Netflix partners up with Microsoft for ad-supported streaming service

Netflix plans to sell a cheaper, advertising-supported alternative to its flagship streaming service by the fourth quarter of this year. People who already subscribe won’t see the ads—those will be for customers signing up for the new tier.

Netflix long made the absence of ads a major part of its selling point to customers. But slowing growth has forced the company to look for new ways to attract subscribers, and new ways to generate revenue. The company announced plans to enter the advertising business after reporting a drop in customers.

Because Netflix has given itself a tight time frame to get the service up and running, management has searched for an outside partner to handle the sales and technology. 

In a blog post Wednesday, Netflix disclosed few details about its plans. Chief Operating Officer Greg Peters has been meeting with potential candidates. Alphabet Inc.’s Google and Comcast Corp. had been seen as frontrunners.

“Microsoft has the proven ability to support all our advertising needs as we work together to build a new ad-supported offering,” Peters said in the blog post. “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.” 

Shares rally

Shares of Netflix reversed earlier losses and gained as much as 2.4% to $178.64 in New York. The stock, once a highflier, was down 71% this year through Tuesday’s close following the company’s April prediction for a loss of 2 million subscribers in the just-ended second quarter. Netflix reports financial results on July 19.

Microsoft generated $10 billion in advertising sales last year and bought Xandr, AT&T Inc.’s ad business, last December. AT&T created Xandr in 2018 after buying the advertising technology firm AppNexus, and named the business after founder Alexander Graham Bell.

Introducing advertising has already posed challenges for Netflix, which must sort out how and if it wants to insert commercials into original series that were shot and edited for an ad-free service. It must also negotiate the right to insert spots into programs it has licensed from other companies, which may demand additional payment.

Talent agreed to work at Netflix when it was an ad-free service and will need to decide if they are comfortable with a new movie or series airing with commercials.

Yet the opportunity for Netflix is significant, according to media executives. With 221 million customers and a programming budget of more than $17 billion, Netflix has the scale of audience and breadth of programming to build a large business.