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 convert even more people to the idea of getting their entertainment piped over high-speed Internet connections.
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 on-demand video systems supplant its core business of renting DVDs through the mail. The online streaming push also helps the company reduce its postage bill for mailing DVDs.
The deal also makes the three studios' joint pay TV venture, Epix, immediately profitable.
Streaming movies provide more instant gratification than renting DVDs through the mail or from a store because the video can be delivered within 30 seconds over a high-speed connection. The video isn't stored on the computer hard drives owned by subscribers; it's just shown on a connected device, such as video game consoles. The concept has become more popular as more households have gotten high-speed Internet access and Netflix has obtained the streaming rights to more recent movies and TV shows.
Analysts believe the influx of newer movies available for Internet streaming 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 $8.11, or nearly 7 percent, to close at $125.01.
Netflix's stock price has quadrupled during the last two years as the number of the company's subscribers has nearly doubled to 15 million. Meanwhile, traditional video stores have been closing, a trend reflected by the collapse of Movie Gallery Inc. and the struggles of Blockbuster Inc., whose shares are worth so little now that they were recently de-listed from the New York Stock Exchange.
Epix, a pay TV channel launched last October by Viacom Inc.'s Paramount, Metro-Goldwyn-Mayer Inc. and Lions Gate Entertainment Corp., 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. Netflix is getting the rights to stream movies 90 days after they appear on Epix, which is 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 streaming rights that cover about 46 percent of the movies that have be shown in U.S. theaters this year, said Ted Sarandos, Netflix's chief content officer. He says that's comparable to what Time Warner Inc.'s HBO gets for its pay TV channel, although HBO appears to still hold the edge in the number of movies that made the most money in theaters.
"We are giving people more and more reason to stream instead of waiting to get their DVDs through the mail," Sarandos said.
Just over 60 percent of Netflix's subscribers streamed at least 15 minutes of video in the April-June period, up from 36 percent at the end of last year.
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, Amazon.com 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.
Mailing DVDs remains Netflix's bread and butter, so the Internet isn't in immediate danger of choking from Netflix' expanded online streaming. Still, it represents the company's growth engine. 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 on streaming rights during the first half of this year, up from $31 million during the first six months of 2009.
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. The price for streaming rights has been escalating as more people sign up for Netflix.
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 analysts 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 29 cents to close Tuesday at $33.96 while Lions Gate's stock edged up 2 cents to $6.60.
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