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