Netflix to pitch more online films to movie studios

By Adam Satariano, Ari Levy and Ronald Grover
Sunday, January 3, 2010

Netflix chief content officer Ted Sarandos bypassed Hollywood to jump-start the company's online film-rental business in 2008. Now he has to convince the studios the company is a friend and not a foe.

Chief executive officer Reed Hastings is counting on Sarandos to cut deals with studios giving Netflix rights to show more films online. Sarandos, 45, says he is willing to write big checks and negotiate directly with studios after Netflix earlier went around Walt Disney Co. and Sony to gain access to their titles from the Starz cable channel.

"We have to fight against their fear that we'll destroy the ecosystem," Sarandos, a former video-store clerk, said at a Dec. 16 panel discussion. "We're not destroying anything. We're creating a new opportunity."

Sarandos's success is critical to Netflix as viewers move to the Web, endangering the mail-order DVD rental business that helped the company upend brick-and-mortar stores such as Blockbuster. His challenge is to persuade studios to provide content as they explore their own digital options, including offering movies online themselves.

"The challenge for Netflix is what to do when the world migrates to digital distribution and whether it can obtain product from all the studios as that's happening," said Warren Lieberfarb, the former head of Warner Bros. DVD operations.

Netflix, the largest mail-order film-rental service, offers Web-based movie-viewing that's used by 42 percent of its 11.1 million subscribers, according to the company. It has an online library of 17,000 films and TV shows.

The studios, coping with a decline in DVD sales, are trying to avoid the fate of newspapers and music labels, which lost sales when their content went online. Hollywood executives view digital distribution as a threat to the traditional way money is made from movies.

"Everybody views it as a terminal career decision if you get it wrong," said Frank Biondi, who has led Universal Studios, Time Warner's HBO cable network and Viacom, owner of Paramount Pictures.

Acquiring DVDs has rarely been a problem for Netflix, which charges $8.99 a month and up for unlimited mail-order service. The company needs additional rights from the studios to stream films to PCs, game consoles and Web-linked TVs.

Netflix gained streaming rights to Disney and Sony movies including "Ratatouille" and "Spider-Man 3" by allying with Starz, the pay-TV network controlled by John Malone's Liberty Media, based in Englewood, Colo. In the future, permission will have to come from the studios, Netflix said in its annual report.

The Starz partnership created "animosity" in Hollywood, according to Tony Wible, an analyst at Janney Montgomery Scott in Philadelphia, who recommends selling Netflix shares. The retailer will probably need to pay studios more or risk losing content, he said.

Paramount, based in Los Angeles, supplies older titles to Netflix for streaming, Thomas Lesinski, head of home entertainment, said in an e-mail. "But not new releases."

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