EXCLUSIVE

Update at 12:00 a.m.:

Relativity and Netflix officially announced their "groundbreaking deal to stream first run, studio quality theatrical movies to Netflix subscribers."

"Our continued goal is to expand the breadth and timeliness of films and TV shows available to stream on Netflix," said Ted Sarandos, chief content officer for Netflix.

"Historically, the rights to distribute these films are pre-sold to pay TV for as long as nine years after their theatrical release," he said. "Through our partnership with Relativity, these films will start to become available to our members just months after their DVD release."

"We have always been about finding new ways to grow and monetize our business," said Ryan Kavanaugh, Relativity's CEO. "This clearly is a natural step in the evolution of the movie business and opens up a whole new world of revenue and marketing opportunities. Netflix has certainly made its mark, with a service that reaches over 13 million people and allows consumers to have what they want, when they want it. We have a shared vision, and this deal marks a significant change in our industry."

(see full news release below)

Earlier:

In a deal that may change the landscape of pay television deals, Relativity Media and Netflix are gearing up to announce an alliance in which the online streaming service will exclusively release Relativity movies in what would otherwise be the pay TV window, TheWrap as learned.

The Relativity deal is set to be announced officially on Tuesday, according to knowledgeable individuals.

Under the terms of the deal, Relativity will provide Netflix with the licensing rights to all movies on which it controls distribution. The production company, which has co-financing and co-production deals with both Universal and Sony, controls the rights to 14 movies over the next 12 months.

(Left: Relativity Media CEO Ryan Kavanaugh)

They include the upcoming “The Fighter,” starring Mark Wahlberg and Christian Bale, the buzzed-about documentary “Catfish” and the Medieval thriller “Season of the Witch."

The deal would effectively make Netflix a new player in the pay television window, competing with the likes of HBO, Showtime and Starz.

Those premium pay TV deals are critical to Hollywood studios, bringing in an estimated more than $100 million per year to each of the major studios. The Netflix deal with Relativity is believed to be on a par with or better than the major studios' pay TV deals.

For Netflix, the deal gives the streaming service access to premium movies that it otherwise would have no hope of offering its subscribers until the expiration of the pay TV window, which can go as long as nine years.

For Relativity, the deal offers lucrative release terms that it could not hope to have with HBO and Showtime, which each have deals with the major studios and a limited number of slots for movies.

The deal effectively puts both companies on the map in Hollywood in a way that would not have been possible before the era of the Internet.

With the equivalent of a pay television deal in place, Relativity could potentially be in a position to strike out on its own as a distributor. With existing distributors like Overture available for sale, Relativity could feasibly decide to challenge the major studios on their own turf in the theatrical space.

The arrival of Netflix as a player in this space could change the balance of power between HBO and Showtime and the major studios when they look to renegotiate their deals, which come due starting in approximately 2015.  

Neither Relativity nor Netflix would comment officially for this story.

The deal does represent a significant capital risk for Netflix, but the payoff could be huge in helping drive subscriber growth as it shifts to a focus on streaming VOD and away from physical DVDs.

Netflix currently has a subscriber base of 13 million paying customers, which puts it competitively on par with the likes of Showtime, and makes it larger than Starz. The service has been on a steady growth trajectory, and aims to achieve some 15 million subscribers by the end of the year.

For Hollywood studios, the arrival of Netflix as a premium payer in the early release life of a film is also a potential game-changer in terms of marketing. The streaming service provides direct data about consumers in ways that the pay cable channels cannot; the data will allow a producer such as Relativity to fine tune its marketing and better understand its audience.

Furthermore, the deal does not prevent electronic sellthrough from sites like Amazon or iTunes, while most studio deals with the premium pay cable channels do.

 

The full news release:

Agreement Marks Big Shift in Film Distribution – First Time Content is Made Available for Subscription Streaming, Bypassing 'Pay TV'

LOS ANGELES, July 6 /PRNewswire-FirstCall/ — Netflix, Inc. (Nasdaq: NFLX) and Relativity Media, LLC today announced a long term agreement through which major theatrically released films owned by Relativity will be licensed directly and exclusively to Netflix for streaming to its subscribers during the "pay TV window."  Traditionally, these films have flowed through Relativity's studio releasing partners to output deals with premium TV channels.

The deal marks a continued shift in the distribution of major motion pictures in the U.S.  Under the agreement, an increasing amount of popular contemporary movies previously encumbered by pay TV agreements with premium channels such as HBO, Showtime and Starz will become available to be streamed from Netflix months – and not years – after their release on DVD.  It will be the first time that studio quality theatrical feature films will be streamed via subscription by Netflix instead of being broadcast by the traditional pay providers, and it opens up a new revenue stream for such movies.

Among the first wave of films covered under the Netflix-Relativity deal are "The Fighter," starring Christian Bale, Mark Wahlberg and Amy Adams and distributed by Paramount Pictures, and "Skyline," co-directed by the Brothers Strause and released by Rogue Pictures and Universal Studios.  Both films are scheduled for theatrical release later this year and to be available at Netflix in early 2011.  Also on tap for Netflix are Rogue Pictures' Nicolas Cage action/thriller "Season of the Witch" and "Movie 43," written and directed by Peter Farley.  Both are set to hit theaters this year as well.

Relativity has financed, co-financed or produced more than 200 features, generating more than $13 billion in worldwide box office revenue.  Fifty Relativity films have become "Top 10" box office releases during the past two years.  Current Relativity theatrical releases include "Robin Hood," "Get Him to the Greek" and "Grown Ups."  Relativity produces and/or finances between 20 and 30 pictures a year, and it has more than 10 "single picture" movies – films it is financing and producing fully – that are scheduled to be released over the next 12 months.

Broadening the range and appeal of content available for Netflix members to watch instantly is among the company's top priorities, and the agreement with Relativity is a meaningful step in building the company's streaming offer.

"Our continued goal is to expand the breadth and timeliness of films and TV shows available to stream on Netflix," said Ted Sarandos, chief content officer for Netflix.  "Historically, the rights to distribute these films are pre-sold to pay TV for as long as nine years after their theatrical release.  Through our partnership with Relativity, these films will start to become available to our members just months after their DVD release."

Added Mr. Sarandos:  "Relativity has produced and financed some of the biggest and best films released in the last few years. We are thrilled to partner with them on their exciting upcoming slate of films and to be part of each other's ongoing success."

"We have always been about finding new ways to grow and monetize our business," said Ryan Kavanaugh, Relativity's CEO. "This clearly is a natural step in the evolution of the movie business and opens up a whole new world of revenue and marketing opportunities. Netflix has certainly made its mark, with a service that reaches over 13 million people and allows consumers to have what they want, when they want it. We have a shared vision, and this deal marks a significant change in our industry."

"Consumer demand and interest in new platforms are evolving nearly as quickly as the technology," said Michael J. Joe, Relativity's president.  "The growing number of Netflix subscribers streaming first run movies is very exciting and presents another viable option for us to maximize the long-term business behind our properties. We're delighted to partner with them on this incredible new opportunity, which has great promise for our industry-reshaping Pay TV deals going forward."

The deal was negotiated on Relativity's behalf by Mr. Joe and Andrew Marcus, the company's chief operating officer, and on behalf of Netflix by Robert Kyncl, the company's vice president of content acquisition.