How Netflix is Trying to Become the Next HBO

Will Netflix take down HBO as the nation's premier movie channel? Edward Jay Epstein has an interesting piece in Gawker about the roadblocks Netflix faces as it moves online to create a virtual channel for movies.

Netflix started as a movie-mailing service that could send subscribers unlimited rentals for a flat fee. But recently, in a move that cuts mailing costs and gives subscribers on-demand access to movies, the company is transitioning to the Web. Streaming Netflix online creates what Epstein calls "a 'Watch Instantly' service [that] effectively creates a virtual channel that directly compete[s] with Pay-TV for the wallet and clock of viewers."

But that's where technology meets the law.

Netflix' movie-mailing service is fair under the law because Netflix is only re-selling DVDs it's already bought from retailers and wholesalers. However, streaming DVDs online is not legal without digital rights. That means Netflix has to buy rights for new movies to create a virtual channel that can compete with HBO.

First the company made a deal with Starz Entertainment to sub-license its rights, but movie studios immediately threatened to punish both Starz and Netflix for the agreement, because it directly threatened one of Tinseltown's top revenue generators. Licensing deals with TV channels -- including Pay TV, cable and broadcast -- bring in $16 billion, almost all pure profit.

That's why January's deal between Netflix and Warner Bros. Home Entertainment is so interesting. Netflix appears to be ready to pay studios directly for their movies, just like HBO.

Home Entertainment announced Wednesday that they have expanded their licensing arrangement for streaming movies, and Netflix now has licensing rights to more of the studio's catalog content. In exchange, Netflix agreed to do something it has never done before. The movie-by-mail service won't offer new releases from the studio on DVD or Blu-ray discs until 28 days after they go on sale.

Greg Sandoval breaks this down nicely: Netflix wants streaming rights for new movies; Warner Bros. wants a window of one month, so that voracious fans of WB's newest DVDs have to buy the movies instead of stream them. The deals makes sense for both sides, and offers a behind-the-scenes glimpse of Netflix' future online.

As Netflix moves toward HBO, HBO is also moving toward Netflix. Epstein reports the company is working on HBO Go, an online channel that gives subscribers access to all of HBO's titles. Today, Netflix remains a perfect service for fans of older movies (which account for two-third of Netflix' revenue), but it wants to be a major player in new releases, as well. That means that in the all-important digital-rights game, it's going to play catch-up for a while.