On the screen, Netflix streams video favorites like “Bridgerton” and “Stranger Things.” To surround those programs with commercials, however, the company will require outside assistance.
Netflix said Wednesday that it had selected Microsoft as a partner to help it create a lower-priced subscription tier that would rely on commercials to help generate revenue. “Microsoft has the proven ability to support all our advertising needs as we work together to build a new ad-supported offering,” Netflix said in a statement. “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.”
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The move is a surprising one in many regards. By taking on a partner, Netflix will likely have to sacrifice some of the ad revenue it generates. Yet building an ad-sales unit where none exists is a daunting task, and Netflix may have required help to get started as its rivals — already well-versed in how to sell millions of dollars in commercial inventory to Madison Avenue — use their hard-won expertise as an edge. Disney, for example, earlier this week unveiled a new agreement between itself and the ad-tech company the Trade Desk as part of an effort to boost the commercial inventory it sells via connected-TV. Disney is set to launch an ad-supported version of Disney+ later this year, and was already at work selling it to marketers during the industry’s recent “upfront” ad-sales market.
The choice of Microsoft suggests Netflix is eager to dive into some of the newest techniques in video advertising, such as programmatic ad sales that hinge on using data to match ads to precise kinds of audience, or addressable ads that are sent out to specific viewers segments. In June, Microsoft finalized its acquisition of the Xandr ad-tech unit from AT&T, which had been involved in programmatic advertising. “It’s very early days and we have much to work through. But our long term goal is clear. More choice for consumers and a premium, better-than-linear TV brand experience for advertisers. “Netflix added in its statement. ” We’re excited to work with Microsoft as we bring this new service to life.”
The prospect of landing pitches for Coca-Cola or Apple around Netflix programs is highly enticing to advertisers. As more TV-watchers move to streaming their favorites on demand, marketers have begun to fret about how to reach big pockets of consumers all at once, as they had grown accustomed to doing during TV primetime. Netflix would bring a cadre of popular programs to the mix, many of which generate a substantial enough following to be worth ad dollars.
Luring ad money takes time, however. Netflix and Microsoft will need to develop a sales team, build stronger ties with Madison Avenue media-buying agencies, and do something even more daring. Sponsors will demand to know how many subscribers saw their commercials, and what kind of consumers they are. Marketers may also press Netflix to guarantee a certain level of viewing and impressions, or even to tie a commercial to a particular business outcome, like a visit to a car showroom or the purchase of a movie ticket. This may force executives at Netflix and its partners into levels of disclosure to which they are likely not accustomed.
Netflix’s embrace of ad dollars represents a remarkable about-face for the company, which for years has rebuked queries about whether it would seek ads, even as its streaming rivals did so with relish. In April, however, the company revealed that it had lost 200,000 subscribers in the first quarter and expected to lose 2 million more in months to come. While Netflix has a sizable subscriber base, it is no longer operating in an open playing field, and many of its competitors — Disney+, HBO Max and Hulu among them — have also gained significant traction.
Netflix does have some experience with marketers. In recent years, the company has reached out to popular marketers like Coca-Cola, Diageo’s Tanqueray and Procter & Gamble’s Old Spice. The offer: Help Netflix gain attention for new show launches and align your products with some of the most popular pieces of pop culture. To do so, however, the advertisers have had to take big swings. Late last year, P&G launched a commercial featuring characters from the Netflix series, “The Witcher” singing a bawdy tune about how much people from the world of the show smell. The company even devised new deodorants with scents like “Smell of Surprise” or “Yennefer’s Underarm.”
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