A new pact between cable channel Epix and Netflix to stream movies online makes the video rental giant a pay TV player, whether it admits it or not.
After Tuesday's agreement, Showtime and HBO should start looking over their shoulder, because make no mistake, Netflix is playing on their turf.
Under the agreement, Netflix subscribers will get to stream box-office hits such as "The Last Airbender" and "Iron Man 2" 90 days after their premium pay TV and subscription deals.
And Tuesday's move only builds on a similar arrangement the company made last month with Relativity, which gives Netflix the licensing rights to all movies on which Relativity controls distribution. That amounts to some 14 movies over the next 12 months.
All of this dramatically increases the number of titles that Netflix offers its customers digitally at a time when the company is trying to encourage subscribers to migrate away from by-mail delivery and towards online distribution.
Less than three years since the subscription rental company launched its streaming service with less than 2,000 titles of dubious quality, Netflix is clearly gambling that the future is digital. By turning its subscribers onto streaming, it will dramatically reduce its overhead. The company plans to spend $700 million on postage next year, on its way to $1 billion in postage fees in the next few years.
And last quarter, it reported that 61 percent of its customers streamed all or part of a movie, up from 37 percent in the second quarter of 2009.
"This is part of who we are -- a low priced unlimited subscription company, and our customers are reacting to an economic proposition and the completeness of value they get for their nine bucks," Ted Sarandos, Netflix's chief content officer, told TheWrap on Tuesday.
The flat rate that Netflix offers may not give customers first run episodes of "Weeds" or "True Blood," but it comes with enough movies available for streaming and at a steep enough discount to put the rental service in heavy competition with premium cable movie channels.
"It represents a very big threat to HBO. They aren't serving different markets, they're competing for entertainment dollars on a subscription basis," Edward Woo, an analyst with Wedbush Morgan Securities, told TheWrap.
"I wouldn't say it cuts the [cable] cord, but it definitely shaves the cord," Tony Wible, an analyst with Janney Montgomery Scott, told TheWrap.
On Tuesday, however, Sarandos and Netflix chose to downplay their recent incursions into the pay TV market.
"You don't have to cancel anything or cut your cord," Sarandos told TheWrap. "Streaming provides a reason to have broadband, which cable needs, because you don't need faster internet to send email, but you do need it for great video service. It's a win-win and there's no evidence that it represents a threat.
"You can subscribe to Showtime and see every past episode of 'Dexter' while you watch the current season, so it actually gives you a reason to subscribe," he added.
