Netflix-EPIX Deal Puts Pressure on Cable

Jeff Baumgartner
LR Cable News Analysis
Jeff Baumgartner, Senior Editor, Light Reading
8/10/2010



Netflix Inc. (Nasdaq: NFLX) crept precariously closer to cable's premium-TV turf again after striking a deal that gives the broadband video player the green light to stream top-shelf movies and older, library fare from EPIX, a budding programmer that's backed by Viacom Inc. (NYSE: VIA), Metro-Goldwyn-Mayer Inc. , and Lions Gate Entertainment Corp. (NYSE/Toronto: LGF).) (See Netflix Makes EPIX Deal.)

The deal comes with some concessions that control how soon Netflix can offer EPIX's newest titles, but it does push Netflix further into the premium category, enhances its "Watch Instantly" streaming platform, and applies pressure on the traditional pay-TV model programmers have with MSOs, telcos, and satellite TV companies. EPIX is also the latest major premium programmer to join the Netflix stable. It struck a deal to offer Starz Entertainment LLC 's Web-based "Starz Play" service in the fall of 2008. (See Starz Joins Netflix Constellation.)

But this latest deal comes with some hitches and limitations that demonstrate how sensitive EPIX is to its current relationships with more traditional pay-TV affiliates, which today include Verizon Communications Inc. (NYSE: VZ), Dish Network LLC (Nasdaq: DISH), Cox Communications Inc. , Mediacom Communications Corp. , Charter Communications Inc. , and the National Cable Television Cooperative Inc. (NCTC) , a group that lets Tier 2 and Tier 3 MSOs get bulk discounts on programming and broadband equipment. EPIX's current reach is about 30 million US homes.

The most noticeable compromise involves when Netflix gets access to EPIX's newest titles. The deal, for example, prevents Netflix from offering those until 90 days after EPIX debuts them on its linear channel. So, Netflix will have access to titles such as Star Trek when it starts making EPIX content available in September, but not G.I. Joe. Netflix also won't have access to EPIX's full complement of older titles, but will still have access to a library of "several hundred library titles," according to EPIX president Mark Greenberg.

And the deal is markedly different than the one Netflix struck with Starz. Under that agreement, Netflix offers new Starz releases at the same time they appear on the flagship Starz channel. Additionally, Netflix offers a live stream of Starz's flagship, linear channel. In comparison, Netflix won't be streaming EPIX's linear channel, and EPIX won't be branding itself on the Netflix service.

Even with those limitations, "it's a huge win for Netflix, because it's going to add valuable content to the streaming library, which has become a huge focus of theirs," says Will Richmond, the president and founder of Broadband Directions LLC, a publishing and consulting firm that specializes in the broadband video market.

He called the 90-day delay on EPIX's freshest fare a "pretty good compromise" for Netflix, noting that many consumers aren't necessarily aware of movie release windows. "Netflix is exploiting that reality," Richmond adds.

Still, the deal does speak to the power Netflix -- with its sub base of 15 million -- now wields in Hollywood as a dealmaker. Among other recent moves, Netflix is building up its TV library, which puts pressure on Hulu LLC , and has forged an exclusive streaming deal with Relativity Media. (See Netflix CEO: Hulu Plus Still 'Too Small to Matter' and Netflix Takes on Movie Channels.)

"They're very willing to pay checks to Hollywood," Richmond says of Netflix's aggressive content strategy, predicting that more EPIX-style deals are yet to come.

EPIX builds in broadband
EPIX's Greenberg tells Light Reading Cable that deals with less traditional broadband video distributors such as Netflix will be key to helping the young premium programmer get into the black and enabling it to offer content in ways that consumers increasingly want to get it.

"Day one, it was always in our business model," he says of EPIX's involvement with less traditional broadband video distributors. "The Netflix team has been talking to us since the day we were created, and I think they put a proposition in front of us that made sense. It's a sizable deal that will allow us, moving forward, to be profitable."

Netflix and Epix aren't talking about specific terms of the multi-year agreement, but a report claims that Netflix will be paying close to $1 billion over the life of the deal.

The Netflix deal also raises questions on how it might affect EPIX's negotiations with other major MSOs, including Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Cablevision Systems Corp. (NYSE: CVC), that have yet to sign carriage deals with the programmer.

Greenberg says MSOs still have plenty of room to exploit EPIX's content despite the arrangement with Netflix. All of EPIX's traditional cable affiliates, for example, don't have to wait 90 days to offer the programmer's newest content via broadband.

"They are getting it day-and-date with the channel," Greenberg says. "Our belief is that we could always fully support [cable's] TV Everywhere initiative and be successful at it and build a business, but at the same time generate revenue on other platforms."

But Richmond says it's getting harder for consumers to ignore the value Netflix is bringing with a service that starts at $9 per month and delivers such a rich library of content, even though most isn't offered in HD yet. That may lead some to pay Netflix, rather than their cable operator, for access to EPIX.

"For cable, there's a new player on the scene," Richmond says of Netflix. "They're not an absolute, direct competitor... but they could cause some headaches down the road."

— Jeff Baumgartner, Site Editor, Light Reading Cable

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