Netflix vs. the Hollywood Studios

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Netflix bypassed the studios to win digital access to Spider-Man 3 and Ratatouille Sony Pictures/Courtesy Everett Collection

Walt Disney Co./Courtesy Everett Collection

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And apart from the few Sony and Disney films Netflix got from the Starz deal, the selection is dated. Thomas Lesinski, Paramount Digital Entertainment's home entertainment chief, wrote in an e-mail that he lets Netflix stream older titles "but not new releases."

One Movie, Many Sales

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. Typically, films move from cinemas to stores, to cable and satellite pay-per-view, to premium channels like HBO, then to basic cable and broadcast—with the studios cashing in at each step. Plus, having watched the implosion of the music and newspaper industries, the studios are moving cautiously online. "Everybody views it as a terminal career decision if you get it wrong," says Frank Biondi Jr., a former Viacom (VIA) president and CEO who now works for WaterView Advisors, a New York private equity firm.

Before Sarandos can persuade the studios that Netflix is a safe place to stream their movies, however, he has some serious diplomacy to do—and not just because of the Starz deal. Studio executives partly blame cheap rentals from Netflix and its ilk for cratering their retail DVD business. In August, Warner Brothers (TWX) said it would stop selling its DVDs to video subscription services like Netflix until 28 days after it sold them to retailers like Best Buy (BBY) or Wal-Mart unless they paid more for the discs. Hastings has said he might accept the 28-day rule but won't commit until the two sides negotiate the price. If Warner and Netflix cut a deal, other studios likely will follow suit.

Persuading the studios to let Netflix stream more recent films will be a lot harder, however. The studios are willing to do so—but there's a catch. Warner Brothers and other studios 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.

Bargaining for Unlimited Streaming

Hastings and Sarandos aren't likely to bite, because Netflix subscribers are used to getting cheap all-you-can-eat subscriptions. Would you pay $4 to stream a film when you can watch as many as you want for $8.99 a month on DVD? The arithmetic doesn't add up.

Sarandos declined to discuss the talks with Warner Brothers. But his position is plain. 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 said in an interview. "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 that the studios like even more than a $100 million opening weekend: plenty of cash. He has been going around Hollywood making the point that Netflix will pay the U.S. Postal Service $600 million this year to ship DVDs to subscribers. "I'd love to be paying that to the studios," says Sarandos. "That's real money. But I have to get the content."

Grover covers the media and entertainment industry for Bloomberg Businessweek in Los Angeles. Satariano is a reporter for Bloomberg News. Levy is a reporter for Bloomberg News.

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