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Why Time Warner is Buying Flixter

The Time Warner building.
Mark Lennihan
The Time Warner building.

It's been a busy day for Time Warner .

In addition to reporting earnings that beat expectations— revenue up 6 percent on stronger cable TV ad sales — it announced it's buying Flixter.

This acquisition is significant for its home entertainment strategy, which is focused on driving more digital sales of movies, and speaks to the direction that all the studios will likely be moving. Time Warner snapped up Flixter because like the rest of the industry it's facing the precipitous decline of DVD sales — down 20 percent in the first quarter.

Flixter, a film discovery app, is used by 25 million users per month and has been downloaded more than 35 million times. Flixter also owns Rotten Tomatoes, the movie review site which has over 12 million unique visitors per month. Time Warner didn't disclose how much it paid, but the company was reportedly looking for $60 million to $90 million.

Why Flixter? CEO Jeff Bewkes made Time Warner's intentions very clear on the company's earnings call that this is pat of a grand plan to drive digital sales of movies.

The company will integrate Flixter and Rotten Tomatoes into its new app, called Digital Everywhere, which aims to organize users' entire content library and allow them to access their films from anywhere. (Here's my blog on the upcoming app). The plan is to use Flixter to encourage people to buy more movies online.

Today on the earnings call CEO Jeff Bewkes said he "wants to advantage more profitable distribution channels" and that the company is "working hard to make digital ownership more compelling to consumers." Here's how that translates: Bewkes wants to encourage more people to *buy* digital films, which bring higher margins than rentals, and far higher margins than streaming a movie on say, Netflix. By allowing people to connect with friends about their entertainment libraries and easily browse what else is out there, as Flixter does, Time Warner aims to drive higher sales.

BTIG analyst Richard Greenfield is blunt about the problem Time Warner's home entertainment business is facing. He points to the fact that Warner Brothers is offering a 67 percent discount on Blu-Ray discs for Mother's Day. Greenfield says this kind of offer points to just how troubled the DVD business is — total spending on purchases — both DVDs and digital purchases-- dropped nearly 19 percent in the quarter while rental spending increased just 4 percent.

Greenfield argues: "Consumers simply do not need to own content anymore, especially in the digital world." It seems Groupon users agree with Greenfield. In New York there was more interest in a two-year subscription to "Better Homes & Gardens" magazine on Groupon than Warner Brothers offer. We'll see if Warner Brothers new strategy to boost the value of ownership can turn that kind of Groupon stat around.

Questions? Comments? MediaMoney@cnbc.com