Netflix is partnering with Microsoft to build an ad-supported tier of its streaming service as it races to offer a cheaper option for consumers amid stiff competition and rising inflation.
The streaming service, which has reportedly been in talks with potential partners, chose Microsoft because it “offers the flexibility to innovate over time on both the technology and sales sides, as well as strong privacy protections for our members Chief Operating Officer Greg Peters said Wednesday.
Netflix CEO Reed Hastings announced in April that the company would create an ad-supported version of its service. The news came as a surprise as Hastings had previously been staunchly anti-advertising, describing Netflix as an ad-free zone that allowed viewers to “chill out” without being “exploited”.
The ad push is part of Netflix’s aim to refocus on 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 in 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 doesn’t drive too many full-price customers away, while still reaching enough people to attract advertisers.
Netflix has not disclosed how much the service will cost or other details about the product. “It’s very early and we have a lot to work on,” Peters said.
Disney chief Bob Chapek said in May that ad-supported Disney Plus is “good for the consumer because it’s going to give us another entry point.”
Disney has an edge over Netflix because it also controls streaming service Hulu, which has an ad-supported tier, as well as experience selling ads through its traditional TV services, such as ABC.
In April, Netflix revealed that a decade-long period of subscriber growth was over, spooking investors and raising questions about the value of entertainment companies struggling to compete in streaming. Netflix is also looking to stop password sharing to stem subscriber declines.
Other streaming services in the US and around the world already have ad-supported streaming, including Warner’s HBO Max, NBCUniversal’s Peacock and Paramount Plus.
Some analysts question whether the shift to advertising is a return to traditional television. “It’s scary if the only way to revive growth is to offer cheaper products that degrade 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 has been among ad companies competing for business with Netflix. Working with Netflix will depend heavily on the technology and ad-selling ability it gained last month with the acquisition of Xandr, a consumer advertising platform, from AT&T.
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Microsoft CEO Satya Nadella painted the partnership as a first step toward building an ad service that supports a broader group of media companies at a time when Google’s advertising practices are under regulatory scrutiny.
“We want publishers to have more long-term viable ad monetization platforms so more people can access the content they love, wherever they are,” he tweeted after the deal was announced.
The software company did not comment on whether the alliance with Netflix would involve providing additional data to make ads more targeted, beyond the customer and viewing data the streaming service has.
Advertising generates more than $10 billion in annual revenue for Microsoft, making it the fourth-largest player in digital advertising, with most of its sales coming from the Bing search engine and LinkedIn job postings. The company bet big on becoming a bigger player in the broader ad market with its $6.3 billion purchase of aQuantive in 2007, but reversed course five years later when it wrote off nearly the entire investment.
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