Netflix: Microsoft Relationship Is About Advertising For Now

Greg Peters Netflix
COO Greg Peters on Netflix' second-quarter earnings call (Image credit: Netflix)

Netflix said that its ad-supported product will launch in early 2023 and it confirmed that its tech partner, Microsoft, will be the exclusive sales channel and ad server for Netflix commercial inventory.

On the streamer’s second-quarter earnings video, Netflix COO and Chief Product Officer Greg Peters, declined to say whether there was a commitment to guarantee a significant level of revenue for Microsoft.

Analyst Doug Anmuth of J.P. Morgan also asked if the arrangement with Microsoft would grow into a more strategic relationship beyond advertising. There has been speculation that Microsoft could eventually buy Netflix. And Anmuth specifically asked about cloud services and gaming.

“First of all, we picked Microsoft as our ad partner because we think they're going to be great as an ad partner,” Peters said. 

Peters said that Amazon Web Service continues to provide Netflix’ cloud infrastructure. 

“We haven’t changed that relationship,” he said, adding  “we've done other stuff with Microsoft. We continue to do work with them on sort of go-to-market partnerships, things like that. We'll look for those opportunities as they exist with Microsoft and with other companies as well. So I would say this doesn't foreclose on anything like that. But you should think about this as a great ads partnership deal at the end of the day.”

Also: Netflix's Decision To Work with Microsoft a Mostly Positive Surprise

Netflix talked to Google and Comcast about its ad business. It picked Microsoft because it possessed certain “fundamentals,” Peter said. 

“They've got technical capacity, which is complementary to ours, a go-to-market capacity, which we need to leverage, and it will be very important for us,” he said. “We saw a high degree of strategic alignment in their interest in innovating in the space and really working with us over the next several years to basically try and create a new ads ecosystem around premium TV, connected TV ads.”

Peters endeavored  to lower initial expectations about the ad product. 

“We’re  going to take an iterative approach, this is what we call the Crawl, Walk, Run model,” he said. “At the beginning it will look like what you're familiar with, but over time, we think there's a tremendous opportunity to leverage that innovation DNA that we have,  as well as a bunch of enabling characteristics around addressability and measurability and things like that to provide an incredible experience for consumers, those who choose to take the ad-supported offering, but also provide an incredible experience for brands and advertisers who want to work with us to make sure that we're doing a good job of elevating what that looks like for them.”

Early discussions with potential advertisers and media buyers have been encouraging, Peters said. 

“We've seen a lot of excitement,’ he said. “They've wanted to connect with the titles, incredible content that [co-CEO and content head Ted Sarandos’] team is putting out there. And I think we also share a perspective on what is a great experience for consumers and for advertisers” including frequency caps.

“I think it's going to be a win-win-win for all parties involved,” he said.

Peters added that the economics of an ad-supported tier should also work. Even at a lower subscription price, Netflix’s models show that subscribers that opt for the ad-supported product will generate revenue equal to or greater than those on the current ad-free service.

“We're launching first in the countries that have sort of the more mature ad markets and we feel more confident in the ad monetization, then we'll sort of explore next tiers of countries over time. So that's a dimension of growth, he said.

In order to put ads in its acquired programming, Netflix has to renegotiate some of its deals with the studios that sold shows to Netflix. But Sarandos said that’s not a big issue.

“Today, the vast majority of what people watch on Netflix, we can include in the ad-supported tier today,” Sarandos said. “There are some things that don't that we're in conversation with the studios on. But if we launch the product today, the members in the ad tier would have a great experience. And we will clear some additional content, but certainly not all of it. But I don't think it's a material holdback to the business.”

Spencer Neumann, Netflix’s CEO, called renegotiating to get ads on licensed programming nice to have, but not a must have. 

“As Ted says, we can launch today without any additional content clearance rights. And hopefully, we can supplement that, but we'll be disciplined in what we do,” Neumann said.  ■

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.