenues, advanced at 20.8% and 20.2% respectively in 2010. Additionally, these segments have the largest share of their sales generated via online channels (55.2% and 35.1% respectively) in 2010.

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CHAPTER 2 GROWTH OPPORTUNITIES

Slowdown on the horizon As a result of maturity and the decrease in discretionary spending caused by low levels of consumer confidence, the UK e-retail market growth is expected to decelerate to reach 7.8% in 2015.

Table 3: Online spending 2010-2015

Total online spending Y-o-Y growth Share in total retail spending Year £ million $ million % % 2010 23,091 35,660 15.8% 8.0%

2011 26,219 40,490 13.5% 8.9%

2012 29,590 45,696 12.9% 9.8%

2013 33,473 51,693 13.1% 10.8%

2014 37,067 57,243 10.7% 11.8%

2015 39,962 61,714 7.8% 12.1%

SOURCE: MARKETLINE M A R K E T L I N E

Despite new devices and cheaper access rates, with internet penetration reaching its peak in the UK, growth in new users is beginning to slow. Government initiatives supporting cheaper access rates and new devices becoming more affordable will see a second spike in users in 2012, but overall most of the people that have a desire to get online, are already connected.

Growth opportunities in customer satisfaction and enhanced shopping experience The slowdown in growth means there will no longer be easy wins and future growth opportunities will most likely come from:

• improved service levels (delivery and returns),

• diversification into non-core product categories

• incorporation of new innovative technologies, (iPads and netbooks) and further developments in mobile technology, allowing customers to browse the internet from mobile phones,

• integration with social media engaging customers in an enhanced shopping experience.

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Internet business thriving in the Channel Islands Internet business is thriving in the Channel Islands due to a legal tax loophole. Goods on Channel Islands-based sites sold for less than £15 (£18 from November 2011) can legitimately be shipped to customers in the mainland UK without incurring any sales tax, under EU rules drafted almost 30 years ago.

Figure 3: Channel Islands geographical location

SOURCE: Datamonitor’ research M A R K E T L I N E

Anyone shipping goods to the EU would normally ensure that VAT is paid when those goods are sold on. Governments ensure this tax is collected, as VAT accounts for a large share of budget revenues. However, it also means there is a cost to charging VAT: someone has to track goods, fill in forms, collect the revenue and pass it on to the tax man. It seems to make little sense to engage in a costly process to collect VAT of a few pence. That is why the EU introduced the Low Value Consignment Relief (LVCR), an exemption from VAT for all goods valued under £15 (£18 starting November 2011) imported from outside the EU.

The VAT exemption is possible because, although part of the Customs Territory of the European Community, the islands are not in the European Union, and are able to trade goods into the EU from outside it. Islanders are often offered qualified UK citizenship because they are a protectorate of the monarchy, affording them the best trading advantages of both sides.

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Business advantages of offshore fulfillment There can be significant business advantages of offshore fulfillment. In competitive, price-sensitive markets such as CD and DVD retailing, the decision to offer a 20% discount to customers or not to pass on the discount and boost the company’s own profits instead, can make a serious difference to any company’s prospects.

The existing European LVCR rules on VAT were drafted about 30 years ago, long before the potential of the internet had even been imagined. The arrival of online retailing, however, has allowed larger firms to construct complex transaction and logistics structures, using Channel Islands-based subsidiaries or agent companies to qualify for the tax relief. Minimal presence is not enough to exploit the loophole.

Since the introduction of this legislation, Jersey has tightened up its rules on who can and who cannot take advantage of the tax benefit. In the past, some retailers have tried to establish a minimal presence, simply sending goods via the Jersey postal system in an attempt to win VAT exemption.

At present, the entire buying process should take place in the Channel Islands, including the order acceptance, contract ratification and the conclusion of the order. As illustrated by the example of Play.com, this can be successfully achieved by establishing a separate company in the islands to carry out this activity.

Revenue boost through instant tax benefit With the discovery of the tax loophole, the Channel Islands’ complicated constitutional set-up became an advantage for retailers located there. The discovery came about the same time as Play.com, located in Jersey and owned by Jersey residents, started trading. The company was the first to exploit it. In this way, Play.com was granted an instant VAT advantage over its UK-based competitors, facilitating the company’s rapid development and boosting its turnover from £12 million to £280 million in the space of 5 years.

After Play.com’s successful strategy, other retailers including Amazon, TheHut.com, Tesco, Asda, Sainsbury’s, Boots Opticians and Dollond & Aitchiso, amongst others followed suit to set up their operations on the Channel Islands, in order to offer VAT-free prices.

£130 million loss on tax revenues The conservative estimates of the UK Treasury revealed that it is losing about £130 million in revenues each year because of Channel Islands-based VAT avoidance websites. This figure represents a jump of more than 50% on five years ago, according to Revenue & Customs.

Industry insiders believe however, that the true figure could be much higher. If unchallenged, taxpayer losses are likely to soar higher, further boosted by the VAT rate increase to 20% at the beginning of 2011.

Breach of the Principal VAT Directive A group of retailers, called the Retailers Against VAT Abuse Schemes (RAVAS) have blamed the legal VAT exempt for pushing hundreds of smaller retailers, especially music and DVD stores, out of business. The group has filed a complaint with the EU Directorate of Taxation, alleging that the UK Government has breached the Directive covering LVCR by failing to take action to stop abuse.

The retailers argue that by failing to stop abuse of LVCR the UK Government is in breach of the Principal VAT Directive. The directive states that the conditions for EU tax exemptions such as LVCR should be laid down “for the purposes of ensuring the correct and straightforward application of those exemptions” and to prevent any “possible evasions, avoidance or abuse”.

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Crackdown on internet VAT avoidance effect on future UK e-commerce revenues In 2011, Britain’s Chancellor of the Exchequer (equivalent to the Finance Minister in other countries), George Osborne, signaled his intention to close the tax loophole. From November 2011, the VAT-free threshold was cut from £18 to £15. The effect of lowering the threshold is deemed by many to be insufficient for it will still permit offshore companies to undercut UK mainland companies. The chancellor has pledged to announce plans to stamp out the practice by March 2012). Such plans, if successfully implemented, portend the gloomier outlook for the multi-million pound Channel Islands industry.

Up until now, the UK government was concerned about facing possible legal action if it attempted to stop the likes of Play.com or Amazon, from exploiting the tax exemption that enabled them to ship goods to the Channels Islands and then back to UK customers without the cost of VAT. However, the EU has now given its assurance to the Treasury that it is within its rights to abolish the “abusive and restrictive” trade.

Amazon is the most popular e-retailer despite increasing competition from bricks and mortar retailers According to Verdict’s UK e-retail 2011 research, UK e-retail market players face increasing competition from traditional bricks and mortar type retailers diversifying into online sales.

Figure 4: Most popular websites 2010

2010 Rank Retailer Share of purchase

visits 2010

Share of purchase

visits 2009 (%)

Rank movement

2010/091 Amazon 18.7 19.0 –

2 eBay 7.6 7.2 –

3 *Tesco 5.8 5.6 –

4 Argos 4.4 3.9 1

5 Play.com 4.2 4.5 -1

6 John Lewis 3.2 3.2 –

7 Asda 2.7 2.2 3

8 Next 2.4 2.5 -1

9 Marks & Spencer 2.2 2.3 –

10 Currys 2.1 2.5 -2

11 Comet 1.9 1.7

12 iTunes 1.8 1.5 2

13 Debenhams 1.7 1.6 -1

14 GAME 1.6 1.2 4

15 HMV 1.4 1.5 -2

SOURCE: Verdict, Top 100 Websites 2011 M A R K E T L I N E

Amongst the most popular online retail sites, Amazon UK was most often visited and held the largest share of purchase visits (18.7%) in 2010. eBay held the second place with a 7.6% share. However, ranked the third most popular was a traditional retailer – Tesco – with a greater market share of purchase visits than Play.com.

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CHAPTER 3 SUCCESS STRATEGY

Play.com Play Ltd., trading as Play.com, is a Jersey-based, privately owned online retailer. Its main product lines include: DVDs, CDs, books, gadgets, video games, DRM-free MP3 downloads, and other electronic products, as well as clothes and accessories. It is considered to be one of Europe’s most successful e-commerce retailers.

Figure 5: Play.com

SOURCE: MarketLine research M A R K E T L I N E

Survivor of dotcom boom Play.com was one of the first online retailers targeting the UK and a rare survivor of the dotcom boom. The company was founded in 1998, by Richard Goulding, Simon Perrée and Peter de Bourcier, as a side business, from the stockroom above a branch of the sportswear chain Athlete’s Foot, for which Goulding and Perrée operated a Jersey franchise.

The idea was born after Goulding spotted DVDs for the first time on a trip to the United States. The company first focused on selling CDs and DVDs mainly to young, tech-savvy men.

One of Europe’s biggest e-retail businesses Today, Play.com is one Europe’s biggest e-retailers, with estimated annual sales of about £427.4 million (approximately $660 million). It has 14 million registered users, 8 million listed products and a staff of 500. Its offices are located in Jersey, Cambridge, Bristol, London and Baroda, India.

According to Play.com’s website, the company “differentiates itself from its main competitors by focusing on entertainment only and pioneering free delivery on the internet.”

The scale of the business is only estimated, as Play.com’s former parent company, Zuma Investments, is headquartered in Jersey and therefore is not required to publish financial statements. The company refused to comment on details disclosure, but is known to be one of Europe’s most successful online retailers.

Since its acquisition in second half of 2011, Play.com is a part of Rakuten Group. Rakuten is one of the biggest online shopping operators in Japan, with over 50 million registered users. The company has 10,000 employees worldwide. Its online shopping business, Rakuten Ichiba, is the largest online shopping mall in Japan, and allows customers to shop more than 18 million products from over 18,000 merchants.

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CHAPTER 4 FACTORS OF RAPID EXPANSION

Online shopping driven by lower prices and customer satisfaction The main reasons that shoppers chose a site to buy from in 2010 include: lower prices (43.4% of shoppers), company reputation (34.4%) and satisfaction with service levels (24.7%). The importance of these factors is on the rise, meaning that shoppers are more cautious with their spending and are looking for the best value for money. Additionally, as websites have become more sophisticated and functional they are more engaging and easier to use, which improves the satisfaction factor.

Online shoppers also value a wide choice of goods available (17.4%), fast delivery of purchased goods (8.5%) and easy to navigate websites (6.9%); however, the importance of these factors decreased in 2010, compared to 2009.

Figure 6: Top 10 reasons to buy from one site over another 2000-2010

SOURCE: Verdict UK e-Retail 2011 M A R K E T L I N E

Competitive prices Play.com can afford to offer lower priced products since it is benefiting from the tax loophole in EU VAT regulations. The company is based on the Channel Islands and is allowed to sell goods at a lower price as it does not have to include the UK VAT rate of 20%.

However, many large retailers have copied Play.com’s strategy and have moved their operations to the Channel Islands. As a result, Play.com’s price advantage over retailers with similar business models has been eroded to some extent.

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One of the top 10 most popular retailers in the UK Amongst the most visited online retailers, Play.com was ranked 4th in 2010, according to Verdict’s UK e-retail 2011 research. Its share of purchase visits totaled 4.2% in 2010, a slight decrease from 4.5% in 2009. This puts Play.com in direct competition with both online retailers (e.g. Amazon, eBay) and traditional retailers diversifying into online sales (e.g. Tesco).

Additionally, the company ranks second (as of 2010) in the UK customer satisfaction index, meaning that it has good reputation amongst its customers.

Table 4: UK National Customer Satisfaction Index

Company Base Line 2008 2009 2010

Amazon.co.uk 85 85 87 88

play.com 87 87 88 86

E-Commerce 82 82 83 84

eBay.co.uk 79 79 80 82

iTunes 84 84 82 81

Ticketmaster.co.uk 82 82 80 81

Czech Republic 74 74 76 77

SOURCE: NCSI- UK M A R K E T L I N E

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Wide product range and ease of navigation Play.com’s website is easy to navigate. It includes a simple menu bar that enables easy browsing through categories of goods that are of interest. The tabs are labeled in an intuitive way (i.e. Home, DVD, Music, Games, Books, Electronics, Gadgets and Ringtones), each leading to a wide selection of goods available across all categories. Products are described for sale with text, photos, and multimedia files, providing a good amount of information, technical specification and product reviews. The search engine offers customized search options.

Figure 7: Play.com website

SOURCE: WWW.PLAY.COM M A R K E T L I N E

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Simple payment process and reward scheme After creating a user account, making a purchase on Play.com is just a few clicks away. To further facilitate the shopping process, the company launched the Play.com credit card in 2009, claiming “competitive (15.9%) rates of interest and balance transfers”. The card offers a reward scheme for use on the Play.com website. “PlayPoints” earned by paying with the card (two PlayPoints for every £1 spent) are redeemable against over 8 million products on the Play.com website.

Figure 8: Play.com payment card

SOURCE: WWW.PLAY.COM M A R K E T L I N E

Free delivery service Free standard delivery is a big feature of Play.com, with no freight charges on anything delivered within the UK. First class delivery rates depend on product size and weight.

The returns process is relatively simple and includes a pre-paid postage option for UK customers. There is also an easily viewable tracking system in place to inform shoppers about the delivery status, making the shopping experience more convenient.

Integration with social media and enhanced shopping experience When it comes to making purchasing decisions, consumers place great importance on the opinions of friends. Play.com’s strategy is leveraging this trend to the company’s advantage; this is reflected in its presence on popular social networks, such as Facebook and Twitter, through which it can promote its brands, offer more personalized customer services and make the shopping process more enjoyable.

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Online focus and big labels for affordable prices Play.com is constantly integrating new digital technologies into its sales and delivery system. The company offers a digital distribution service which allows users to download music directly from the site.

Play.com’s PlayDigital download site was launched in 2008, challenging iTunes and, boasting more than 3 million tracks from all of the major record labels along with plenty of smaller publishers. Top 100 singles retailed from 65p per track, and complete albums started at £4.99 – both less than iTunes prices.

Today, PlayDigital labels include Sony BMG, Warner Music, EMI and Universal. All its tracks are available DRM-free in the MP3 format, meaning that they can be played on any device, including iPods.

Figure 9: Play.com’s digital download platform

SOURCE: WWW.PLAY.COM M A R K E T L I N E

PlayTrade competes head-on with Amazon and eBay Third party sellers can list their items on the Play.com website through their PlayTrade section, which competes head-on with Amazon and eBay. PlayTrade is the online trading platform through which Play customers can buy and sell products to each other.

Becoming a trader does not require listing or insertion fees. There is a fixed charge per sale and a commission-based element (10%), which is applicable only when a sale is made. Play.com handles advertising and payments via PlayFunds accounts.

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CHAPTER 5 PLAY.COM’S PROFITABILITY IS IN QUESTION AFTER A CONTROVERSIAL TAKEOVER

£400 million business The scale of the Play.com business is only estimated, as its former parent Zuma Investments is not required to disclose its financial statements.

Past disclosures in a Jersey court case showed that by 2004 Play.com was shipping 15.2 million items per year, generating revenues of £190 million ($293.4 million). In 2005, the volume of shipments grew by 64% to reach 25 million, while revenue grew by 31.6% to nearly £250 million ($386.1 million). In 2010, the revenue was estimated to be around £427.4 million ($660 million).

Table 5: Play.com revenues 2004-2010 (estimate)

Total revenues Y-o-Y growth Year £ million $ million % Amazon.co.uk 190.0 293.4 87

play.com 205.0 386.1 88

E-Commerce 290.0 447.8 83

eBay.co.uk 315.0 486.5 80

iTunes 340.0 525.1 82

Ticketmaster.co.uk 400.0 617.7 80

Czech Republic 427.4 660.0 76

SOURCE: Datamonitor research M A R K E T L I N E

Figure 10: Play.com revenues 2004-2009 (estimate)

150,0

200,0

250,0

300,0

350,0

400,0

450,0

2004 2005 2006 2007 2008 2009 2010

Revenues (£ mln)

SOURCE: Datamonitor research M A R K E T L I N E

Legal tax exemption facilitating Play.com rapid expansion?

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While the largest e-commerce retailers are ranked higher than Play.com based on revenues, popularity or share of purchases per visit, Play.com was the one recording the most rapid growth in the short period from its establishment , starting as a small, internet based company selling CDs and DVDs and expanding into one of Europe’ largest online retailers. The substantial factor facilitating such expansion may be the fact that while Play.com’s main competitors followed its successful strategy of setting up their businesses on the Channel Islands, Play.com was the first to exploit the LCSV tax advantage.

Play’s managing director, Stuart Rowe was not forthcoming when asked in the interview for the Guardian (2009) what proportion of Play’s sales were VAT-free. He claimed that the company is not concerned because the VAT relief has less of an effect on the company than it did in times gone by, as it sells many items that are not exempt.

Play.com acquisition – another step in Rakuten’s global expansion In 2011, Play.com was sold to Japanese group Rakuten. Rakuten now has internet operations in 10 countries and is keen to step up its presence in Europe and globally. The Play.com acquisition is another step in Rakuten’s continued expansion into Europe and globally.

In 2010, Rakuten bought France-based e-commerce operator PriceMinister and US e-retailer Buy.com Inc. Next, in June 2011, was the purchase of a 75% stake in Brazil-based Ikeda, which sells e-commerce technology and services to more than 100 of the largest online retailers in that country. Following this investment, the company also acquired 80% of Germany-based Tradoria GmbH, which sells an e-commerce platform. Early in 2011, Rakuten was part of a group of investors that raised $100 million for Russia-based online retailer Ozon.ru, which, like Play.com, sells a wide variety of products.

Brand’s success questioned after £25 million takeover The price of the Play.com acquisition was £25 million ($38.6 million), which is seemingly low, assuming that its estimated annual sales of £500 million ($772.2 million) are accurate. Such a low price may reflect the government’s moves to close the tax loophole that allows Channel Islands retailers to sell CDs and DVDs at VAT-free prices.

In comparison, the French online marketplace – PriceMinister – was bought by Rakuten in the same year for a price of $248 million. Compared to Amazon’s market capitalization which is around three times its annual sales, Play.com’s acquisition price is only around one twentieth of its estimated annual sales figure. This may suggest that Play.com is not actually as profitable as expected, or even that it has a high level of debt.

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CONCLUSIONS

Change of strategy needed

Analysis of factors influencing buyers’ choice of online shopping sites shows that Play.com is well positioned and has the competitive advantages that are necessary to adapt to an ever evolving e-commerce market and compete efficiently with international players such as Amazon or eBay.

However, considering the controversy surrounding LVCR tax exemption and the suspiciously low price of Play.com’s recent acquisition, boosted by the lack of transparency of Play.com’s profit, the company may be in need of a change in strategy.

The near future will show to what extent the company’s success is reliant on LVCR tax exemption and if it can still hold its position among the most profitable e-commerce retailers, if and when the chancellor’s desire to close this VAT loophole is fulfilled.

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APPENDIX Definitions The online retail market consists of the total revenues generated through the sale of retail goods via online channels, valued at retail selling price.

Purchase visits are visits made when considering making a purchase.

Further Reading Verdict, UK e-Retail 2011, (CM00147-002); May 2011

Verdict, Top 100 Websites 2011, (CM00004-007); May 2011

Datamonitor: Online Retail in Europe Industry Profile, 2011

business.timesonline.co.uk/tol/business/industry_sectors/retailing/article3123843.ece

uk.finance.yahoo.com/news/Channel-Islands-VAT-loophole-tele-178509852.html?x=0

www.guardian.co.uk/business/2011/sep/21/playcom-sold-rakuten-japan

www.out-law.com/page-7425

www.pocket-lint.com/news/24223/playcom-offers-credit-card-loyalty-points

www.play.com/Campaign.html?campaign=6748&cid=5106868

www.guardian.co.uk/business/2011/jan/19/offshore-companies-holed-hmv

www.bbc.co.uk/news/business-15004271

www.cambridgenetwork.co.uk/directory/orgprofile/default.aspx?objid=43411

www.econsultancy.com/uk/blog/6665-is-play-com-really-the-best-mobile-commerce-website

www.hexus.net/content/item.php?item=29671

www.guardian.co.uk/business/2011/mar/01/budget-clamp-down-internet-vat-dodge

www.out-law.com/page-6694

www.imrg.org/imrgwebsite/user/pages/homepage.aspx

www.global.rakuten.com/newsrelease/2011/0921.html

www.telegraph.co.uk/technology/3358823/The-six-best-digital-music-download-sites.html

www.guardian.co.uk/business/2011/jan/19/offshore-companies-holed-hmv

www.itproportal.com/2011/09/22/rakuten-acquires-playcom-25-million/

www.crave.cnet.co.uk/digitalmusic/play-com-launches-drm-free-itunes-store-competitor-49295557/

www.u.tv/articles/article.aspx?cat=news&guid=5b22b1c7-f17c-4656-9597-9f4ea40212cc

www.internetretailer.com/2011/09/21/japans-rakuten-buy-uk-based-online-retailer-playcom

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