Netflix’s choice of Microsoft to help it get into the advertising business came as a bit of a surprise, but Wall Street analysts and ad-tech industry insiders had mostly positive reactions to the choice.
Microsoft isn’t in the TV industry in a big way now, and that might be one of the reasons why it was attractive to Netflix: no point in getting in bed with a competitor. And Microsoft’s decision to take advanced advertising company Xandr off AT&T’s hands suddenly looks like a pretty good deal.
Of course the devil is in the details and it remains to be seen just how the Netflix-Microsoft relationship plays out. It could be short term until Netflix buys or builds its own capabilities. Or the two could be in it for the long term. Could there be a marriage in the future? Some observers raised the possibility of Microsoft acquiring Netflix down the line.
Matthew Swanson, analyst at RBC Capital Markets, noted that surprise was the initial feedback he was getting from investors and ad industry insiders.
“While Microsoft has a history in advertising with Bing and LinkedIn, they do not have an established presence within CTV and additionally are missing an established salesforce and ad-server for the market,” Swanson noted.
“The reasons this announcement was a surprise may be the same reasons that Microsoft was selected, notably compared to Google, Amazon or NBCUniversal, Microsoft does not have conflicting inventory that competes directly with Netflix. Additionally, the recent acquisition of Xandr has strengthened the company's SSP positioning with Microsoft emphasizing the privacy focus of the acquisition, which appears to also appeal to Netflix from the press release," Swanson said.
Swanson added that the addition of premium inventory to the market from Netflix “should be a positive for the broader CTV market, increasing competition and accentuating the value added services of these providers as demand shifts from direct sales towards reserved and open auctions as the supply/demand curves find a new equilibrium.”
Daniel Salmon, BMO Capital Markets also expected Xandr to “play a key role” as Microsoft works to sell Netflix AVOD inventory. He said Netflix could initially take advantage of Xandr’s Monetize platform.
Netflix will be reporting its second-quarter earnings next week, following up on the bomb it dropped on Wall Street last quarter when it disclosed a drop in subscribers. Netflix’s stock plunged, taking other media companies in the streaming business with it. The subscription shock also prompted Netflix’s about-face on advertising.
Salmon said he'd like to see Netflix answer some questions about advertising as part of its earning report. Among them: What is your short and long-term strategy for the ad-supported subscription plan? What is the timeline for introducing the ad experience? What does the partnership with Microsoft entail? Where do you plan to launch the ad-support first? Is it important for Netflix to launch in the U.S. before the 2023 Newfronts/Upfronts?
Some execs in the ad-supported streaming business continue to see plans for Netflix and Disney Plus to air commercials as a boon for the industry. They saw the selection of Microsoft as a way for those benefits to be realized quickly.
"Netflix's entry into the advertising game is a huge win for consumers, advertisers, and its own opportunity for growth. Selecting Microsoft as its partner is a smart strategic decision that provides Netflix with the proven advertising technology and a turnkey advertising solution that already has substantial scale without building a dependency on a platform owned by a streaming competitor,” said Ashwin Navin, CEO and co-founder of Samba TV.
“At its roots Netflix is a technology company -- so it's no surprise that they lead with that experience in solving for the future,” said Scott Schiller, global chief commercial officer at EMX. “For Microsoft, it's the next big move in continuing to unite its gaming, and Xandr technology divisions with cloud-based advertising solutions. And who knows what's next for the two companies?”
Nicole Scaglione, VP, OTT and CTV Business at PubMatic, said the deal highlighted the opportunity in AVOD.
“For Netflix to fully realize their monetization potential, they will need to engage with a lot of technology and buying partners across the ecosystem. Microsoft has relationships and scale across channels and platforms, along with experienced sales teams and great tech infrastructure that can help Netflix grow their ad business quickly. Microsoft and Xandr want what is best for brands, publishers and consumers and this aligns with PubMatic’s vision for ecosystem harmony," Scaglione said.
“Netflix has to focus on entering the ad business on strong footing,” said Matt Spiegel, executive VP, media & entertainment vertical, at TransUnion. “It is really important to show marketers right away that it is easy to work with them. That reality makes their ad-tech and ad sales partner a critical decision. While choosing Microsoft is at first look a surprising choice, it actually makes a lot of sense. By choosing Microsoft and Xandr it won’t have concerns of sharing business strategy with a partner that is also a competitor. Secondly, Netflix has a large global following and Microsoft has done a good job of serving as an advertising partner for media companies with significant inventory outside the U.S.”
James G. Brooks, CEO and founder of GlassView, said Netflix still faces challenges as it aims to incorporate ads into its product.
“Like its contemporaries, Netflix will have to balance keeping viewers tuned in while monetizing the platform,” Brooks said. “The best way to accomplish this is through rigorous attention to frequency management as well as serving contextually and demographically relevant ads. Netflix knows its audience -- after all, they did create one of the most sophisticated recommendation platforms based on audience interest -- so this should be a real opportunity for them rather than a challenge. I would also imagine that advertisers will be lining up to serve ads on Netflix, so there could be a dent in streaming revenues to competitors.” ■
