The high-stakes game of chicken between Matt Blank and Brad Grey—corporate cousins in patriarch Sumner Redstone’s National Amusements—is escalating.

The standoff revolves around the rights to first-run studio movies, which have traditionally been snapped up for vast sums by the premium cable channels.

The Blank-Grey scuffle came to a head last spring when Blank’s Showtime, the CBS-owned premium cable channel, balked at plunking down those sums and failed to renew its contract with the Viacom-owned Paramount movie studio.

Grey’s Paramount, along with MGM and Lionsgate—two other studios who didn’t re-up with Showtime—retaliated by announcing they would launch their own premium cable channel, which would rely on a pipeline of movies from the three studios as well as original programming.

That announcement was viewed skeptically by many in the industry, who wondered what appetite remained among cable distributors and consumers for yet another movies-based premium cable network.

Several months later, those doubts seem prescient as the new channel, which has yet to be named or find a distributor, is rumored to be giving up its ambition to be a premium service, competing directly with HBO and Showtime. Instead, according to recent reports, it is aiming lower, planning to launch as a basic digital cable channel.

Such a move could prove to be another potential black eye for Grey, who is already suffering through one public embarrassment this month: the messy divorce of Paramount from DreamWorks, which recently left the bigger studio behind with the help of backing from Indian company Reliance.

Grey’s office referred calls to Mark Greenberg, who is now running the new network.

According to him, competing with HBO was never the point.

“They have their model and have done a great job,” says Greenberg, C.E.O. and president of the venture. “But we have some phenomenal movies in our slate, everything from Iron Man to Indiana Jones to the future James Bond movies.”
 
As for the lack of a distributor, Larry Gerbrandt, principal with Media Valuation Partners in Beverly Hills, California, calls that “common. Historically, most, though not all, cable networks have launched with relatively few commitments.”

Jim Packer, MGM’s co-president of worldwide television, said he didn’t know if the network, called Studio 3 Partners internally, would be a premium or basic digital cable channel, but stressed that it would not be ad-supported, which he says is its “key delineator.”

The channel will announce a name closer to launch, in the fourth quarter of 2009, and employ 75 to 100 people handling programming, marketing, and development. On the other side of the battlefield, not everything is rosy for Matt Blank and Showtime either.
 
Industry analysts predict the channel stands to lose subscribers without a guaranteed pipeline of movies from the three studios. (A Showtime representative says the channel will have those movies through 2010 under the existing contract). This summer, Showtime inked a deal with the Weinstein Co. to help fill its movie-programming hours.
 
That agreement gives subscribers "an enormous and diverse slate of films at a price to Showtime that is consistent with today's marketplace," said Blank in this summer’s press release, further twisting the knife in Paramount’s back.
 
While details of the deal are not public, the terms are known to be favorable to Showtime. The problem, though, is that the Weinstein Co.'s last big box office hit was Scary Movie 4, in 2006. Its most-hyped film of last year, Quentin Tarantino's double feature Grindhouse, made just $25 million in the U.S. Earlier this year, Woody Allen's Cassandra's Dream made under $1 million, one of the lowest-grossing Allen films of all time.
 
Showtime is “painted into a corner” now, with a diminished pipeline of movies and a limited, though successful, reservoir of original programming, says Porter Bibb, a managing partner at Mediatech Capital Partners in New York.