Why Netflix chose Microsoft for an 'upset' ad tech win

In a plot twist fit for an episode of “Stranger Things,” Netflix chose Microsoft as an advertising partner to build the ad-supported version of the streaming service, leaving ad industry watchers slightly surprised. Microsoft has key advertising technology infrastructure that will now go toward powering the first ads on Netflix, but is still a nascent player in connected TV. While the partnership came as a shock, in hindsight, it could make total sense. “It’s a surprise upset win for Microsoft,” said Kevin Krim, president and CEO of EDO, a data and measurement firm in the connected TV space. “It’s not very often that a potentially huge source of premium video advertising comes on the market.” For weeks, Netflix had been talking with potential partners to help develop its first ad-supported service, which will be cheaper than the ad-free version. Last month, at the Cannes Lions International Festival of Creativity in France, Netflix co-CEO Ted Sarandos spoke at the main stage of the conference, and Netflix executives were mingling with advertising leaders to discuss the prospects for the streaming giant to enter the ads game. Netflix was close to picking either Google or FreeWheel, an advance connected TV buying platform owned by Comcast, according to people familiar with Netflix’s talks at Cannes, where it spoke with both companies. On Wednesday, Microsoft became Netflix’s “global advertising technology and sales partner,” Greg Peters, Netflix’s chief operating officer, said in the announcement. Sign up for Ad Age newsletters From influencer marketing to agencies, get the latest news and analysis delivered to your inbox Click here In the end, the deal may have come down to Microsoft not being an overt Netflix rival. Google owns YouTube and FreeWheel is owned by Comcast, making them direct streaming competitors. And even though Microsoft is not known for its ad serving technology, it has pieces of an ads business that could plug into the future of gaming, the metaverse, commerce and entertainment. Netflix recently launched a game studio, showing its interest in the genre, and Microsoft owns Xbox, one of the only premium consoles. Microsoft is also buying Activision Blizzard in a $68.7 billion deal announced in January. “I have to imagine, in choosing Microsoft, Netflix was concerned about the conflicts they would potentially expose themselves to with other key partners,” said Matt Spiegel, executive VP of media and entertainment vertical at TransUnion, global information and data company. Choosing Microsoft, “makes complete sense” in that light, Spiegel said. The deal is a coup for Microsoft because its footprint in connected TV has been light. Now, Microsoft has landed Netflix and its desirable potential ad inventory. Netflix is seen to have some of the highest quality programming, with blockbusters such as “Stranger Things” and “Inventing Anna,” and reality programming such as “The Circle.” “Marketers looking to Microsoft for their advertising needs will have access to the Netflix audience and premium connected TV inventory,” said Mikhail Parakhin, Microsoft’s president of web experiences. “All ads served on Netflix will be exclusively available through the Microsoft platform.” The terms of the deal were not disclosed. Advertising experts said that it is likely that Microsoft gave Netflix some revenue guarantees as part of the transaction. In these types of deals, ad partners are known for setting a floor on the amount of ad revenue they are likely to generate. Netflix declined to comment for this story. Ad tech and gaming Microsoft will lean on one of its core ad tech acquisitions, Xandr, which it bought last year, to serve ads. Xandr has a long and storied pedigree in ad tech, starting as AppNexus in 2007, competing with Google's ad marketplace. In 2018, AT&T bought AppNexus and renamed it Xandr, after Alexander Graham Bell, and it had hopes of turning it into a connected TV ad platform to serve properties like HBO acquired from WarnerMedia. But Xandr never quite caught on among advertisers, and it was not viewed as a major threat to Google, FreeWheel and other newcomers that have made a specialty out of connected TV ads. Now, Microsoft owns it. “Xandr was on nobody’s radar,” said Nicole Scaglione, global VP of OTT at PubMatic, a programmatic digital ad tech company. “It’s because they don’t really have a ton of those CTV relationships right now, so they weren’t really one of the usual suspects” to win Netflix’s business. “Microsoft can help them scale,” Scaglione said. “They have infrastructure, and they have an ad sales business, so ad sales is not new to Microsoft.” Another ad tech executive, who spoke on the condition of anonymity, said that the Microsoft pick is puzzling because Netflix is going with such an unproven player. “It will be interesting to see if Microsoft can deliver on the ad tech stack,” the exec said. “It’s not something I think they’ve ever done at scale. Xandr historically has been more display focused than they have video inventory.” Brands on the rise A look at up-and-coming brands disrupting their categories Read more here Streaming TV has become one of the most attractive places to buy advertising as traditional TV loses popularity. Amazon is running NFL games in the fall, showing the draw of streaming video. Just this week, Disney struck a new ad partnership with media-buying platform The Trade Desk, to help expand programmatic ads on TV and connected TV. Disney is introducing an ad-supported version of Disney+ on top of Hulu, ESPN, ABC, National Geographic and other channels. Warner Bros. Discovery, Paramount and NBCUniversal are among the top traditional broadcasters also developing streaming ad channels. Connected TV ad spend is expected to grow in the U.S. from about $19 billion this year to almost $39 billion by 2026, according to eMarketer, when CTV will account for 10% of all digital ad spend in the U.S. In April, Netflix said it was finally ready for ads, after years of shunning them. In the first quarter, Netflix had seen its highest subscriber losses in more than a decade, losing 200,000 subscribers, and it forecasted it could lose 2 million more. Netflix still has more than 220 million subscribers worldwide, however. Netflix is trying to push viewers who piggyback on other people's accounts, with shared log-in credentials, to pay for the service, with the option for a lower-cost, ad-supported version. In April, Co-CEO Reed Hastings telegraphed how Netflix could push into ads rather quickly. “We can be a straight publisher and have other people do all of the fancy ad matching, and integrate all the data about people,” Hastings said on an earnings call with Wall Street analysts. “So we can stay out of that and really be focused on our members, creating you know that great experience, and then you know again getting monetized in a first-class way by a range of companies that offer that service.” Microsoft has been slowly amassing all the tools for a robust ads business: It owns Bing in search; it owns LinkedIn, a growing social media advertising platform; and Activision Blizzard, the video game publisher it is set to acquire, sells in-game ads. “The tip of the spear is gaming,” said Tal Chalozin, chief technology officer at Innovid, the CTV and digital ad and analytics platform. “Microsoft is clearly a powerhouse in gaming, and my bet is the partnership between Microsoft and Netflix is just a tiny piece of a much bigger collaboration.”

Why Netflix chose Microsoft for an 'upset' ad tech win

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