On Thursday, Netflix announced it inked a deal for shows from the CW network. This new content, bolstering the streaming service's TV library, will draw a key younger demographic to Netflix while paying CW's parents, CBS and Warner Brothers, up to $1 billion dollars over ten years.
The details: Netflix is licensing the rights to stream more than 700 episodes of past seasons of CW shows like Gossip Girl and The Vampire Diaries.
The deal includes future scripted programs through the 2014-2015 season, and extends for four years after each series ends.
The cost of the deal depends on how many episodes and shows the CW runs: Netflix will pay per episode, ranging from $150,000 to $700,000, depending on the show and how long it's been on air.
The total value could reach $1 billion over the next eight to ten years, depending on the number of series and how many episodes run. This 1 billion number may be the biggest number we've seen Netflix pay, but it's not so large on a per-year basis.
Who wins from this deal?
Time Warner and CBS benefit from another revenue stream for their content. Morgan Stanley analyst Ben Swinburne says he believes new video distributors will "drive incremental monetization opportunities for content owners." Translation: incremental revenue with no incremental cost for the content owners. Swinburne estimates that the deal could generate as much as 4-5 cents, or 2% in EPS upside for CBS and 1-2 cents (less than 1%) of EPS upside for Time Warner next year.
Netflix, meanwhile, is establishing itself as a destination for a huge variety of streaming TV content. Just last week, the company inked a deal for AMC and Sundance Channel programming. It also gives Netflix a new appeal for that hard-to-reach demographic that the CW is so focused on: tweens, teens and 20-somethings.
Last month, Netflix secured a distribution deal with DreamWorks Animation, which appeals to even younger kids. Netflix's streaming content now has wider appeal than ever.
Is it worth it for Netflix? It all depends on how many subscribers Netflix has over the next 10 years. The negotiations between a network like CW and Netflix come down to a bet on Netflix's future subscriber base — the larger its subscriber numbers, the more efficient this deal is on a per-subscriber basis. The more subscribers Netflix has, the fewer people will pay (with dollars or ad viewing) to watch shows elsewhere. The fewer subscribers Netflix has, the better a deal CW gets.
The question of the strength of Netflix's subscriber base will be answered on October 24, when we hear the company's latest earnings report. We'll see what kind of impact it's recent decision to split up its streaming and DVD rental businesses has on subscribers.
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