Netflix, as expected, is initially taking the "buy" route for its first foray into the world of advertising, announcing this week that it will lean heavily on Microsoft to support its launch of ad-supported subscription options.

Financial terms and the length of the agreement haven't been disclosed, but Microsoft's role sounds pretty sizable and lengthy when one reads between the lines.

Microsoft has been tapped as Netflix's "global advertising technology sales partner," Greg Peters, Netflix's COO and chief product officer, explained in a blog post. "Microsoft has the proven ability to support all our advertising needs as we work together to build a new ad-supported offering."

Figure 1: Netflix reportedly wants to launch ad-supported options before the end of 2022. Teaming with a well-established ad-tech player should help Netflix accelerate its move into the world of advertising.
(Source: Netflix)

And there's a longevity element, as Microsoft has "the flexibility to innovate over time on both the technology and sales side," and will provide strong privacy assurances, Peters added. The exec also reiterated Netflix's aim to deliver an ad experience that is better than traditional linear TV. (Ed note: That's not exactly the highest of bars to leap over).

Xandr acquisition said to be key to ad-tech deal

Microsoft has been building and buying ad-tech for years, including its 2008 acquisition of Navic Networks, a startup original led by current Starry CEO and former Aereo CEO Chet Kanojia that developed campaign management tools and a network for targeted advertising. More recently, Microsoft closed its acquisition of Xandr, a programmatic/automated advertising specialist, from AT&T in May 2022.

Microsoft's online ad business also includes its Bing search engine, but the Xandr deal provided the tech required to contend for Netflix's ad business, according to The Wall Street Journal. For fiscal Q3 2022, Microsoft said revenues from search and news advertising (excluding traffic acquisition costs) jumped 23%.

In a separate post, Mikhail Parakhin, president of web experiences at Microsoft, said Microsoft will have access to Netflix's premium connected TV inventory and that all ads served on Netflix will be exclusively available through the Microsoft platform.

Comcast, Google lose out

The deal comes together weeks after rumors suggested that Comcast (via its NBCUniversal and FreeWheel units) and Google were among top contenders to snare a piece of Netflix's ad business. Speaking at the Cannes Lions conference last month, Netflix co-CEO Ted Sarandos said talks were underway with several potential ad-tech partners, but was clear that Netflix was eager to secure a relatively friction-free entrance into the ad market, and then expand and evolve from there.

"We want a pretty easy entry to the market – which, again, we will build on and iterate in … What we do at first will not be representative of what the product will be ultimately. I want our product to be better than TV," Sarandos said.

Microsoft partnership comes ahead of Q2 results

Expect Netflix to tack on a few details about its ad plans on Monday (July 18), when the company posts Q2 2022 results. The company reportedly wants to launch an ad-supported product before the end of 2022.

Netflix's rapid move toward an ad model enters the picture as subscriber growth at the streaming giant becomes increasingly saturated. Netflix lost 200,000 streaming subs in Q1 2022 and said it anticipated even steeper subscriber losses in Q2.

With an ad play, the idea is to stoke growth by providing less expensive options for a segment of consumers, a strategy that's already taken hold or will soon at rival premium streaming services such as Hulu, Disney+, HBO Max and NBCU's Peacock.

According to the WSJ, Netflix is trying to renegotiate deals for its originals and licensed content so it can support them with advertising. The pub expects studios to seek a premium of up to 30% on their existing contracts in exchange for those ad rights.

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— Jeff Baumgartner, Senior Editor, Light Reading