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    Advertising, Connected TV

    Netflix + Microsoft—The Good, the Bad and the What Ifs

    A Look at the Recent Partnership Announcement

    Netflix + Microsoft—The Good, the Bad and the What Ifs

    5 Min Read

    It’s finally here—following months of rumblings and conjecture, Netflix announced that it has chosen Microsoft as its technology and sales partner to help launch ad-supported subscriptions. There are still more questions than answers regarding what advertising will look like on the platform and how much the new plan will cost subscribers. And, much of the early sentiment around the partnership hasn’t been great. But is it deserved?

    Industry Experts Have Some Concerns

    The announcement in itself isn’t a shock considering that in April, after reporting a loss of 200,000 subscribers, Netflix indicated that it would develop an ad-supported model. Instead, what has many industry experts scratching their heads is the choice to partner with Microsoft—a company that isn’t exactly known for its experience in advertising.

    “It [Microsoft] has never been in the third-party adtech business, so it’s got to build a lot of capabilities in its SSP, its supply side platform, in order to actually represent Netflix,” Laura Martin, Needham senior analyst, told Yahoo Finance Live. “Whereas, if Netflix had picked Google, or Roku, or Freewheel, or Magnite [all of which already have third-party SSPs], Netflix could have been in market much faster.”

    Aside from Microsoft’s lack of adtech experience, experts have voiced concerns about the risks involved with Netflix and Microsoft’s move towards ad-supported content.

    “For both companies, the risks of failure can’t be overstated,” Tom Wilton wrote for Nasdaq.com. “Netflix has positioned a lower-cost ad-supported offering as a strategy to combat falling subscriber numbers. Meanwhile, Microsoft no longer operates a streaming platform upon which to sell video ads (R.I.P. Mixer). Fundamentally, this is an enormous opportunity for the two companies, but there’s a chance they both might have bitten off more than they can chew.”

    MNTN’s CEO Mark Douglas had a similar opinion. In an interview with CNBC, Douglas said: “There are a lot of risks in this in the sense that Netflix really has no clue how many of their users will elect for an ad-supported plan. And at a cheaper price point, I think they need to be prepared to really invest in this.”

    Despite these concerns, the Netflix/Microsoft partnership could prove beneficial for both brands.

    Microsoft Might Make More Sense Than Skeptics Think

    In the same interview with CNBC, Douglas spoke to the natural synergy between Netflix and Microsoft and the opportunity that might come from building an ad offering from scratch.

    “One thing that’s interesting about Netflix is that they have no legacy ad business,” Douglas said. “So I think there’s a lot of room for creativity here. And I think advertisers will probably be very intrigued by that and potentially respond very well to it.”

    Douglas’ suggestion about advertiser interest is already coming to fruition—after years of being kept away from Netflix’s sizable and diverse audience, many advertisers are eager to see what this new ad platform could offer. Advertising leaders from top brands like Hyundai, Peloton, Anheuser-Busch InBev and LendingTree Inc. have expressed interest in running ads on Netflix when the opportunity arises.

    The attention of high-profile advertisers is certainly encouraging for this blossoming partnership. However, there’s more to be explored regarding Netflix’s choice to move forward with Microsoft.

    Let’s start by addressing the whole “Microsoft isn’t experienced in adtech” issue. While this might be the case in part, Microsoft has actually been working to solidify its place in the advertising world for years. To start, Microsoft owns LinkedIn. Sure, it’s not a streaming service ad channel, but many parallels can be made between paid social and Connected TV (CTV) advertising—potential brand reach, audience targeting and detailed campaign data, to name a few. Not to mention that retargeting via paid social can be used to bolster CTV advertising campaigns.

    It’s also important to note that Microsoft has an advertising service—in December 2021, Microsoft acquired Xandr, a data-enabled technology platform focused on delivering ads in a “post-cookie world”. According to eMarketer, ads are already appearing in Windows 10 search and toolbars. That said, advertisements in search and toolbars is just the beginning for Microsoft—ad-supported video gaming is also on the horizon. In April, Business Insider reported that Microsoft is developing a program that will place ads in free-to-play Xbox games. Knowing this, Netflix’s choice to partner with Microsoft becomes a bit clearer.

    Another bonus for Netflix is that Microsoft owns cloud computing service Azure. Currently, Netflix uses Amazon Web Services (AWS) for nearly all of its computing and storage needs. One glaring problem with this—Amazon Prime Video is a direct competitor of Netflix in the streaming service space. If Netflix made the transition from AWS to Azure, then it could stop putting money in the pockets of one of its biggest rivals. A cherry on top of all of this? The move to Azure would likely save Netflix a lot of money (we’re talking hypothetical figures with a B following them).

    The Future of Streaming: Living Room Domination?

    For years Microsoft has dreamed of taking over peoples’ living rooms. It all started in the 90s with WebTV, a set-top box that offered customers “easy-to-use access to the Internet via television”. WebTV was discontinued in 2013, but the loss was padded by the buzz around Microsoft’s soon to be released gaming console the Xbox One.

    “Our ambition is to become the all-in-one system for every living room,” Don Mattrick, president of Microsoft’s interactive entertainment business, said in regards to the Xbox One. “The place where your games, TV and entertainment come alive.”

    The creation of the Xbox proved a wise move for Microsoft, with the latest version (Series X) selling ~8M units and driving 18 million Xbox Game Pass subscriptions. Microsoft continues to lean into the opportunity the gaming space provides—in January of 2022 it acquired video game heavyweight Activision Blizzard Inc.

    Could the newly founded partnership between Netflix and Microsoft be the next step towards total living room domination? It’s a viable possibility as both Netflix and Microsoft now have access to each other’s customer base, and the opportunity for Netflix+Microsoft subscription bundling is in all probability already being discussed.

    In the long run, this partnership could prove a powerful way to take over most living room screens, and for that matter, many other screens throughout the house. Should this be the case, competitor streaming services will likely look for ways to follow suit.

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