Netflix Enlists Microsoft To Enable Ad-Supported Tier

(Image credit: Netflix)

Netflix said it will work with Microsoft as its global advertising technology partner as the company rolls out an advertising-supported version of its industry-leading streaming service.

“Microsoft has the proven ability to support all our advertising needs as we work together to build a new ad-supported offering,“ Netflix chief operating officer and chief product officer Greg Peters said. “More importantly, Microsoft offered the flexibility to innovate over time on both the technology and sales side, as well as strong privacy protections for our members.”

Financial terms of the deal were not disclosed.

“At launch, consumers will have more options to access Netflix’s award-winning content,“ Microsoft president, web experiences Mikhail Parakhin said. “Marketers looking to Microsoft for their advertising needs will have access to the Netflix audience and premium connected TV inventory.

”All ads served on Netflix will be exclusively available through the Microsoft platform,“ Parakhin said. “Today’s announcement also endorses Microsoft’s approach to privacy, which is built on protecting customers’ information.“

After announcing it had lost 200,000 subscribers in the first quarter, sending its stock — and shares in other media companies turning to streaming — tumbling, Netflix looked to assuage Wall Street and reignite its growth with plans to cut down on password-sharing and explore an ad-supported version of its service.

Netflix later indicated it was aiming to start the ad tier by the end of the year.

While it is a leader in streaming technology, building an ad-tech stack from scratch would be an expensive, time-consuming enterprise for Netflix, which instead reached out to partner with companies in the industry. Reports circulated that Netflix was talking to companies including Comcast and Google

Not known as a TV ad-industry player, Microsoft recently acquired Xandr, which was AT&T's advanced advertising company when it owned WarnerMedia.

Part of Netflix’s popularity comes from not having ads. But its subscription price has climbed and, as viewers subscribe to more services, they're looking for cheaper alternatives, including ad-supported VOD. 

“It’s very early days and we have much to work through, but our long-term goal is clear: More choice for consumers and a premium, better-than-linear TV brand experience for advertisers,“ Netflix’s Peters said. “We’re excited to work with Microsoft as we bring this new service to life.” 

 Analyst Steven Cahall estimated that Netflix could generate ad revenues of $889 million in 2023, $1.975 billion in 2024 and $2.9 billion in 2025. 

“Netflix  has scale and power: Netflix will eventually deliver more ads than any other company, maybe except for Google and Amazon (and possibly Meta combining Instagram and Facebook),” he said in a report in June.

Creating a lower-priced ad supported tier will also help Netflix rekindle subscriber growth.will be able to increase its subscriber count to 272 million by 2025. Cahall calculates that AVOD will account for 30% of Netflix subscribers at that point. 

Cahall thought Netflix could charge $9.99 a month for the AVOD service, compared to $14.49 for its current ad-free standard tier.

In addition to tech issues, Netflix is reportedly in the process of renegotiating the deals it made for acquired content, giving it rights to sell advertising in the series it dosn’t own. It will also have an issue finding appropriate place to put ads in its originals because they weren’t formatted for commercials.

Tim Vanderhook, CEO of Viant Technology, one of the ad tech companies that had discussions with Netflix, said  Putting its own ad stack would have been difficult for Netflix to do quickly.

Vanderhook, who also co-founded Xumo, one of the first ad supported streaming service (now owned by Comcast) said Netflix needs to ad insertion technology to make sure ads run in the proper place without disruption the program stream and, more importantly, reportng on the back end that tells advertisers where and when their ads ran, who the ads reached and what impact it had. 

“They first need to decide what is the ad format? Are they going to offer 30-second spots or 15-second spots? What are the rules going to be on ad loads,” he said. “They’ree going to be so good at that because they're a product lead consumer-driven company and they're going to be focused on the consumer experience.”

Vanderhook is also bullish that the ad supported version of Netflix will generate substantial subscriber growth, as well as strong levels of revenue per subscriber.

Netflix will be jumping into an ad market showing signs of slowing down. The market will also be getting more crowded with Disney also planning to launch an ad supported version of Disney Plus.

But demand for streaming advertising to connected TVs has been the strongest sector of the market, commanding strong pricing because of the superior addressability offered by streaming ads

“I don't think it's a heavy lift that all marketers want to reach the consumer audience that Netflix has,” Vanderhook said. Especially if its able to put the right ad in front of the right viewer.

Vikrant Mathur, Co-Founder of AVOD publisher Future Today, reacted to the news that Netflix was working with Microsoft by wondering if MIcrosoft would buy Netflix.

“I think it is a huge win for Microsoft. They already have a $10 billion-plusadvertising business and most recently with the acquisition of Xandr they now have a significant presence in the CTV space. Netflix inventory will be the icing on that cake,” Mathur said.

“Assuming this is exclusive, ownership of the Netflix inventory puts Microsoft clearly above any other competitor in the space and very well in control of the $60 billion television advertising market. It would be interesting to see if, over the long term, Netflix builds its own ad stack and capabilities in parallel or simply outsources the job to Microsoft. Is this the first step towards a Microsoft acquisition of Netflix?" ■

Jon Lafayette

Jon has been business editor of Broadcasting+Cable since 2010. He focuses on revenue-generating activities, including advertising and distribution, as well as executive intrigue and merger and acquisition activity. Just about any story is fair game, if a dollar sign can make its way into the article. Before B+C, Jon covered the industry for TVWeek, Cable World, Electronic Media, Advertising Age and The New York Post. A native New Yorker, Jon is hiding in plain sight in the suburbs of Chicago.