Netflix & the H'wd studios (BBW)

By Nancy Tartaglione

Is Netflix's Ted Sarandos friend or foe? A report by Bloomberg BusinessWeek takes a look at that question today.

The content chief is one of the studios' most devoted customers who buys an estimated $240 million worth of DVDs per year.

All was going well until Sarandos last year cut a deal with Starz to stream Disney and Sony films to subscribers' PCs, Web-connected TVs, and game consoles. But, says the report, "for an industry that jealously protects its right to license movies to the highest bidder, the move amounted to an end run."

Why would Sarandos risk angering Hollywood? Because Netflix needs to position itself for a future when viewers will be able to watch any movie or TV show they want instantly on their PC, TV, mobile phone, game console or tablet.

In order to stay relevant the company needs access to much more of the studios' digital content. If not, it could be overwhelmed by deep-pocketed rivals - from the cable companies to Amazon, Google and Apple to the studios themselves. The firm has recently been the focus of takeover speculation, with Amazon oft cited as the most likely suitor.

Lately, says BBW, Sarandos has been shuttling between Hollywood power lunches, film festivals and awards dinners, telling anyone who will listen that Netflix is not the enemy but a bridge to the future. "Don't forget, the studios have fought every form of home entertainment," Sarandos wrote in an e-mail to BBW. "And TV and DVDs have become their largest sources of revenue and profits."

Despite his claims that he expects to still be mailing out DVDs 20 years from now, Netflix CEO Reed Hastings has been hedging his bets. Three years ago Netflix launched Watch Instantly, an online service that allows subscribers to watch a limited selection of movies and TV shows right away rather than wait for the DVD. The company says 42% of its 11.1 million subscribers have tried the service.

But to turn it into the real deal, Netflix will have to build a compelling online library and so far, new releases are scarce, BBW notes.

That's because the studios don't want to blow up a business model that allows them to sell the same movie over and over in various formats and venues.

Before Sarandos can persuade the studios that Netflix is a safe place to stream their movies, he has some diplomacy to do. Studio executives, writes BBW, partly blame cheap rentals from Netflix and its ilk for seriously harming their retail DVD business.

The studios are willing to let Netflix stream more recent films, say BBW, but there's a catch: Warner Bros. and others want Netflix to accept the same deal Hollywood has with the cable companies. They charge about $4 each time someone watches a new movie and then kick the studios 65% to 70% of the take.

Because Netflix subscribers are used to cheap all-you-can-eat subscriptions, Hastings and Sarandos aren't likely to bite, says BBW.

Sarandos declined to discuss the talks with Warner, but his position is plain, says BBW. He is offering to write big checks up front for the right to stream movies as often as people want to watch them. "What everyone else is asking the studios to do is 'give me your content, and if I do a really good job of putting it in front of the right people and I sell ads for the right prices, then I'll give you half,' " Sarandos told BBW. "What I'm saying is, I'm paying what Showtime will pay you, and there's no reason not to do this deal with me."

Sarandos does have a bargaining chip in the form of cash. He's been going around Hollywood making the point that Netflix will pay the US Postal Service $600 million this year to ship DVDs to subscribers. "I'd love to be paying that to the studios," Sarandos told BBW. "That's real money. But I have to get the content."