SVOD race intensifies with matching movie catalogs

The licensing pact Amazon struck Monday with premium movie channel Epix is the biggest stride taken yet by one of the growing number of would-be rivals to Netflix.

The multi-year deal gives Amazon Prime Instant Video some of the same high-profile movies Netflix has had to itself in the subscription VOD category for the past few years, including “The Avengers,” “Iron Man 2,” “The Hunger Games,” “Transformers: Dark of the Moon,” “Thor,” “Rango,” “Kick-Ass,” and “Paranormal Activity 2.”

Financial terms of the deal were not disclosed, but UBS analysts estimate Epix will reap about $50 million per year from Amazon while continuing to collect a sum from Netflix slightly less than the $200 million per year it was paying to lock up exclusivity on those titles.

“In addition to altering the content comparison, Amazon’s Epix deal is a sign that the company is willing to spend aggressively in the space,” said Michael Olson, analyst with PiperJaffray.

Amazon picked an opportune time to increase its library by 3,000 titles, with the company expected to announce new tablets into its Kindle line later this week. That will bring the total volume of titles to more than 25,000 — a sum approaching the streaming component of Netflix, which doesn’t disclose its library volume.

Amazon’s deal wasn’t entirely surprising; Netflix warned Wall Street in its second-quarter earnings call in July that its exclusive hold on Epix titles was about to lapse. Netflix CEO Reed Hastings had pre-emptively played down the impact of the loss. “Epix is not a particularly large source of our viewing,” he said.

But the very fact that Hastings bothered to note the impending loss was a telling sign that Netflix at the very least feared the reaction that would follow the $1 billion deal Epix signed in 2010 reverting to a non-exclusive basis. That anxiety was warranted, with Netflix stock sliding 6% in Tuesday trading; Amazon was down less than 1%.

Whatever the value of Epix to Netflix, the streaming service was presumed to be more reliant than ever on those films since losing a key deal in February with another pay-TV channel, Starz, that gave it access to Disney and Sony titles. That said, Netflix reported long ago that TV episodes comprise the bulk of its streaming hours, with children’s programming believed to be especially popular — so much so that losing exclusivity on blockbuster titles may not matter too much anymore.

“It’s hardly a lethal blow,” said Susquehanna Financial Group analyst Vasily Karasyov, who added that Amazon’s newfound aggressiveness justifies Netflix’s own foray into original programming. “The development validates Netflix management’s decision to produce original content, which the company would control.”

While intensifying competition in the subscription VOD space has been cited as one of the many factors in the Wall Street consensus that has suppressed Netflix’s stock, the challenge posed by aspiring rivals has always been more hypothetical than actual. By every metric, Netflix has had such a huge headstart that talk of parity in the SVOD space among players like Amazon and Hulu Plus is less a testament to what they’ve achieved to date and more of what could be.

Slowly but surely, however, Amazon in recent months seems to inching its way toward making good on its long-awaited potential. Last month, Amazon locked in its first exclusive deal, bringing a handful of TV series from Warner Bros. Television Group, including “The West Wing” and “Fringe,” to both Amazon Instant Video and Prime, albeit on a short-term basis.

Prior to that deal, Amazon Prime has been filled almost entirely by commodity content that at least one of its competitors could boast as well, minimizing any differentiation in the SVOD marketplace.

It remains to be seen how deeply Amazon wants to invest in Prime and whether the service is really going to go toe to toe with Netflix for the long-term exclusives that may be the Los Gatos, Calif. company’s most valuable asset, be they expensive output deals with the likes of the CW or AMC, or access to the pay-TV window with titles from DreamWorks Animation.

Prime Instant Video is, after all, still essentially just a value-add for the $79 annual membership fee for Amazon users seeking free two-day shipping for Amazon products. While Hastings publicly anticipated Amazon would launch a standalone service beyond Prime to directly challenge Netflix, that offering has yet to materialize. Amazon, in fact, has yet to acknowledge that such a venture is even in the works.

Epix parent companies Paramount, MGM and Lionsgate are surely happy with a fresh revenue source for a channel that has found only limited distribution traction in pay TV, where it has stalled at 30 million homes. Epix may yet find more buyers, with a joint streaming service coming later this year from Redbox and Verizon likely to be in pursuit of a similar deal.

That’s encouraging news for the Hollywood studios, which want to multiply the number of buyers for their content while keeping Netflix from being able to amass the kind of clout that Apple has exercised in other areas.

“Preventing an emergence of another gatekeeper is the strategic imperative for content producers,” said Karasyov.

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