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“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,” said COO and Chief Product Officer Greg Peters.
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Netflix’ depressed stock got a bump on the news, rising 2% to about $180.
The ad-supported service had a tortured start in a sideways announcement by co-CEOs Reed Hastings and Ted Sarandos on last quarter’s earnings call. The streaming king blindsided Wall Street by losing subscribers in Q1 and anticipates even bigger losses in the second quarter ending June, which has slashed more than two-thirds of the company’s value. The about-face by the service, which had always led the field and refused to entertain the idea of advertising (Hastings often cited privacy concerns and a wish to avoid Facebook-style corporate headaches), spooked investors.
Now that it’s on track to roll out with ads, the sentiment on the Street could change. Execs are expected to give some details on the new tier and the state of streaming when the company reports its second quarter financials next Tuesday. Many questions remain unanswered about how the advertising experience will look and feel on Netflix, as Peters acknowledged, saying, “It’s very early days and we have much to work through.”
Increased competition, which has bedeviled the company in the last few quarters in the U.S., may help explain the change of heart. Disney plans to introduce a cheaper, ad-supported version of Disney+ over the coming months, and HBO Max added one in mid-2021. NBCU’s Peacock has a free, ad-supported tier as well as a subscription one with ads.
“Microsoft has the proven ability to support all our advertising needs as we together build a new ad-supported offering,” Peters said. “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.”
Microsoft CEO Satya Nadella said the company is ‘thrilled to be named Netflix’s technology and sales partner” in the new offering, calling it “a big day for Netflix and Microsoft.”
The selection of Microsoft followed reports of talks with other major players in ad-supported streaming, including Roku, Google and NBCUniversal. While Microsoft hasn’t historically been known as an advertising-centric entity, it did recently acquire ad-tech operation Xandr from AT&T and also reaps significant proceeds from ads on search engine Bing and social network LinkedIn. In its most recent quarterly earnings report last April, Microsoft said its search and news ad revenue rose to $2.9 billion in the quarter, from $2.4 billion in the year-ago period. LinkedIn ad revenue jumped 61%.
One senior executive in the streaming sector who is unaffiliated with with either company noted that Netflix has recently ramped up its efforts in video games, a space Microsoft successfully expanded into with the Xbox. Microsoft has also proposed taking over game publishing giant Activision Blizzard, but that $69 billion all-cash deal is still being reviewed by regulators. “This partnership has bigger implications than just advertising,” the executive said.
Dade Hayes contributed to this report.
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