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

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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

Relativity Media’s chief executive. Credit: Michael Kelly / For The Times