Play.com goes East for £25m

Tokyo-listed Rakuten has agreed to buy all shares in Jersey-based online retailer Play.com. Seems George Osborne's VAT clampdown has recorded its first victim...

by Dave Waller
Last Updated: 06 Nov 2012
The Japanese group has snapped up the music and film website for £25m, taking on an unspecified amount of debt and working capital in the process, as part of its aggressive European expansion. It comes as George Osborne kicks in with plans to tighten the VAT rules – which had allowed Play and other Channel Island-based outfits to beat UK high-street rivals for prices.

Play is currently the UK's biggest seller of DVDs online, with estimated annual sales of about £500m. That's a lot of box-sets. It’s also one of the controversial beneficiaries of EU VAT rules, that meant sales of less than £18 are exempt from sales tax. The practice is all totally above board, but if you want to know how powerful such a thing is, ask the top brass at HMV: sales at the high-street group have dropped so strikingly in the 13 years of Play’s rise that its famous dog has been left listening to the sounds of real insecurity in his master’s voice.

Still, despite all the success, Play’s three jersey-based entrepreneur-founders must have seen the writing on the wall. In his March budget, George Osborne signalled his intention to close the VAT loophole that Play has exploited. He’s already cutting the VAT-free threshold from £18 to £15 from next month, and plans to close the loophole entirely within a year. Yet not only is VAT about to get stricter - demand is down too: UK DVD sales dipped 6% last year, while downloading and streaming rose 18%. In the US DVD sales fell 20% last year.

Rakuten operates a ‘virtual shopping mall’ model, charging independent retailers a few hundred dollars in monthly rent for a small percentage of transactions for each of its merchants. It offers better terms than eBay and Amazon, and is clearly going for it in its quest to become a credible international rival: it has a target of deriving 70% of its ‘gross transaction value’ within 10 years in 27 countries outside Japan. That compares with 10% today, from 10 countries.

And if its acquisitional activity is anything to go by, it's clearly not worried about the wobble in the eurozone. It’s just snapped up a string of European companies, including France's PriceMinister and the German online shopping mall Tradoria. And given that the UK has the highest internet sales penetration in Europe, expected to reach £37bn by 2014, Play.com represents a real chance to fast-forward its way to dominance.

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