Upstart rides Netflix deal to establish digital foothold

When the partners behind Epix joined forces nearly four years ago, they were quick to talk up their vision of differentiating their service from long-established pay TV rivals by making it easily accessible to subscribers on a myriad of digital platforms.

“Yeah, sure,” was the skeptical response from reporters (this one included) and biz pundits: “But how are you going to convince Comcast and DirecTV to carry another pay TV channel?”

Two years and a bit after Epix bowed in October 2009, the service owned by Viacom, Lionsgate and MGM still doesn’t have carriage deals with Comcast, DirecTV or Time Warner Cable, the holy trinity of subscription TV providers. But it does have a very big deal in the digital realm with Netflix, and that has been enough to see Epix through its infancy.

There’s no better example of how the growing competition for content on emerging digital platforms is aiding old-school Hollywood than the Netflix-Epix partnership. The deal, which took effect in September 2010, came along when both sides were in desperate need of what the other had to offer: Epix needed distribution and license fees; Netflix needed marquee-value movies.

The five-year Netflix pact, valued at about $900 million, turned the tide for the Epix partners overnight. And by next fall, the Epix partners will be free to pursue more digital dollars with their first-run movies when Netflix’s two-year window of exclusivity expires.

All told, the Epix partners are now probably doing about as well as they would have had they stuck with a traditional pay TV output deal. Viacom’s Paramount Pictures, Lionsgate and MGM banded together in 2008 after Showtime informed each of them that it would not renew their (separate) output deals on the same rich terms as it had offered in the past.

“Relative to the fact that the old (Showtime) agreements were not on the table any more, (Netflix) appears to be a better scenario than having accepted what Showtime was offering,” says BTIG Research analyst Richard Greenfield. “Given the cards they were dealt it was the right decision to make. We were very skeptical of the chess game around digital rights, but it definitely played out in their favor.”

So did they get lucky with the timing of the Netflix deal? Or was it savvy foresight?

The answer is both, Epix prexy Mark Greenberg admits.

Greenberg knew the digital world was about to blossom in a big way for Hollywood as consumers warmed up to on-demand and online platforms. After 17 years as a distribution exec with Showtime, Greenberg spent a year working as a consultant to Blockbuster Entertainment before he was recruited by the Epix partners. At the outset, Greenberg figured Epix’s big digital play would be with Blockbuster. As it turned out, Blockbuster’s fortunes deteriorated as Netflix’s soared.

“Strategically, we set out to do this from day one. We knew there were other platforms and other devices that were going to be just as important to (viewers) as linear TV,” Greenberg says. “The advantage of having the studios own this (venture) is that we can move a little more quickly as the marketplace evolves and digital really starts to deliver on the promise.”

On the other hand, the conventional wisdom is that Epix willingly gave up any hope of cutting a deal with Comast, DirecTV or TW Cable in aligning with the company the cable and satellite guys see as the enemy. Epix also had to temper its ambition to produce original series from the get-go, though that remains a long-term goal.

Epix now counts about 9.5 million subscribers to date through its deals with cable operators Cox, Charter and Mediacom, satcaster Dish Network and the Verizon Fios service. In most of those deals, Epix is bundled into a larger premium movie channel tier, rather than charging a separate monthly fee a la HBO, Showtime or Starz.

Epix continues to have conversations with the larger operators, Greenberg insists. But there is no question that a majority of Epix’s viewership comes from Netflix’s 23 million-plus subscriber base.

Last week Epix established a beachhead on Xbox 360, making it available via authentication to subscribers who take the service through Dish Network, Mediacom and Verizon. Epix’s track record with authentication on various cutting-edge services is a selling point to traditional distribs, according to Greenberg.

“We can help our clients drive to a younger demographic that wants to use these devices,” he says.

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