HBO's deal to air "Sesame Street" confirms what many have long suspected: Younger generations are quickly moving toward digital platforms and forgoing traditional TV formats.
Sesame Workshop, the nonprofit organization behind the 45-year-old educational show, announced last week a partnership that gives HBO the exclusive rights to any new episodes of "Sesame Street" for nine months before they air on PBS.
Experts say the deal could be a boon for HBO as it looks to establish its footing in the direct-to-consumer media market—a critical area for old media companies suffering from the quickening decline of the multichannel cable bundle.
Two issues are crucial in chasing the children's market, say analysts. One, the availability of a steady stream of commercial-free, kid-friendly content is a crucial draw for parents.
U.S. digital video viewer penetration in the 11 years old and under category is expected to jump to 74 percent by 2019, compared with 68 percent in 2013, according to research firm eMarketer.
By 2019, kids 11 years old and younger will make up about 8.7 percent of the total digital streaming market, which is forecast to include about 224 million people by the same time, compared with 196 million last year, eMarketer said.
HBO, which had little interest in kids programming a few years ago, has to broaden its offerings if it wants to be considered a bonafide direct-to-consumer option, said Rich Greenfield, an analyst at BTIG, pointing to the network's new show "Vice" and a partnership with Bill Simmons as examples of its attempts to diversify its content.
Secondly, getting kids to identify with a platform early is perceived to help strengthen brand loyalty when they grow up, which makes children a very attractive audience for both advertising- and subscription-based platforms, according to media industry experts.
"It's all aimed at reducing the reasons to churn and giving more people in the household more reasons to use the service every single day, which wasn't so important in the bundle world, but is very important in the direct-to-consumer world," Greenfield said.
By itself, the children's market is big. It is estimated that advertisers spend more than $12 billion per year to reach the youth market and that kids view more than 40,000 commercials each year, according to the American Psychological Association. Other estimates have placed the figure as high as $17 billion per year.
According to the Advertising Educational Fund, the market to kids 12 years old and under is valued at about $500 billion.
HBO's deal with Sesame Workshop is "a move in the right direction" as the network looks to compete against online content providers who have beefed up their children's offerings over the years with hopes of being a one-stop shop for a family's viewing habits, according to Greenfield.
"The kids market is critical because it's the glue. You may only watch a TV show once a week, but kids are using devices to watch content every single day," Greenfield said
Children's content is something that can be watched every day, you don't want "Game of Thrones" to end and have users cancel their subscriptions until it comes back, he added.
Netflix expanded its lineup of original children's shows in June with the addition of four new animated series, including a preschool show from Cirque du Soleil Media about a character named Luna Petunia who plays in a dreamland.
The U.S. streaming giant has also landed partnerships with Disney Channel, DreamWorks Animation, Mattel, Hasbro, Lego, Scholastic and PBS. Netflix did not immediately respond to CNBC's request for comment.
"Sesame Street" is currently available on other streaming platforms licensing agreements, but those will not be renewed after this year.
HBO plans to offer the show on its linear channel, and more importantly, on HBO Now, which is probably the most compelling reason for the deal, said Tuna Amobi, an analyst with S&P Capital IQ.
"I think this is an acknowledgement by HBO that it is rolling out content to attract more of this audience that has been migrating, otherwise HBO would remain at a disadvantage," Amobi said.
HBO is not ad supported, but kids are a very attractive audience for advertisers and gaining their attention early is a crucial part of building brand loyalty, research shows.
While some may disagree with the decision to put Big Bird and Elmo behind a paywall, the deal serves as lifeline for an educational show that was created to give a head start to low-income children.
The news is significant for PBS too, which has been forced to essentially acknowledge that the old way it does business is no longer feasible, Amobi said. "I would not be surprised if PBS was looking to move toward similar deals with other shows."
Sesame Workshop receives the bulk of its funding from product licensing agreements, but that figure has dwindled over the last few years along with DVD sales. It reported an operating loss of $11 million for 2014 and $5.7 million for the previous year.
Children are increasingly watching shows via streaming services instead of traditional television, Sesame Workshop said in a statement last week.
HBO has downplayed the idea that the motivation for the deal was to trying to duplicate the success Netflix and other streamers have had with kids shows. The pact is a rare move for HBO, which typically doesn't license programming, but it said it made the agreement because of the legacy of the program.
"There's no other piece of programming in the children's landscape that is as high quality and has a historical legacy to it that we feel fits with the HBO brand more than 'Sesame Street,'" HBO spokesperson Jeff Cusson told CNBC.
According to Jeff Dunn, chief executive of Sesame Workshop, two-thirds of children now first experience the show on video-on-demand and streaming services.
"Our new partnership with HBO represents a true winning public-private partnership model," Dunn said in a statement. "It provides Sesame Workshop with the critical funding it needs to be able to continue production of 'Sesame Street' and secure its nonprofit mission" of helping kids.