Netflix recently announced an agreement with Microsoft to be its “global advertising technology and sales partner” for the platform’s new ad-supported tier, expected in early 2023. It was a somewhat surprising choice, as Microsoft is a relatively small player in the advertising space.
Microsoft did bring in $10 billion in ad revenue last year by selling ads on a variety of platforms, including its Bing search engine and LinkedIn social network, but is far surpassed by other major players in the ad media space such as Google, Comcast, Amazon, and Roku. Netflix Chief Operating Officer Greg Peters said that Microsoft was selected for its ability to innovate and its strong privacy protections. The fact that Microsoft does not have its own competing streaming service, as the other major players do, may also have played a role in the decision, with Netflix not wanting to share its revenues – and data – with its competitors.
After years of resisting ads on its premium streaming platform (and saying no to ads as recently as this past March), Netflix changed course in April when it reported its first subscriber decline in over a decade in its Q1 earnings report. For Q2, the company announced a second consecutive quarterly loss of subscribers, as an additional 970,000 accounts were lost. Netflix is optimistic that introducing a cheaper ad-supported tier will help turn the tide and lead to a net gain of subscribers.
Netflix will continue to offer its current ad-free tiers for those who prefer a more premium ad-free viewing experience. However, not all content that is currently available on Netflix will be available on the ad-supported tiers. While all Netflix developed original content should be, the licensing agreements with other studios do not currently allow some content to be shown with ads. Netflix is in the process of renegotiating with studios to clear more content for the ad-supported tiers.
There’s some speculation that the advertising deal is part of a larger strategy. A partnership with Microsoft could give Netflix inroads for their gaming initiative. Netflix recently brought the critically acclaimed indie PC game Into the Breach to mobile as a Netflix exclusive title under the Netflix Games umbrella—bringing the total number of games available to Netflix subscribers to 24. Microsoft, with its Xbox game console, cloud gaming on Game Pass, and depth and variety of in-house game development studios, could make for a great partner to more fully develop their gaming offerings.
Interpret’s VideoWatch data shows strong synergy between the two, with 55% of Xbox Game Pass subscribers also subscribing to Netflix. Special offers and deals (or perks) offered to Game Pass subscribers could help Netflix further bolster its subscriber base among Xbox gamers.