What went wrong at Play.com?

It was early 2009 when Play.com was at the height of its power.

The National Consumer Satisfaction Index had Play.com rated above Amazon and iTunes as the No.1 online retailer, while Verdict Research named it as the UK’s second favourite music and video retailer behind Amazon.

That year it would go on to win its fourth MCV Award and its second Which? Award, both for best online retailer.

The Jersey-based retailer, with offices in Cambridge, had built its business on the Channel Island tax loophole, which allowed it to avoid paying tax on goods under 18 – encompassing most CDs and DVDs.

But it was a powerful name in games, too. In March 2008 it ran Play.com Live, a major video games consumer show in Wembley Stadium. Its 2008 turnover was reported to be 400m, with 110m coming from video games.

One in 20 games sold that year in the UK were sold via Play.com. And the company’s management was plotting an IPO.

Less than four years later and Play.com is sold to Japanese firm Rakuten for 25m, and last week the firm announced plans to close its direct retail business.

One of the most popular reasons given for the demise of Play.com was the belated decision by the Government to close the loophole that allowed the VAT-free sales of CDs and DVDs.

Play.com had cetainly exploited this legal clause, and its abolition would have certainly had an impact on a Jersey-based firm. However, the reality is the loophole’s potency on the industry has diminished over the years. The savings that could be made from Play.com (and the other Channel Island stores) was simply not worth the added delivery time it took for consumers to get their goods.

The reality is that Play.com’s fall began long before then.

By 2008 Play.com was struggling to launch significant new initiatives. Its plan to sell tickets via a deal with Ticketmaster was a failure and despite the right noises, the company never launched a decent digital download service for music, video or games.

In 2008 Play.com spent significant money on marketing, but by 2009 it had ceased splashing the cash. It even stopped doing its live music events. Play.com Live never returned for a second year.

And then came the exodus. Seven-year games boss Gian Luzio left to join The Hut Group in 2009 and just a few months later Play.com’s marketing manager Richard Chapple followed him to the same firm. In 2010, marketing director Martin Talbot left to join Wiggle and head of business development Paul Zimmerman took the CEO role at Firebox. And finally in 2011 MD Stuart Rowe also departed.

To the eyes of the customer Play was the cheapest, with great service and was totally entertainment focused,” said one former Play.com veteran.

But at the time it was expanding into new areas and launching its Amazon marketplace competitor. In 2009 and 2010 Play.com lost its way and lost some of its best staff.”

As Play.com’s traffic began to slide and sales began to dip the real killer blow happened. Amazon got its act together.

The plucky Jersey retailer had been giving its giant US rival a bloody nose year-after-year. But by 2010 Amazon finally offered free delivery, something that Play.com had been offering for years. It then revamped its site, was more aggressive on price and stocked more items. It launched Amazon Prime, a next day delivery service that Play, based in the Channel Islands, couldn’t offer.

And then finally the tax loophole that Play.com had built its business on since its inception in 1998, closed in April last year.

Amazon and others had spread their bets. Play.com banked on something that became illegal.

That’s how Play.com fell from being a 400m entertainment powerhouse, to a 25m outlet. In 2009 the team at Play had dreams of an IPO, but ultimately it waited too long to sell-up.

It goes to show how hard it is to remain at the top in the fast-changing world of entertainment and online retail.