Netflix to Stream First-Run Films

Netflix Inc., the mail-order movie rental service, will get exclusive online streaming rights to first-run films produced by Relativity Media LLC under a deal that bypasses pay-TV services such as HBO and Showtime.

The accord expands the inventory of recently issued films that Netflix can provide online after their release on DVD or Blu-ray in the U.S., the companies said today in a statement. Financial terms weren’t disclosed.

Among the first movies to be offered online will be “The Fighter” with Christian Bale, scheduled to be distributed in theaters by Viacom Inc.’s Paramount Pictures, and “Skyline,” which is being released by Universal Pictures and Relativity’s Rogue Pictures, according to the statement. Relativity, based in West Hollywood, California, produces features and arranges financing for other studios’ films.

“The Relativity deal establishes a new business model but is not likely to change the landscape as there are long-term output deals in place between the major studios and pay TV networks,” Tony Wible, an analyst with Janney Montgomery Scott LLC in Philadelphia, wrote today in a note. Netflix “does not have the capital to pursue these expensive contracts.”

After a period of pay-per-view exclusivity, Los Gatos, California-based Netflix will be the only subscription service with rights to the 12 to 15 films Relativity produces annually on its own, Ted Sarandos, Netflix’s chief content officer, said in an interview.

“This is the first and only place where you’ll see these films available for subscription services,” Sarandos said.

Number of Films

The number of movies under the agreement may increase to as many as 30 films a year, according to the statement. Ryan Kavanaugh, Relativity’s co-chief executive officer, said in an interview the company keeps the right to sell digital downloads through Apple Inc.’s iTunes store and Amazon.com Inc. when the movies are streaming on Netflix.

Netflix has been expanding its online services by providing access on more than 60 million Internet-connected televisions, Blu-ray players and game consoles, according to Sarandos.

The Netflix “Watch Instantly” service has been largely limited to older movies and television shows because HBO, Showtime and other pay-TV providers have exclusive rights to films deal for as long as nine years, Sarandos said.

The company does stream more recent releases from Walt Disney Co. and Sony Pictures Entertainment through an agreement with the Starz cable channel owned by Liberty Media Corp.

Wible, who recommends selling Netflix shares, said the company may spend $20 million to $32 million a year on the films and would need to add 1.2 million to 1.9 million new subscribers to cover the expense.

Part of Service

Netflix gained 19 cents to $107.27 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares have gained 95 percent this year before today. The company finished the first quarter with 14 million subscribers, with more than half using the streaming service, according to an April 21 statement.

The films will be available at no additional cost to Netflix subscribers, spokesman Steve Swasey said.

Relativity said it has helped finance or produce more than 200 films, generating more than $13 billion in box office sales. The films include “Robin Hood,” “Get Him to the Greek” and “Grown Ups.”

To contact the reporters on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net; Michael White in Los Angeles at mwhite8@bloomberg.net.

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