Variety confirms that Time Warner and new CEO Jeff Bewkes has decided to roll New Line Cinema into Warner Bros, ending its 40-year run as an independent studio.

New Line will continue to operate as a separate entity, maintaining its own operations such as development, production, marketing, distribution and business affairs.

Co-chiefs and co-founders Bob Shaye and Michael Lynne are stepping down.

In a memo to their employees, they said the changes would mean New Line will “probably be a much smaller operation than in the past.” This means major lay-offs. (See the entire letter below.)

Earlier this month it was rumored that the company would be folded back into WB amidst another major lawsuit over the Lord of the Rings profits with possible delays on the horizon for The Hobbit.

The studio has also had some problems finding a hit recently, including the domestic box office bomb that was The Golden Compass. The last movie that was a runaway hit would probably be 2005’s Wedding Crashers. And only the Lord of the Rings trilogy before that.

CEO Jeff Bewkes said, “Given the trend toward fewer movie releases, New Line and Warner Bros. will now have more complementary release slates, with New Line focusing on genres that have been its strength.” Don’t run two movies under the same conglomerate on the same opening weekend. Sounds reasonable. It doesn’t make sense to compete with yourself.

Bewkes also said New Line would no longer sell off international rights to finance films. “With the growing importance of international revenues, it makes sense for New Line to retain its international film rights and to exploit them through Warner Bros.’ global distribution infrastructure,” he added.

It does absolutely make sense. A huge problem with the whole Golden Compass fiasco was that New Line sold foreign distribution rights to cover the $180 million budget. Then the movie bombed her and did fairly well overseas (almost 80% of its total $330 million gross). The majority of profits for big blockbusters come from overseas and Bewkes is aware of that.

How this affects future projects (i.e. the two Hobbit movies) is still up in the air.