As well as the very literal meaning of watershed as a 'line of division between two adjacent rivers or lakes' (Webster 1913), there is a figurative meaning which is used far more frequently in the UK than in North America.
In this figurative meaning, watershed is used to refer to any critical or defining division, balance, or moment, such as crucial piece of legislation, or a vitally important strategic battle in a war.
However, its most common usage, and almost certainly the one that has maintained its currency as a figure of speech, is in connection with television. In the UK, terrestrial (non-cable/satellite) broadcasters refer to 9pm simply as 'the watershed', after which time it is permissible to broadcast pretty much anything.