News Articles

Analysis: Why the Billion-Dollar CW-Netflix Deal Should Catch Your Attention

Backend deal for relatively low-rated network saw CBS and WB get on same page about Netflix and create de facto annuity for CW for years to come 10/13/2011 03:21:33 PM Eastern

Virtually every week it seems, another television network or studio is cutting a deal with Netflix, Amazon, Hulu or another SVOD service; it's to the point where such deals have begun attracting diminishing attention from the media, perhaps rightfully so.

Netflix, of course, has been busy making other headlines, coming under fire for attempts to evolve its business model, and along the way, quickly evaporating much of the massive goodwill the brand had amassed. They were even parodied recently on Saturday Night Live.

The CW is the joint venture of CBS and Warner Bros that has hummed along for years, carving out a modest niche in its younger demographic, especially female viewers. But it has never created a show that has remotely made significant money in backend sales, due to a combination of gaining lower ratings than most other broadcast shows, and the fact that they feature a highly-serialized format that historically doesn't sell in syndication, especially to cable outlets.

Despite all these non-billboard-type details, the Oct. 13 announcement that Netflix and The CW had cut a deal was one of the more intriguing agreements I have seen in years.

Here's the Deal

First off: the pact. Netflix can begin showing episodes of all CW scripted shows (not unscripted ones) beginning the September after the season in which that episode aired. So, any episodes airing now will become available in Sept. 2012.

The deal is exclusive for SVOD, though there is a carve-out for the parties to still sell their shows to, for instance, a cable outlet. But again, there has never been a market for CW programming there to this point, including bigger shows such as Gossip Girl.

The basic deal is that if a scripted series (drama or comedy . . .though for now, on The CW, that means drama) airs on The CW, Netflix automatically acquires it. And the money is significant: The entire package could reach upwards of $1 billion. While financial terms were not disclosed, sources say there is a minimum price for the first 3 years of a series, with each episode potentially fetching upwards of over $300,000. If a series reaches its fourth year-when the production costs traditionally shoot up for the producing studio-Netflix ends up paying closer to seven figures per episode.

Granted, if The CW were to suddenly hit a massive home run by, say, CBS, ABC, NBC or Fox standards, Netflix would be getting an absolute steal at those prices. That, of course, is a new problem CW execs would be thrilled to have. And on top of that, the studios still have the rights to sell The CW shows on other platforms.

For now, the deal affects shows produced over the next four years . . . though it actually runs longer than that, because Netflix keeps the rights for four years after each series -- current or future -- ends its CW run. 

How the Deal Was Done

Their names weren't on the press release, but negotiations for The CW were spearheaded by Scott Koondel (who holds the joint titles of president of distribution for CBS Television Distribution and SVP of corporate licensing and distribution for the CBS Corporation) and Warner Bros Domestic Televison Distribution's President, Ken Werner, and Tom Cerio, executive VP of cable sales.

While parent companies CBS and WB jointly own The CW and get along as well as any joint venture parents probably can, Werner and Koondel are rivals on other fronts, so the fact that they were doing this together makes for strange bedfellows indeed. But the two began talking things through around the time of the broadcast upfronts, and successfully set out to create an auction for the package.

While Netflix got the deal, other potential outlets in the mix for all or part of the package included Google, Hulu, Amazon and even Comcast. And the relationships with Netflix itself were interesting. Koondel and CBS have done business with Netflix before: Koondel previously closed a lucrative deal with Netflix for CBS, which helped set the pricing for this deal.

Warner Bros. chief Jeff Bewkes has never been quiet publicly about his own Netflix concerns, gaining credibility by many (myself included) for his outspoken and cautious take. But while WB wouldn't want to sell a top-tier movie package or a top-rated show to Netflix -- according to sources with knowledge of WB exec thinking -- it was happy to be in business with the outfit for a nice return on this relatively low-value fare.

A Huge Boon for The CW

This is massive news for The CW, a network that has never made a hit according to traditional broadcast standards, and just in recent years finally moved beyond constant questions about its viability as a going concern, despite its strides in building buzz and other metrics.

The deal gives the network a much-needed new revenue stream-basically, an annuity tied to how many shows the network produces. You could even argue in a convoluted way that Netflix has just become a de facto investor in the network.

The new deal also means that the network can expect potentially significant backend revenue-something it never had before. It is, in essence, money from nothing. It also gives the network increased motivation to develop more series, as the potential financial risk for each series has just received a partial hedge.

I would not expect to see the network dark in the summer for much longer. That will be good news on several fronts, as The CW should be able to spend a little more year round, and turn the "open for business" sign up a little brighter, which should then lead to a domino effect of more and better projects coming to their attention.

And of course, The CW hopes this will help ratings for returning shows, as Netflix will give viewers who didn't watch before a chance to catch up quickly via Netflix when the next season of originals begins. For this reason, CW affiliates should also be smiling at this arrangement.

For Netflix, the deal adds high-profile content that it kept away from helping to build its rivals. And they're banking on that content delivering many more customers to its product from The CW's targeted younger female niche.

November