Etailer Play.com last week revealed it is to close its retail arm in the UK after the Government closed the Channel Islands tax loophole its business relied on

Why are we talking about this now?

Entertainment etailer Play.com is to shut down its retail arm to focus on its marketplace business from March. The online retailer, owned by Japanese ecommerce group Rakuten, is making 147 staff redundant in Jersey, where it is headquartered, as well as 67 at its Cambridge and Bristol offices. Rakuten launched the marketplace business in October last year, allowing merchants to launch their own-branded onlineshops.

Why is Play.com shutting the retail business?

The etailer said it has to shut down its retail business as a direct result of the Government closing the tax loophole that allowed it to sell items priced at £15 or below free of VAT. Low Value Consignment Relief (LVCR), which was scrapped last April, allowed companies based in the Channel Islands to undercut rivals with lower prices. HMV had an operation in Guernsey butclosed it down in July because of the loophole closure.

What are the implications for the market?

The closure is likely to be good news for Amazon – the two companies have similar business models and it’s likely Play.com’s customers will flock naturally to the etail giant.

Other entertainment retailers such as HMV are likely to benefit too but the effect might not be that significant – the consequences of Zavvi’s closure in 2008, for instance, were far greater for the ailing retailer.

Conluminomanaging director Neil Saunders says: “It will benefit HMV to a degree but the business model is slightly different. It won’t give HMV the breathing space it might like.”

Saunders adds that while Play.com had 14 million registered UK users in 2011, it operatesacross a disparate set of categories, meaning the effect of its closure will be spread quite thinly.

Was Play.com doomed to failure?

To some degree, yes. While it has grown to become one of the UK’s largest etailers, by the time Rakuten acquired it last year, it was valued at just £25m. Its business model is similar to Amazon’s, but its operations are less efficient. Play.com also doesn’t have the economies of scale enjoyed by Amazon, making costs more difficult to control.

“To some degree it was probably inevitable,” says Saunders. “The LVCR really was of great assistance to Play.com in terms of making its business model work.”