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At a cost of nearly one billion dollars, Netflix on Tuesday said it would add films from Paramount Pictures, Lions Gate and MGM to its online subscription service.
It was a coup — albeit a costly one — for Netflix, which knows its needs to lock up the digital rights to films as customers stop receiving DVDs by mail and start receiving streams via the Internet. The deal will commence Sept. 1.
Ted Sarandos, the chief content officer for Netflix, said he is essentially taking the “huge pile of money” that Netflix pays in postage for DVDs by mail — about $600 million this year — “and starting to pay it to the studios and networks.”
Wall Street analysts estimated that Netflix would pay about $900 million over the course of five years to Epix, a fledgling competitor to HBO that holds the rights to the film output of Paramount, Lions Gate and MGM. Those payments are expected to help the money-losing Epix break even in the next fiscal year.
The Epix deal will add new releases like “Iron Man” and “The Curious Case of Benjamin Button” to Netflix’s catalog, greatly enhancing the “Watch Instantly” streaming service that the company markets to subscribers as part of an $8.99 package that also includes DVD deliveries. It was the second film deal for Netflix this summer, coming a month after a pact with Relativity Media, the firm run by Ryan Kavanaugh.
Netflix’s open checkbook demonstrates that Internet streaming is clearly coming to the forefront in Hollywood, but in a carefully controlled manner. Mr. Sarandos said in an interview Tuesday that the content deals were part of “our continued commitment to making streaming a better and better proposition for our subscribers.”
Netflix’s future depends in large part on cutting financial deals that keep those streams in place.
The company first took on the likes of Blockbuster with DVDs by mail. Then, in 2007, it set its sights on online streaming, but existing deals with pay TV operators like HBO made it impossible to stream many of the biggest film releases. These deals preserve what is called the pay television window, which opens up about a year after a film is first released in theaters and gives HBO, Showtime or Starz about 18 months of screening (and, more recently, Web streaming) time.
Pay TV arrangements are important contributors to the bottom lines of Hollywood studios, helping them wring more money out of both blockbusters and flops. These arrangements rely on cable and satellite carriers to collect monthly payments.
Accordingly, the movies that were initially available on the “Watch Instantly” service were mostly ones “you’ve never heard of,” Mr. Sarandos said. But the company in 2008 cut an important deal with Starz that allowed access to high-profile films from Sony and The Walt Disney Company. Now it is adding more films through the payments to Epix.
In doing so, it is essentially creating a brand new window for movie viewing, one that does not depend on cable or satellite carriers. “If you own content, you want to sell it to as many people as possible without blowing up your existing revenue streams,” said the Morgan Stanley analyst Benjamin Swinburne.
At the same time, having Netflix in the marketplace puts pressure on cable and satellite providers “because you’ve got another bidder out there,” he said.
The 2-year-old Epix is invisible to most consumers because it has had trouble gaining space on those carriers’ systems. But it is preserving the deals it does have by carving out a three-month TV window for films before they are available to Netflix subscribers.
Jon Feltheimer, the chief executive of Lions Gate, told analysts Tuesday that “by creating this groundbreaking new window for their streaming service, we both protect our traditional MSO customers and create a significant and guaranteed new revenue stream for our service.” MSO is an abbreviation for cable and satellite carriers.
The Los Angeles Times first reported the pending deal on Monday.
Netflix says it prefers to be a distributor for pay TV — not a competitor to it — and wants to license content from HBO and Showtime. HBO has the rights to Fox, Universal and Warner films for at least the next four years.
Asked about the giant amount of content that Netflix was lacking due to HBO’s deals, Mr. Sarandos seemed to take a long-term view. “Every deal expires,” he said, “and every deal has to be renewed.”
some text from NYTimes Online