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Netflix deal makes CW pay off for CBS and Warner Bros.

October 13, 2011 | 12:34 pm

The CW's "Vampire Diaries," one of the shows that will be available on Netflix
Netflix has just made the CW network's future very secure.

A new deal that makes Netflix the second home for CW programs will put the venture into the black, said Leslie Moonves, chief executive of CBS Corp., which co-owns the network with Time Warner's Warner Bros. unit.

Although terms of the agreement were not disclosed, Wells Fargo Securities analyst Marci Ryvicker said it could be worth close to $1 billion by the time it expires.

"It essentially makes the CW a profitable enterprise," Moonves said. That means that CBS and Warner Bros. will make money off the shows they produce for the CW, even if the network itself does not cover programming costs with advertising revenue. Warner Bros. Television Group President Bruce Rosenblum echoed Moonves' sentiment, saying the joint venture "just became more valuable."

People familiar with the deal agreed Netflix could ultimately end up paying close to $1 billion. However, the final worth of the contract won't be known for years and could be much less as it will be determined by how well the CW's programming performs. Netflix is buying rights to repeats of current and future series on the network, and the longer the shows stay on the air and performs well, the more the subscription video company will pay for streaming rights.

For example, Netflix is paying in the neighborhood of $600,000 an episode for "Gossip Girl," an established show, but will initially pay much less for newer or lower-rated CW programs, people familiar with the pact said. The window between when a new episode of a CW show appears on the network and then ends up on Netflix could be as long as a year.

Launched in 2006 as a result of a merger between the struggling UPN and WB networks, the CW relies primarily on serialized hourlong dramas that appeal to teens and young adults, such as "The Vampire Diaries" and "Gossip Girl." Its shows have a loyal following among young viewers, but serialized programs don't typically generate the strong rerun revenue of situation comedies and procedural dramas such as"NCIS" or "Law & Order," which is key to producers recouping their investments.

"Serialized dramas do not have the same value" in reruns, Moonves said.

But fans of such shows do flock to services such as Netflix, where they can watch multiple episodes on their own schedule rather than having to wait days or weeks between episodes.

"This deal validates the programming strategy of the network," Rosenblum said.

Netflix has exclusive online subscription rerun rights to all episodes of all CW shows. However, CBS and Warner Bros. can still sell reruns to other outlets, including local television stations and cable networks.

The CW agreement accelerates a trend that has seen Netflix transform from a service focused primarily on movies to a home for television repeats. The company has said that more than 60% of the video streamed by its users is now television programs.

At the same time, Netflix has been losing movie rights. Pay channel Starz recently said it would not renew a deal to provide movies from Sony Pictures and Walt Disney Pictures; that deal expires in February.

Many other Hollywood studios have said they only want to provide Netflix with older titles, as they believe that offering recently released pictures harms more-profitable DVD sales and video-on-demand rentals. When Starz announced it would not renew its agreement, Netflix said it would spend the money it expected to spend on those movies on other content. The CW appears to be a key part of that replacement strategy.

-- Joe Flint and Ben Fritz

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Photo: A scene from CW's "The Vampire Diaries." Credit: Quantrell Colbert / CW.

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