LOS ANGELES Online movie subscription service Netflix Inc reached a deal on Tuesday, valued as high as $32 million a year, to stream Relativity Media LLC films before pay-TV channels as it moves to compete aggressively in that space.
"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 then 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 Time Warner Inc's HBO and Liberty Media Corp's Starz.
Analysts said many major studios have locked in long-term deals with HBO and Starz but pricing has become an issue as these 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.
Relativity Media has financed, co-financed or produced more than 200 features, generating more than $13 billion in worldwide box office revenue, but its deal with Netflix covers only films it owns entirely, starting with two films, "Skyline" and "The Fighter."
"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.
The market has already started shifting. CBS Corp's Showtime refused to renew with Paramount in 2008 over pricing for movies and has now increased its emphasis on original programing while buying 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.
Meanwhile, Netflix currently has a deal with Starz to offer the cable channel's content online as part of its monthly movie-rental subscription plan, 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 and Matthew Lewis)