Why the Netflix-Microsoft ad partnership is a win-win

Netflix made headlines recently when it appointed Microsoft as its tech and sales partner to aid in its first ad-supported subscription offering. All ads served on Netflix will be exclusively available through the Microsoft platform.  While competitors such as Google or Comcast have their own streaming platforms such as YouTube and Peacock respectively, Microsoft currently doesn't own one. Safe to say, it's partnership with Netflix can potentially give the tech giant the firepower it needs to break into the streaming space.

Netflix was previously in discussions with multiple partners in June for the new offering. Hence, the choice of Microsoft might be seen as a notable one, given it might not have developed as big of a name in the adtech scene as compared to other competitors.

Nonetheless, Microsoft beefed up its capabilities in the adtech scene last December with its acquisition of Xandr last year from AT&T. The tech giant previously said that with Xandr, it can accelerate the delivery of digital advertising solutions for the open web by combining Microsoft's audience understanding, technology and global advertising customer base with Xandr’s large-scale, data-driven platforms for advertising.

Nishant Kaushal, ADNA's head of data, strategy and solutions, told MARKETING-INTERACTIVE that Netflix's selection of Microsoft might have come as a surprise to the industry as it skipped adtech giants, however Amazon, Google, and Comcast all also happen to be direct competitors to Netflix.  Moreover, Kaushal said the partnership does have its own synergy.

Like Netflix, Microsoft is also an entertainment (gaming-centred) giant, but it does not compete directly due to Microsoft’s lack of video offering. On the other hand, Microsoft has an ever-enhancing ad-tech that Netflix needs to get back to subscriber growth.

"Microsoft has been experimenting with and developing in-game advertising that is integrated into its Xbox platform in a less intrusive way. This experience and knowledge of ‘in-entertainment’ ads, would be interesting for Netflix. It can go beyond the traditional ad that interrupts or makes the audience wait, there could be more interesting content collaboration that add values to both viewers and brands and integrates more seamlessly," Kaushal added.

In fact, he also views the Netflix-Microsoft relationship as a symbiotic one with Microsoft getting exclusive access to Netflix's prized data of a significant proportion of world’s population’s content preferences which will make it own ad-ops more effective.

Separately, there has also been chatter about Microsoft potentially snapping up Netflix. Quoting Needham senior analyst Laura Martin, Yahoo Finance reported that Netflix could potentially be "looking for an exit". Given that there is no other company that could have made a US$100 billion purchase, Martin reckoned that Netflix is perhaps trying to "get closer to Microsoft" in hopes that it might acquire the streaming company after finalising the Activision deal.

To this end, Kaushal said this chatter "might not be so far-fetched". According to him, Netflix's current market capitalisation stands at US$84 billion, which was a 74% decline compared to US$320 billion just 10 months back while Microsoft is nearly at US$2 trillion. "This partnership allows the company to much better gauge the incremental value of such a move for its business," he explained. 

Meanwhile, Forrester's VP, principal analyst, Joanna O'Connell, concurred that Microsoft's acquisition of Xandr makes this partnership feasible, given that the latter was "an early, dominant player in the programmatic display ad space" and, when acquired by AT&T back in 2018, began to hang its hat on the TV/video ad opportunity.

Xandr also currently has solutions for monetising programmatic streaming inventory and advanced TV, holistic yield management, ad serving, and supporting clients' preferred industry IDs. It also has a legacy of sitting between buyers and sellers, unlike more traditional DSPs or SSPs, lending it a unique perspective on the needs of both.

Microsoft’s president and vice chair, sits on Netflix’s board, and Reed Hastings sat on Microsoft’s board from 2007 to 2012. In addition, Netflix’s first version of “Watch Instantly” used Microsoft’s Silverlight for streaming (instead of the more commonly used Flash Player), and Xbox 360 was the first console to feature an HD Netflix streaming app.

Despite the potential, O'Connell said the question remains as to whether the partnership will truly push the envelope on innovating the ad experience, such as developing new formats or models in streaming TV.

"Microsoft does bring gaming to the table, where there’s opportunity and innovation but nascency. If these new partners can translate this kind of next-gen thinking into the more traditional streaming TV ad ecosystem — where the ad experience is, well, just plain bad (too many ad pods, too many repeating ads) — that’s where magic could happen," she added.

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