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Netflix challenging HBO and Showtime as it signs distribution deal with Relativity Media

RyanK If you can't join 'em, compete against 'em.

With top pay-cable channels HBO and Showtime and upstart Epix largely refusing to let Netflix stream movies during the long periods that they control the rights, the DVD subscription service is going around them, starting with independent film financing and production company Relativity Media.

The two companies have signed a five-year-plus agreement through which Relativity's movies will be distributed via Netflix's Internet streaming service instead of traditional runs on pay-cable channels, which start four-to-seven months after a DVD release.

It's the first time Netflix, which is aggressively trying to increase the amount of content on its Internet service in order to attract and retain subscribers, has signed such a deal with a Hollywood movie maker. Earlier this year it negotiated with Walt Disney Pictures to land similar rights, according to people close to the situation, but lost out to pay channel Starz.

"It would be my preference that the pay channels all supply us their films, but this is an example of the other way to get there, which is to compete with those guys," said Ted Sarandos, Netflix's chief content officer.

Netflix currently pays Starz to stream films from its suppliers, which include Walt Disney Pictures and Sony Pictures, during the pay TV window. Its Internet offering is otherwise made up of independently produced pictures and those that have finished their pay TV run, which typically lasts about eight years after theatrical release.

While specific financial details were not disclosed, people familiar with the deal said Netflix's payments to Relativity would be similar to those typically made by pay channels to studios and could go as high as about $100 million per year.

That figure will largely depend on how many movies Relativity ends up producing and how they fare at the box office. Sarandos said he was expecting roughly 12 to 15 pictures in 2011.

The deal doesn't cover movies that Relativity co-finances with Universal Pictures and Sony Pictures under existing agreements. It only include the ones it makes as part of a small but growing initiative to fully finance productions itself, including through Rogue Pictures, the low-budget label it bought from Universal last year.

Among the movies Relativity has financed in the last year are the hit romantic weeper "Dear John" and the flops "MacGruber" and "The Spy Next Door." Upcoming films that will go through Netflix include boxing drama "The Fighter," starring Christian Bale and Mark Wahlberg, and the Nicolas Cage thriller "Season of the Witch."

"This is very similar to the kind of deal that gets made with HBO or Showtime, but it has characteristics that we feel make this a better all around structure," said Relativity chief Ryan Kavanaugh.

A major difference is that Netflix will allow Relativity to sell and rent its movies through digital stores such as iTunes and Amazon.com as well as video game consoles. HBO and other pay channels forbid other methods of digital distribution during certain periods when they have exclusive rights.

-- Ben Fritz

Photo: Ryan Kavanaugh, Relativity Media's chief executive. Credit: Michael Kelly / For The Times

Comments () | Archives (3)

Anything other than their co-financed pictures a crap. Pay TV subscribers will be happy they're not paying to watch MacGruber. Nothing novel about this.

The Netflix deal is a significant milestone as it establishes a new distribution window that includes app stores. Just as pay TV and international rights became major factors in helping otherwise marginally profitable entertainment turn a profit -- like @Eduardo's "MacGruber" example -- I believe Internet-enabled streaming can become a key window for Relativity and other forward-thinking studios.

The truth of the matter is, redbox is starting to kick ass with their $1.00 movies and latest movies out. Netflix needs to step up and stream some new releases from time to time just so that it is convenient to the customers. They will definitely save money and turn their profit margin up if they start streaming as that will save money when it comes to purchasing bluray/dvds and shipping costs. Afterall, there are many illegal sites that offer movie streaming, if Netflix can start streaming latest releases, I believe most of those people that watch movies on illegal sites will definetly subscribe to netflix for the better quality, ability to rent dvd/bluray if needed all for a low price! Its a win win situation for netflix. Netflix should also get into renting out video game titles (for xbox and ps3 for an extra price) and selling accessories such as (DVD players and BluRay Disc players at a competitive price to the customers directly). The idea here is to get people to think netflix membership just like a gym membership. Some hit the gym and workout and get their money worth but most pay for the gym membership only to go once a month. If Netflix can get members to join and keep paying religiously eventhough they may not watch more then 1 or 2 movies, the ability to retain them as members and the customers to feel the ability to rent movies or stream some latest releases whenever they wish is a good thing. Lots of great ideas and potential for netflix to grow and they need to start thinking about these ideas mentioned. Another idea could be a deeper discount if you pay in full for 1 yr that comes with a free month of xbox live! (this of course should be once they start doing the whole rent-a-video game thing)

-Bobby (Business Consultant)


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