Netflix teams up with Microsoft for ad-supported streaming tier

Netflix is partnering with Microsoft to build an advertisement-supported tier of its streaming service, as it races to offer a cheaper option for consumers amid tough competition and soaring inflation.

The streaming service, which had reportedly been speaking with potential partners, chose Microsoft because it “offered the flexibility to innovate over time on both the technology and sales side, as well as strong privacy protections for our members”, according to chief operating officer Greg Peters on Wednesday.

Netflix chief executive Reed Hastings had in April announced the company would create an advertising-supported version of its service. The news came as a surprise as Hastings had previously been staunchly against ads, describing Netflix as an advertising-free zone that allows viewers to “relax” without being “exploited”. 

The push into advertising is part of Netflix’s aim to reorient itself for leaner times. It has lost two-thirds of its market value since November, and analysts have likened its fall to the dotcom crash.

Disney, the other giant of the streaming business, also recently said it would launch a cheaper, ad-supported version of its service.

Netflix and Disney have the same goal: to add more subscribers. Their challenge is to ensure that the ad-supported option does not drain away too many full-price customers, while also reaching enough people to attract advertisers.

Netflix has not disclosed what the service would cost, or other details about the product. “It’s very early days and we have much to work through,” said Peters.

Disney chief Bob Chapek in May said an ad-supported Disney Plus is “good for the consumer because it’s going to give us another entry price point”. 

Disney has a head start over Netflix, because it also controls the Hulu streaming service, which has an ad-supported tier, as well as experience selling ads through its traditional television services, such as ABC.

Netflix in April revealed its decade-long run of subscriber growth had ended, spooking investors and raising questions about the value of entertainment companies jostling to compete in streaming. Netflix is also looking to crack down on password-sharing to help stem the decline in subscribers.

Other streaming services in the US and globally already have ad-supported streaming, including Warner’s HBO Max, NBCUniversal’s Peacock, and Paramount Plus.

Some analysts question whether the move into advertising is a regression back to traditional television. “It is scary if the only way to reinvigorate growth is offering cheaper products that worsen the consumer experience, essentially making it more like the dying linear TV experience,” said Rich Greenfield, an analyst at LightShed Partners.

The deal is a win for Microsoft as it seeks to build a broader advertising platform and become a more credible alternative to Google, which was among the advertising companies competing for the Netflix business. The work with Netflix will depend heavily on the technology and ad sales capability it obtained last month with the acquisition of Xandr, a consumer advertising platform, from AT&T.

Microsoft chief executive Satya Nadella painted the partnership as a first step towards building an ad service that supports a wider group of media companies, at a time when Google’s advertising practices have come under regulatory scrutiny.

“We want publishers to have more long-term viable ad monetisation platforms, so more people can access the content they love wherever they are,” he tweeted after the deal was announced.

The software company would not comment on whether the alliance with Netflix would involve it supplying additional data to help make ads more targeted, beyond the customer and viewing data the streaming service has.

Advertising brings in more than $10bn in revenue annually for Microsoft, making it the fourth-biggest digital advertising player, with most of its sales coming from the Bing search engine and jobs postings on LinkedIn. It bet heavily on becoming a bigger player in the broader ad market with the $6.3bn purchase of aQuantive in 2007, but reversed course five years later when it wrote off virtually all of the investment.