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More bad news for DVDs. Netflix and Epix are discussing a five-year, $1B deal that would give Netflix exclusive rights to stream movies from Paramount, MGM, and Lions Gate as part of its ‘Watch It Now!’ service.

Netflix already has an arrangement in place with Starz to stream movies from Disney and Sony Pictures, so this deal could be a real momentum-generator for streaming. According to the terms of the discussions, Netflix would have access to these movies several months after they are released on DVD.

According to the LA Times story,  the agreement would also allow Paramount, Lionsgate and MGM to sell and rent their movies via digital stores such as Apple Inc.’s iTunes, something HBO doesn’t allow.

Epix has been struggling to become profitable and also operates a streaming video subscription service. Its CEO recently predicted that Epix would reach between 3 and 4 million homes this summer. In contrast, Netflix has over 15 million subscribers.

So, how does this arrangement threaten the DVD market? Simple. Movies with short tails (in and out of theaters quickly) depend on DVD sales and rentals over several months to make back their budgets and even turn a profit.

But a lot of those movies are impulse rentals, as there isn’t much demand for them. These films are often found in discount bins at retail stores and Blockbuster, several months after their release. (Disney’s The Sorcerer’s Apprentice, which has grossed $111 million worldwide in four weeks but had a production budget of $150 million, will depend heavily on packaged media sales and rentals and pay TV just to break even.)

So a subscriber to Netflix would probably be content to just wait a few months and catch up with these less-than-compelling titles online, if they haven’t already rented them for $1 a night at a Redbox kiosk.

What’s next for Netflix? I predict the service will eventually turn into a full-blown broadband TV network, creating and streaming its own original programming. With 15+ million viewers, that’s more than enough critical mass to pull it off. Netflix is already planning to stream TV shows, so why not develop its own content?

Of course, that will put Netflix at odds with traditional pay TV service providers, such as Comcast and Time Warner. And it may lead to more cord-cutting, a trend that that pay TV companies dismiss now, but is likely to cause some real financial pain in the near future.

Another real possibility is that one of the major Hollywood studios and media conglomerates will buy Netflix in the next two years. Don’t bet against it! That would be a strong defensive move against losing pay TV subscribers and would instantly make the purchaser the 800-pound gorilla in streaming.

Posted by Pete Putman, August 10, 2010 8:19 AM

About Pete Putman

Peter Putman is the president of ROAM Consulting L.L.C. His company provides training, marketing communications, and product testing/development services to manufacturers, dealers, and end-users of displays, display interfaces, and related products.

Pete edits and publishes HDTVexpert.com, a Web blog focused on digital TV, HDTV, and display technologies. He is also a columnist for Pro AV magazine, the leading trade publication for commercial AV systems integrators.