Netflix: Premium Cable’s Worst Nightmare

Hollywood is having a hard time deciding if Netflix (NFLX) is friend or foe. The fast-growing movie service has already helped drive DVD retailer Blockbuster (BBI) to the brink of Chapter 11. Now, Netflix is poised to take on premium cable giants like HBO and Showtime. Last month, Netflix bought the rights to stream films from three studios. That will make it the first true Web-based movie channel. It already has 15 million subscribers and an ad-hoc distribution network that includes Web-ready TVs like Sony’s (SNE) Bravia, game consoles like Microsoft’s (MSFT) Xbox 360, and even gadgets like Apple’s (AAPL) iPad. That makes Netflix’s $8.99 a month mail-order and online service a threat to more-expensive premium cable channels. It also poses a quandary for HBO parent Time Warner (TWC), whose Warner Bros. studio has become more reliant on Netflix as a source of revenue as overall DVD sales have declined. Netflix “is a customer for our output, and it is a potential competitor to networks like HBO,” Time Warner CEO Jeff Bewkes said last month. “So far it has been more of a complementary service to HBO than a competitor.”

That’s changing. Netflix’s most recent deals have moved it from the periphery of the home-entertainment ecosystem into the center of a world in which consumers can watch films and TV shows anytime and anywhere. On Aug. 10 it agreed to pay $900 million for online rights to films from the new Epix pay-TV channel, giving it streaming rights to 3,000 or more films from Viacom’s (VIA.B) Paramount Pictures, Lions Gate Entertainment (LGF), and MGM. That raised Netflix’s total to more than 20,000 films and TV shows. (It already had rights to some shows from CBS’ (CBS) Showtime, and movies from Walt Disney (DIS) and Sony via a deal with the Starz pay channel that expires late next year.) 

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