Netflix Inc has struck a deal with Relativity Media LLC to screen its movies ahead of pay-TV channels for the first time, putting it in competition with the likes of Time Warner's HBO or Showtime.
Analysts say the Relativity deal is likely the first of many, challenging the years-long exclusivity that premium movie channels now pay for. The choice of Netflix over HBO and its peers reflects how studios are looking to the Web for distribution while finding themselves embroiled in costly price battles with cable networks.
Under a deal valued as high as $32 million a year, the fast-growing Web movie-subscription service will stream Relativity films such as the Christian Bale vehicle The Fighter and Skyline in early 2011.
Relativity Media has financed, co-financed or produced more than 200 feature films, but the Netflix deal covers only films it owns entirely. Relativity has more than 10 films scheduled for release in the next 12 months.
It is clear that Netflix is becoming a competitor to movie channels, which is good for studios because they now have someone new willing to pay good money for that content, said Barton Crockett, analyst with Lazard Capital Markets.
After a film is released in theaters, it is traditionally released on DVD/Blu-ray followed by pay-per-view or video-on-demand and then to what is called the first-run window on premium cable channels like HBO and Liberty Media Starz.
Analysts said major studios are locked in long-term deals but pricing has become an issue as cable channels turn more to original series. Many experts believe when these deals expire around 2015, Netflix will step in.
While Netflix is dealing with a relatively small player in Relativity, they're introducing a new model and becoming another Pay TV network player, said Tony Wible, analyst with Janney Montgomery Scott, who estimated Netflix may spend $20 million to $32 million per year to stream Relativity films that might have played on premium channels.
This deal should be a positive for content owners as they will presumably have multiple parties vying for their product down the road, he said.
With the networks pushing for better deals on the movie licensing renewals, it looks like we're moving toward an opportunity for Netflix, which is favored to compete for those rights, but we're several years away, said Tom Adams of Adams Media Research.
Netflix, with about 14 million subscribers, is already closing in on the 16.5 million subscribers that cable network Showtime reaches, but is bringing in fewer dollars per subscriber with its $8.99 a month plan than cable networks.
Netflix has a much smaller programing budget as well.
With fewer subscribers paying less money per month than these cable networks, Netflix has less money coming into the door, which could make competitive bidding a challenge, Adams said, estimating that HBO will spend $1.45 billion for programing in 2010. By contrast, he sees Netflix spending $517 million for content in 2010, including $150 million for streamed programing.
Nevertheless, the market has already started shifting. CBS Corp's Showtime refused to renew with Paramount in 2008 over movie pricing to focus more on new series and films from independent studios like Summit and the Weinstein Co.
Paramount then launched Epix, a new movie channel, with Lions Gate Entertainment and Metro-Goldwyn-Mayer.
Netflix currently has a deal with Starz to offer the cable channel's content online but analysts speculate that deal could expire sometime in 2011 or 2012.
Netflix got an extremely attractive deal with Starz and it angered some studios. When that deal expires, the pricing may double or triple from what Netflix is currently paying Starz, said Wible, noting that deal is estimated at $50 million to $60 million per year.
Netflix may be using this Relativity deal as a backup to the extent that they may not get Starz anymore or a hedge for negotiating, he said.
Netflix shares ended 0.2 percent higher at $107.27 on the Nasdaq on Tuesday after rising as much as 4 percent during the day.
(Additional reporting by Sakthi Prasad in Bangalore; Editing by David Holmes, Matthew Lewis and Bernard Orr)