Microsoft Pick for Netflix Ad Tier Should 'Steady the Waters': EMarketer
Netflix’s choice of Microsoft as technology and sales partner for its ad-supported VOD subscription tier (see 2207130048) “will go a long way to steady the waters” for the upcoming offering “while helping Microsoft solidify its position as a major player in digital advertising,” blogged eMarketer analyst Daniel Konstantinovic Thursday.
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Netflix Chief Operating and Product Officer Greg Peters said Wednesday Microsoft has “the proven ability to support all our advertising needs,” saying the AVOD offering is in “very early days” with “much to work through.”
The streaming service’s advertising initiative “started off on the back foot,” said Konstantinovic, “but partnering with an established firm like Microsoft will help ease concerns about the effectiveness of its ad offerings.” Newer competitors had a “significant head start over the streaming pioneer, having spent months or years fleshing out ad-supported tiers and partnering with measurement firms to bolster their ad businesses,” the analyst said.
CEO Reed Hastings initially said the AVOD offering could take years to implement, “but the company quickly pivoted to a much more aggressive Q4 launch target after anxiety and criticism from advertisers and competitors mounted,” Konstantinovic said. That made Microsoft, with its “broad advertising capabilities and solid reputation,” an attractive partner, he said.
Microsoft invested heavily in its advertising business over the past year, Konstantinovic noted: “A partnership with a platform as prominent as Netflix could help it eat up a larger share of the digital ad market.” Microsoft bought programmatic advertising company Xandr in December from AT&T with the hope to create “a post-cookie ad marketplace that could address the conflicting needs of privacy and targetability,” he said.
Microsoft ad revenue grew 40.2% from 2020-2021 to $7.79 billion; eMarketer projects it will reach $9.27 billion this year and $11.84 billion by 2024. Search and news ad revenue grew 23% to $544 million in Q1, Konstantinovic noted, saying ads have started appearing in Windows 10 search and toolbars, and the company is looking to introduce ads to cloud gaming and free-to-play games on computers and Xbox consoles.
Netflix has been building a gaming business, which could also benefit from Microsoft’s expertise. Netflix agreed to buy Finnish mobile games developer Next Games in March for about $72 million (see 2203020001), and it entered mobile gaming in midsummer. A June blog post pre-announced 28 games due in July. Though it’s mostly focused on mobile games, Netflix “could find a comfortable partner in Microsoft should it attempt to make the jump to other platforms,” Konstantinovic said.
The analyst noted the Netflix-Microsoft news followed by a day Disney’s announcement it partnered with The Trade Desk to build an ad platform for its family of video services. “The ad-supported video gold rush is reaching a fever pitch at the same time that the advertising industry faces a privacy and addressability crisis,” Konstantinovic said, and both announcements “directly confront those needs.”
Privacy was a key message in Disney’s announcement, which focused on the combination of Disney’s privacy-oriented user data from Clean Room and The Trade Desk’s Unified ID 2.0 initiative to create a substitute for third-party cookies, Konstantinovic said.
EMarketer projects the number of AVOD viewers in the U.S. will grow from 140.1 million this year to 171.5 million in 2026. AVOD viewers represent 41.6% of the population; it sees that rising to 49.5% in four years.