Marquee deal: Netflix to pay nearly $1 billion to stream movies from Paramount, Lionsgate, MGM

By Ryan Nakashima, AP
Tuesday, August 10, 2010

Netflix to stream Paramount, Lionsgate, MGM movies

LOS ANGELES — Netflix Inc. will pay nearly $1 billion during the next five years for the online streaming rights to movies from Paramount, Lionsgate and MGM in a deal that could help Netflix attract even more subscribers.

The agreement announced Tuesday marks another breakthrough in Netflix’s bid to stock its online streaming library with more compelling material, so it can keep its subscription service relevant as more households order entertainment through high-speed Internet connections. The online streaming push also helps the company reduce its postage bill for mailing DVDs to its 15 million subscribers.

The deal also makes the three studios’ joint pay TV venture, Epix, immediately profitable.

Analysts believe the influx of newer movies will enable Netflix to maintain its rapid growth of the past two years, lifting its earnings even higher despite the hefty licensing fees. That expectation helped lift Netflix shares $7.70, or 6.6 percent, to $124.60 in Tuesday’s afternoon trading.

Viacom Inc.’s Paramount, Metro-Goldwyn-Mayer Inc. and Lions Gate Entertainment Corp. are selling Netflix the right to stream movies 90 days after they appear on the Epix pay channel offered through subscription TV providers such as Dish Network Corp. and Cox Communications Inc.

The first crop of movies to be released in Netflix’s streaming library on Sept. 1 include “G.I. Joe: The Rise of Cobra,” “The Pink Panther 2″ “The Curious Case of Benjamin Button” and all of “The Godfather” movies. Over the next few months, “Iron Man 2″ and “Star Trek” will also be available for streaming.

The movies will be available for streaming on Netflix for 16 or 17 months, after which the rights will shift to basic cable channels.

Netflix now has movie streaming rights that cover about 46 percent of new releases at the U.S. box office, said Ted Sarandos, Netflix’s chief content officer. That’s comparable to what Time Warner Inc.’s HBO gets for its pay TV channel.

“We are giving people more and more reason to stream instead of waiting to get their DVDs through the mail,” Sarandos said.

Epix, a pay TV channel launched last October by Paramount, MGM and Lions Gate, holds subscription pay TV rights to new releases and movies from its partners’ libraries. The pay TV rights typically start about a year after a movie’s theatrical release.

Mark Greenberg, the president of Epix, told The Associated Press that the channel had discussed a digital distribution deal with many potential partners including the online video site Hulu, Inc., and Google Inc.’s YouTube, but the Netflix deal made the most sense because it had healthy subscriber revenues.

“We’re putting our bet on Netflix. They’ve done a great job and they’re a great brand,” Greenberg said. “In the digital space, they’re the provider for us.”

Although mailing DVDs remains Netflix’s bread and butter, Internet streaming has become the company’s growth engine as it has struck deals to deliver the online service to video game consoles, Blu-ray players and other devices hooked up to flat-panel televisions. Netflix management believes the streaming service is the main reason Netflix has added more than 6.5 million subscribers in the past two years.

Netflix, which is based in Los Gatos, Calif., offers unlimited Internet streaming along with DVD mailing for as little as $9 per month, a price that has held steady even as the company has substantially increased its spending to expand its online library beyond 20,000 titles, up from 2,000 just a few years ago.

The company spent $117 million in the first six months this year on streaming, up from $31 million a year ago. The new deal adds roughly $200 million a year to that tab. That’s on top of the more than $100 million annually that Netflix will pay Relativity Media LLC for the streaming rights to 12 to 15 movies annually starting in 2011. Netflix finalized that exclusive deal last month, underscoring the company’s financial commitment to streaming.

Susquehanna Financial Group analyst Marianne Wolk estimates Netflix will spend $360 million on Internet streaming rights next year. But Sarandos said his company can afford those costs because more streaming means fewer DVDs to mail out, thereby reducing the company’s postage costs, which now run about $600 million a year.

Viacom owns about a 50 percent stake in Epix, while Lions Gate holds about 31 percent and MGM has about 19 percent. Epix lost $90 million in the first half of the year. Lions Gate CEO Jon Feltheimer told analyst Tuesday that combined with other distribution deals, the Netflix licensing fees will make Epix profitable.

Barclays Capital analyst Anthony DiClemente estimated the deal is worth about 75 cents per share to Viacom. Shares of Viacom rose 28 cents, or 0.8 percent, to $33.95 in afternoon trading Tuesday. Shares of Lions Gate rose 2 cents to $6.60.

Michael Liedtke reported from San Francisco.

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