Netflix chooses Microsoft as partner for cheaper service with advertising

Netflix Inc. has Microsoft Corp. was selected as the technology and distribution partner for its new ad-supported streaming service, an important step in its efforts to re-ignite subscriber and revenue growth.

etflix plans to sell a cheaper, ad-supported alternative to its flagship streaming service by the fourth quarter of this year. People who are already subscribed won’t see the ads – these are for customers who sign up for the new tier.

Netflix has long made the lack of advertising a key selling point for customers. However, slowing growth has forced the company to look for new ways to acquire subscribers and new revenue streams. The company announced plans to enter the advertising business in April after reporting a drop in customers.

Because Netflix has a tight timeframe to get the service up and running, management has been looking for an outside partner to handle sales and technology, at least for starters. Chief Operating Officer Greg Peters met with potential candidates including Google and Comcast Corp.

With its win, Microsoft will become the exclusive server and seller of ads on Netflix, a company with 222 million subscribers and even more viewers.

“Microsoft has the proven ability to support all of our advertising needs as we work together to build a new ad-supported offering,” Peters said in the blog post. “More importantly, Microsoft offered the flexibility to innovate over time on both the technology and distribution sides, as well as strong privacy protection for our members.”

Netflix shares rose 1.2 percent to $176.56 at the close in New York. The stock, once a high-flyer, has fallen 71 percent this year after the company forecast a loss of 2 million subscribers for the just-ended second quarter. Netflix reports financial results on July 19. Microsoft showed little change.

Microsoft’s choice came as a surprise to the advertising industry. Google and Comcast were seen as pioneers and leaders in advertising technology and in the distribution space. But both companies operate competing video services.

Microsoft made $10 billion in advertising revenue last year and last December bought Xandr, AT&T Inc.’s ad business. AT&T had acquired two ad tech companies — AdWorks and AppNexus — and in 2018 operated the group as an advertising company under Alexander’s Graham Bell-inspired name Xandr effectively rebooted.

Xandr is considered one of the leading providers of video advertising, according to Ari Paparo, who sold his advertising technology company to Comcast and then worked at the cable giant for a number of years.

“Advertising isn’t exactly the first thing that comes to mind when you think of Microsoft,” Paparo said. “However, they are global, which is very important for Netflix. And they are not competitive like Comcast or Google.”

Microsoft’s Xandr has technology that automates the sale and delivery of ads on a global basis, which is important if Netflix wants to launch spots in markets around the world, according to Dave Morgan, founder and chief executive officer of Simulmedia, a TV and streaming ad buying platform.

The partnership also makes sense because Microsoft has made a large investment in video games with Xbox, an area Netflix is ​​researching, he said.

“I think it’s a smart move,” Morgan said. “It’s become pretty clear since they bought LinkedIn and Xandr that Microsoft has re-engaged in the digital advertising business.”

The introduction of advertising is already posing challenges for Netflix, which on Wednesday offered few details on how or if commercials will be inserted into original series filmed and edited for an ad-free service. It must also negotiate the right to insert spots into programs it licenses from other companies, which may require additional payment.

Actors, producers, directors, and other media companies who agreed to work at Netflix when it was an ad-free service must decide if they’re comfortable with a new movie or series airing with commercials.

Still, according to media executives, the opportunity for Netflix is ​​significant. With a few hundred million customers and more than $17 billion in programming, Netflix has the scale to build a big business.

Walt Disney Co.’s Hulu generated approximately $2 billion in advertising revenue for the 12 months ended September, according to Kantar. Hulu only operates in the United States. With ads, Netflix could increase its revenue by $1 billion to $3 billion in the US and Canada, according to Bloomberg Intelligence. Netflix chooses Microsoft as partner for cheaper service with advertising

Fry Electronics Team

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