Netflix Inc. is threatening to stream two films produced by
Relativity Media LLC before their debut in theaters, a move the
Hollywood studio says could prove devastating as it seeks to regain
its footing after emerging from bankruptcy protection.
Relativity, the upstart movie studio founded by Ryan Kavanaugh
that recently exited chapter 11, says the two films—a comedy
starring Kristen Wiig called "Masterminds" and a thriller with Kate
Beckinsale called "The Disappointments Room"—are key elements in
its nascent comeback.
A premature release of the films on Netflix's streaming service
could torpedo plans for the theatrical release, Relativity's
lawyers say, and leave the studio's future hanging in the
balance.
"It would be, at a minimum, an embarrassment and make their
attempts to continue to raise financing more difficult," said a
source familiar with the deals. A spokeswoman for Relativity
declined to comment Monday.
In court papers filed over the weekend, Relativity said the
streaming giant is attempting to "extract a pound of flesh" after a
bankruptcy judge rejected Netflix's objections to the studio's
reorganization plan.
"Because Netflix did not receive the outcome it desired at the
confirmation hearing, it is now attempting to hijack the process
and to purposely destroy value critical to [Relativity's]
successful reorganization," the studio's lawyers said Saturday in a
filing with the U.S. Bankruptcy Court in New York.
Court papers show Netflix has a long-standing relationship with
Relativity by which it licenses films for exclusive distribution on
its streaming service in exchange for a fee that is calculated
based on the films' domestic box office revenue.
"Masterminds" and "The Disappointments Room" had originally been
scheduled for release in theaters in the U.S. last year and then
would subsequently launch on Netflix's platform, but Relativity's
collapse into bankruptcy suspended their debut.
Relativity's reorganization plan, which won final court approval
earlier this year, now calls for the two films to be rolled out in
theaters in September and December and later released on streaming
services. Relativity says Netflix's threats to upend that timeline
"flies in the face of longstanding industry practice." Studios
shuffle release dates frequently—but usually months or even years
before a movie is scheduled to come out.
In a response filed Monday, Netflix said the law is on its side.
The contracts Relativity decided to take with it when it emerged
from bankruptcy, including those that specify when Netflix can
begin streaming the films, are "clear and unambiguous," the company
said.
"Relativity is now unwilling to live with those dates, because
it has determined that it prefers different dates in connection
with its plans for release and distribution of the films," lawyers
for Netflix said in court papers.
Hollywood isn't expecting "Masterminds," or "The Disappointments
Room" to be anything close to blockbuster hits. But Relativity, a
small independent studio, is hopeful the theatrical release of the
films will signal to the rest of the industry it is back in the
game.
The online release of pristine copies of the movies could be
devastating to the films' box-office and home-entertainment
business. Relativity's lawyers say the studio's business model
projected revenues "pursuant to the time-honored industry practice
of an exclusive theatrical release for its films."
Most movies that appear online before wide theatrical release
are only available through piracy websites, which are much harder
to access for the average consumer than Netflix. Pre-release piracy
reduces the domestic box office of a movie by an average 19%,
according to research conducted at Carnegie Mellon University.
That percentage would surely tick upward if the movies were
released on a popular, legal service like Netflix.
In recent years distributors have warmed to the idea of
releasing low-budget independent features via video-on-demand
services or online-rental sites such as Apple Inc.'s iTunes while
they are still in theaters. But such "day and date" releases
usually require viewers to pay to watch the title in question, and
aren't part of a subscription plan like Netflix.
Lawyers for Relativity say they were led to believe Netflix
would sign contract amendments extending the dates on which the
films could be streamed. The studio is asking a bankruptcy judge to
step in to force Netflix to agree to a deal that would prevent a
premature debut.
Netflix also says it initiated arbitration over the issue last
week and says now that Relativity has emerged from chapter 11
protection, bankruptcy court is no longer the right venue to try to
resolve the dispute.
A bankruptcy court hearing is scheduled for Tuesday in New
York.
Relativity isn't the only company with a stake in the films'
release. CIT Bank N.A., which purchased the bank that led
production loans for the films, is also counting on revenue tied to
the release of the films both in the U.S. and abroad. While CIT's
payments are guaranteed, a bungled release in the U.S. could make
it more difficult for the bank to collect. CIT already agreed to
allow Relativity to extend the time lines for releasing the films,
court papers show.
After Relativity filed for bankruptcy last summer, Mr. Kavanaugh
struggled to line up new investors and botched an effort to bring
in actor Kevin Spacey to take over as the studio's chairman. He
also faced fierce opposition from a number of creditors, including
Netflix, who objected to Relativity's restructuring plan. The
studio claimed Netflix was attempting to use bankruptcy to
renegotiate a more favorable contract with the studio regarding
Netflix's rights to stream Relativity films.
Ultimately, a bankruptcy judge sided with Relativity and
approved a restructuring plan that cut its $1.2 billion debt load
down to about $314 million. The slimmed-down studio emerged from
chapter 11 with plans to release as many as 22 films over the next
three years. Relativity is hoping that slate of films will bring in
as much as $2 billion.
Write to Tom Corrigan at tom.corrigan@wsj.com and Erich
Schwartzel at erich.schwartzel@wsj.com
(END) Dow Jones Newswires
May 10, 2016 00:25 ET (04:25 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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