Netflix and Epix working on major digital partnership to shake up pay TV landscape

In a deal that could transform the landscape for digital movie distribution, start-up pay-TV channel Epix is in serious negotiations to give Netflix exclusive online rights to films from its three equity partners -- Paramount Pictures, Lionsgate and Metro-Goldwyn-Mayer.

The five-year arrangement would allow Netflix subscribers to watch movies such as "Iron Man 2," "Dinner for Schmucks" and this week's release "The Expendables" via the company's Internet streaming service, according to several people familiar with the situation.

The people noted that there are still outstanding issues that must be resolved before the deal can close.

Netflix is expected to pay Epix close to $1 billion in licensing fees over the life of the deal, bringing the channel closer to its goal of breaking even by 2011. Earnest discussions have been ongoing for several months.

The agreement would make Netflix, best known for its DVD-by-mail business, a potentially formidable competitor to Time Warner's dominant pay channel Home Box Office, which has movies from Warner Bros., 20th Century Fox and Universal Pictures. As more people watch Internet content on their televisions, Netflix has been investing huge amounts of money to acquire content for its streaming video service. It already has a deal with Liberty Media's pay channel Starz, which brings it movies from Walt Disney Studios and Sony Pictures. Netflix also recently acquired exclusive pay-TV window rights for films produced by Relativity Media.

Among the issues the two companies are discussing is when exactly Epix would allow Netflix to start streaming its movies. One person familiar with the matter said it would be at some point after Epix starts airing new movies, typically several months after they launch on DVD.

Epix, which launched last year amid doubts that there was room for another pay television channel, is currently carried on only a handful of smaller cable and satellite operators, such as Cox Communications, Charter Communications and Dish Network. In a recent interview, the channel's chief executive, Mark Greenberg, said he expects to reach between 3 million and 4 million television subscribers this summer. The new deal would immediately make his company's movies available to 15 million Netflix subscribers, 61% of whom have previously used its online service.

However, major cable carriers such as Comcast Corp. may be put off by the partnership, which would make paying to subscribe to Epix's channel less appealing to the Netflix users. Epix and its partner studios have apparently concluded that they are willing to make a big bet on the digital future by partnering with content-hungry Netflix.

On a recent call with Wall Street analysts, Netflix Chief Executive Reed Hastings said his company is "investing aggressively in streaming content because of the clear benefits to the business," citing the opportunity to attract more subscribers and spend less on postage to ship DVDs.

A partnership with Netflix is not expected to impact Epix's own online video streaming service.

A person familiar with the matter said the agreement would allow Paramount, Lionsgate and MGM to sell and rent their movies via digital stores such as Apple Inc.'s iTunes, a privilege that HBO doesn't give its studios.

Greenberg did not immediately return a call for comment, nor did a spokesman for Netflix.

[Update, 9:25 a.m., Aug. 11: Netflix and Epix officially announced their partnership on Tuesday morning.]

-- Ben Fritz and Claudia Eller

Photos (top): Netflix Chief Executive Reed Hastings. Credit: Roger Galbraith /Reuters

(bottom): Epix Chief Executive Mark Greenberg. Credit: Michael Nagle / For the Los Angeles Times

Comments

[Michael]

Yeah, but when is the Netflix app for iphone coming out? We were promised by Summer and the Summer is almost over...

[Greg Maragos]

"...bringing the channel closer to its goal of breaking even by 2011..."

I normally roll my eyes when I read something like that, because a company that has failed to make a profit is, at best, living on borrowed time. However, such was the beginning of Amazon.com, so anything is possible.

[jsa]

Sounds good to me. I've recently started streaming NetFlix and find that it's an excellent service.

[Michael]

When I moved most recently I decided to forgo cable or satelite and simply watch Netflix streaming movies (and TV shows!) on my Nintendo Wii. I would be very excited to have the ability to watch more top tier content. I would probably even be willing to pay a few bucks more a month to do so. (Currently I only pay $10 a month for 1 DVD at a time and unlimited streaming, talk about a deal)

[DG3]

Michael, you shouldn't be watching movies on a dinky little phone anyway.

[Netflix Zombie]

Yes we love Netflix but wonder why -- if Netflix is serious about cutting its costs for postage to ship DVDs to customers -- doesn't Netflix offer ALL its content via STREAMING to home computers/ TVs etc.??? Right now, only a fraction of its portfolio is available on Streaming Video, and all the content is available on DVD. Shouldn't that ratio be reversed, or equaled out?

We enjoy paying only $8.99 a month for the one-DVD and unlimited streaming plan. Unless Netflix has to pay royalties for EACH streaming used, rather than just a flat rate for having the content available, then it makes business sense to steer more Netflix customers toward streaming --- If only we could get all the content that way! What's up, Netflix strategists?

[X-MAN]

@Netflix Zombie It's not really Netflix's fault that they don't stream all of their content. The major movie companies have deals with DVD rental chains and with subscriber based services that prohibit Netflix from showing certain releases. That's why they are using the licenses from Starz and Epix as a workaround and showing more movies than they could have licensed individually.

[nabeel]

@Netflix Zombie - they don't offer all media for streaming because they don't have the rights to. Hence, the deal with Epix that is the subject of the article.

[JC]

people still use cable?

[JC]

To Netflix Zombie: most movies are contracted to distributors for several years, that's why you only get certain movies streamed on Netflix. The STARZ partnership was a huge deal because Netflix can stream those movies a few months after they are out on DVD/Blueray, and have gone on to pay channels. Instead of several years before the original contract expires, they can stream them in several months. The same would apply to this new partnership. Netflix also holds back DVD's from initial release date for a couple months, so companies can get more retail sales and pay channels can get a couple of months exclusives with the movies. It's always about the money, before it's about the consumer.

[elpenguin]

Netflix streaming compatibility with Linux, cmon...

[uncle_vito]

All these streaming TV shows are low definition.

I need a better picture before I toss in my money.

Bandwidth of internet is just not there yet.

Vito

[Brandon]

"Right now, only a fraction of its portfolio is available on Streaming Video, and all the content is available on DVD. Shouldn't that ratio be reversed, or equaled out?"

If it were up to Netflix, I would imagine they would offer their entire DVD library via streaming. But the movie companies won't let them. Already they've been forced into deals with at least 2, possibly three studios, where they can't even get the DVDs for new movies until 28 days after they're available in stores and at Blockbuster. Because the movie studios won't work with them, Netflix is forced to make side deals like this with Epix and the one with Starz.

[JohnRJ08]

I hope this deal goes through soon, because Netflix's current list of titles which are available for streaming direct to television is terrible. Mostly old cartoon shows and movies that failed at theaters. A few new items are added every couple of months, but not nearly enough.

[Jim Townes]

I wonder if when founded netflix knew it would eventually go in this direction and the mailing of dvds was a temporary strategy. The name netflix is starting to make a lot more sense now.