Warner Starts Movie Service on Facebook, Pressuring Netflix

Warner Bros. is offering an online rental service on Facebook Inc., giving the studio a new way to distribute films amid concerns by parent Time Warner Inc. (TWX) that Netflix Inc. (NFLX) devalues movies and TV shows.

The studio is testing the service with rentals of “The Dark Knight,” according to a statement today from Burbank, California-based Warner Bros. Users can click a “rent” icon and pay a $3 fee with Facebook Credits, giving the social- networking service a slice of the revenue.

Facebook’s website, with more than 500 million users, offers a large base to help studios reach potential customers directly. Time Warner Chief Executive Officer Jeffrey Bewkes has said Netflix’s subscription for DVDs and unlimited streaming starting at $7.99 a month reduces the value of premium programming, and that he is considering making the company wait longer and pay more for TV shows and movies.

“Facebook is a force to be reckoned with,” Youssef Squali, an analyst with Jefferies & Co. in New York, said in a research note. “We expect the test will pick up steam as more titles become available, and given the higher profitability of digital distribution for film studios, we expect more film studios to sign on as well.”

Under the program, selected movies will be available on each film’s official Facebook page, starting today with “The Dark Knight,” Warner Bros. said in the statement. With the test, Warner Bros. joins a group that includes Amazon.com Inc. (AMZN), which introduced a movie-download service in February through its Prime business, Comcast Corp. (CMCSA)’s TV Everywhere initiative and Time Warner’s HBO Go.

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Facebook subscribers using the Warner Bros. service will have traditional social-network features connected to the movie, including the ability to post comments and update their status.

“This is exactly what Netflix and others haven’t been able to do very well -- integrate video with social,” said Elizabeth Shaw, an analyst with Forrester Research Inc. in San Francisco. “This has the potential of being very big.”

The Warner Bros. service isn’t an immediate threat to Netflix’s mail-order and online service because it offers only pay-per-view, isn’t available at a centralized storefront and can’t easily be viewed on larger-screen televisions, James Mitchell, an analyst at Goldman, Sachs & Co., said in a research note today. On a longer-term basis, Facebook could become a “credible threat.”

Steve Swasey, a spokesman for Netflix, declined to comment on the announcement.

Until now, social games have been a big driver of Facebook Credits, which help users buy items on games such as “FarmVille,” Debra Aho Williamson, an analyst with eMarketer Inc., said in an e-mailed statement. Facebook gets 30 percent of the fees for items such as virtual houses and tractors.

Facebook Credits

“More than 400 games and applications use Facebook Credits to give people a convenient and safe way to buy virtual and digital goods on Facebook,” the Palo Alto, California-based company said in an e-mailed statement. “Facebook Credits is a program open to all developers, and we’re looking forward to seeing the new and interesting ways that developers and partners use credits to offer virtual and digital goods in the future.”

Renting a movie through Facebook costs 30 Facebook Credits, or $3. Viewers have 48 hours to watch the films.

“Facebook has become a daily destination for hundreds of millions of people,” Thomas Gewecke, president of Warner Bros. Digital Distribution, said in the statement. “Making our films available through Facebook is a natural extension of our digital distribution efforts.”

Netflix fell $11.95 to $195.45 at 4 p.m. New York time in Nasdaq Stock Market trading. The stock has gained 11 percent this year and more than tripled in 2010. Time Warner declined 35 cents to $36.43 on the New York Stock Exchange.

By Mail, Streaming

Netflix, based in Los Gatos, California, ships DVDs to subscribers by mail and streams older titles from Hollywood studios. It has agreements to obtain films from the premium cable channels Starz and Epix, and struck a deal in July with Relativity Media LLC for exclusive streaming rights to first-run movies, including “The Fighter.” Its subscribers topped 20 million at year-end.

Warner’s test program with Facebook extends to all devices that offer the social network, including Apple Inc. (AAPL) products.

In choosing Facebook as a platform, Warner also gains broader global distribution of its titles, including in China, Russia and Portugal, Laura Aguilera, broadband media analyst for IHS Screen Digest, said in a research note today.

Netflix offers its streaming service in the U.S. and Canada. The company is looking to expand internationally this year, Chief Executive Officer Reed Hastings said in December.

To contact the reporters on this story: Clifford Edwards in San Francisco at cedwards28@bloomberg.net; Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net; Thomas Giles at tgiles5@bloomberg.net

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