Movie rental chain inks deal with Ryan Kavanaugh's co.

The cracks in Hollywood’s windows keep spreading.

Ryan Kavanaugh’s Relativity Media has tossed a rock at the pay-TV business inking a deal with Netflix that will give the movie rental service the ability to offer its 13 million customers a slate of films shortly after they’re released on DVD, bypassing pay cablers HBO, Showtime, Starz and Epix.

Deal is the latest move by Netflix to build a library of films it can distribute digitally and boost profits by relying less upon the DVD-by-mail service it’s become known for over the years.

The exclusive five-year pact with Relativity also enables Netflix to keep a list of films away from rival Redbox.

The majors aren’t expected to follow Relativity’s lead because pay-TV output deals still pump considerable coin into studio coffers and are a key component of profitablity for pics. Netflix is said to be paying Relativity up to $100 million per year for the rights to around 15 films, commensurate to the coin that pay cablers pay studios through long-term output deals. The final figure depends on how many films are involved and how they perform at the B.O.

“We have always been about finding new ways to grow and monetize our business,” Kavanaugh said. “This clearly is a natural step in the evolution of the movie business and opens up a whole new world of revenue and marketing opportunities. Netflix has certainly made its mark. We have a shared vision, and this deal marks a significant change in our industry.”

In the announcement, Netflix and Relativity said the deal “opens up a new revenue stream” for movies. But it actually eliminates one, considering Relativity will not collect any revenue from the pay TV window. Films will go from DVD directly to Netflix, rather than the traditional DVD, pay-TV, Netflix route.

Deal marks another reason why Hollywood needs to keep an eye on how technology continues to rapidly change the way films are consumed across a variety of new platforms.

Deal with Netflix will stream Relativity’s pics on every platform the rental service is available on — new TVs, DVD and Blu-ray players, videogame consoles, TiVo boxes and Apple’s iPad and soon the iPhone, to name a few — months, rather than years, after the titles bow on DVD.

Movies typically bow on pay-cable channels four to seven months after a DVD release. Netflix had already brokered a deal with Warner Bros., Fox and Universal not to make pics available until 28 days after a DVD hits store shelves.

“Our continued goal is to expand the breadth and timeliness of films and TV shows available to stream on Netflix,” said Ted Sarandos, chief content officer for Netflix. “Historically, the rights to distribute these films are pre-sold to pay-TV for as long as nine years after their theatrical release. Through our partnership with Relativity, these films will start to become available to our members just months after their DVD release.”

Netflix pays Starz to digitally stream films from studios like Disney and Sony during the pay-TV window. With the Relativity pact, Netflix eliminates the pay TV middleman.

But the deal with Relativity covers only films the production company finances and owns outright on its own. It has more than 10 such films skedded for release over the next year.

Those include boxing drama “The Fighter,” starring Christian Bale, Mark Wahlberg and Amy Adams that Paramount will distrib, and “Skyline,” co-directed by the Strause brothers, that Rogue and Universal will release. Both will bow on Netflix in early 2011. Netflix deal also includes the Nicolas Cage thriller “Season of the Witch” and “Movie 43,” penned and helmed by Peter Farley.

Deal does not include entire slates at Universal and Sony that Relativity helps finance. To date, Relativity has agreed to finance, co-finance or produce more than 200 features through 2014.

Kavanaugh is known for experimenting with Hollywood’s traditional business models.

His decision to get into the film biz has clearly paid off. But he also recently bought back the rights to the indie shingle Rogue from Universal, in the hopes of turning it into a standalone consumer brand for edgy fare, complete with a clothing line.

Now, after backing a slate of hits at Universal and Sony over the years, he wants Relativity to increase the number of films that it finances and distributes on its own in an effort to reap more of the reward from the box office and ancillary avenues.

Homevid is one of them, and that’s where Netflix plays a major role.

Until now, homevideo had been handled by the studios that released Relativity’s own films, with films flowing to pay-TV channels through a studio’s output deal with a particular outlet. Universal’s homevid division only had rights to distrib Relativity’s films on select digital platforms.

The Netflix deal now gives Relativity more control of how that happens — and a bigger piece of the financial reward, as a result.

Another upside is that Relativity will be able to sell digital versions of its films to consumers on stores like Apple’s iTunes and Amazon, according to terms of the deal, and that will provide Kavanaugh with yet another opportunity to play with new distribution methods. Pay cablers usually don’t allow that until after the films complete their runs on the channels.

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