Netflix picks Microsoft for ad-funded subscription tier

Streaming giant snubbed Google and Comcast for a major venture that will unlock a highly-lucrative new channel for performance marketers.

Netflix has appointed Microsoft to provide the advertising technology for the streaming service's planned ad-supported tier.

Comcast's NBCUniversal subsidiary and Google were reportedly "top contenders" to serve ads on Netflix before Microsoft won the contract, according to sources from the Wall Street Journal

Netflix announced the move after it reported its first subscriber loss in more than a decade and cut hundreds of jobs earlier this year.

However, the company has not confirmed what the lower price will be, or how many ads viewers will have to watch per show when signing up to the ad-funded tier.

It could involve pre-rolls or ads during episodes, similar to Hulu with Ads with three to four minute commercial breaks.

“Strong privacy protections for our members”

Commenting on the deal, Netflix COO Greg Peters said: “In April we announced that we will introduce a new lower priced ad-supported subscription plan for consumers, in addition to our existing ads-free basic, standard, and premium plans. Today we are pleased to announce that we have selected Microsoft as our global advertising technology and sales partner.

“Microsoft has the proven ability to support all our advertising needs as we together build a new ad-supported offering. More importantly, Microsoft offered the flexibility to innovate over time on both the technology and sales side, as well as strong privacy protections for our members.”

The company has not yet revealed how much it plans to charge subscribers for the new service.

"Premium, better-than-linear TV brand experience"

Peters did not comment on what the new formats would look like, whether pre-roll, in menu or as more traditional ad breaks within shows. 

“It’s very early days and we have much to work through,” he said. “But our long term goal is clear: More choice for consumers and a premium, better-than-linear TV brand experience for advertisers. We’re excited to work with Microsoft as we bring this new service to life.”

Netflix is now trying to renegotiate the deals it has with major entertainment firms so that it can show adverts as part of its service, the Wall Street Journal reported on Tuesday.

The firm has reportedly held discussions with Warner Bros., Universal and Sony Pictures Television.

In April, Netflix saw $50bn wiped off its market value after the company disclosed the surprise fall in subscribers - the first drop since October 2011.

The company, which had gained millions of subscribers during Covid lockdowns, said it had lost 700,000 subscribers from closing its service in Russia.

"Important for advertisers to be acutely conscious of the setting in which they are advertising"

Commenting on what the announcement may mean for brands and advertisers, Matt Andrew, MD at Ekimetrics UK, said:

“With $50bn wiped off Netflix’s market value in April, it is unsurprising that it has taken such a bold step. The platform has a treasure trove of rich data on its viewers, with penetration across multiple markets, providing a vast monetisation opportunity for the brand and meaningful targeting prospects for advertisers. But with the cost of living crisis showing no sign of abating, the new approach opens up the major risk of existing subscribers downgrading to the ad-supported model to save money as they tighten their belts.

“To make this a success, it will be important for advertisers to be acutely conscious of the setting in which they are advertising – and to remember the role they play in a fair value exchange. Advertising is often about entertaining while selling a message - the focus on how this works means there will be scrutiny on all aspects of how successful this will be for Netflix as well as advertisers. Treating Netflix as you do other digital platforms, such as Sky or Meta, where understanding audiences and performing experiments is critical to success, will be important in shaping how budget is optimised. With the rich viewer data at advertisers’ disposal, it will be a prime opportunity to leverage methods such as marketing mix modelling, to ensure they are making highly effective, strategic decisions with marketing spend that drive the intended returns.”

“Brands would be wise to be ready to run test campaigns as soon as they're ready to go live"

Aaron Goldman, CMO, Mediaocean,said: “There's a lot of pent-up demand from brands to advertise on Netflix. When the company said that it would introduce an ad-supported offering, there was both excitement in the industry and speculation over how it would come to market. Now the path forward is clear with Microsoft providing the back-end platform. What's less clear is how consumers will respond to ads on Netflix but brands would be wise to be ready to run test campaigns as soon as they're ready to go live. 

“As with all TV and video advertising, creative personalisation will be a key to success. Netflix has a treasure trove of information about its audience and Microsoft has proven capabilities to deliver highly-targeted ads in a privacy-complaint manner. Together, this combination should spell success for brands as part of their omnichannel TV and video strategies.”

“Create a personal, tailored experience which provides greater value”

John Philips, General Manager at Zuora, said: “We know that Netflix never wanted ads - it goes against their original business model of charging a monthly fee. However, by partnering with Microsoft they’re showing that they’ve taken onboard customer feedback and will now offer a "lower priced ad-supported subscription plan". After losing 200,000 subscribers between January and March this year, the company has been forced to alter their business model. 

“We’re living in economically challenging times; people are feeling the pinch and subscription services which don’t provide value are at risk of being cancelled. By bringing about these new changes, Netflix are giving their customers more options and encouraging them to stay, while offering an enhanced TV brand experience for advertisers. Businesses can look to Netflix’s new offerings to see how to take onboard customer feedback. These new, cheaper options will reduce churn rates and allow the business to keep hold of valuable customer data. This data enables the business to learn from their customers and adjust their offerings to create a personal, tailored experience which provides greater value.”