Netflix to Rely on Microsoft for Its Ad-Backed Video Service

(SAN FRANCISCO) — Netflix has picked Microsoft to help deliver the commercials in a cheaper version of its video streaming service expected to launch later this year with a pledge to minimize the intrusions into personal privacy that often accompany digital ads.

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The alliance announced Wednesday marks a major step toward Netflix’s first foray into advertising after steadfastly refusing to include commercials in its video streaming service since its inception 15 years ago. Netflix said it would end its resistance against ads after it disclosed that it lost over 200,000 subscribers within the first three month of this year due to rising competition and inflation, prompting management to decide it was time to look for an easier option.

Netflix is warning it that it may report more subscriber losses during the April-June period. It has made this clear and encourages the release of a less expensive version with ads, to help stop customer erosion. The decline caused a 70% fall in Netflix’s stock price, which has been wiped out by $190 billion shareholder wealth. This also led to hundreds of layoffs.

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The Los Gatos, California, company is scheduled to release its April-June numbers on July 19, but still hasn’t specified when its ad-supported option will be available except it will roll out before 2023. Netflix’s announcement about the Microsoft partnership also omitted a crucial piece of information: the anticipated price of the ad-supported option.

“It’s very early days and we have much to work through,” Greg Peters, Netflix’s chief operating officer, said in a post that also highlighted Microsoft’s “strong privacy protections.”

Microsoft’s ad contract with the video streaming company, with over 220 million subscribers, is an important coup. Microsoft and Google have been locked in a bitter battle for 20 years.

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“This deal gives Microsoft something its growing ad business has lacked — quality streaming video inventory that has potential to scale” said Insider Intelligence analyst Ross Benes.

Mikhail Parakhin, Microsoft’s president of web experiences, said the Redmond, Washington, company is “thrilled” with Netflix’s choice in a post that also underscored the company’s commitment to privacy.

While Microsoft still makes software that powers most of the world’s personal computers, Google has become increasingly powerful through its dominant search engine, ubiquitous Android software for smartphones and other popular digital services that last year generated more than $200 billion in ad revenue — far more than any other marketing network.

Google ads sales are dependent heavily on personal information its free services gather from their users. It is this type of surveillance Netflix wants to avoid. Google also owns YouTube’s video site, which already competes against Netflix for people’s attention and will soon be an advertising rival, too.

Microsoft may also have been able to benefit from another factor. Netflix Inc.’s co-founder and co-CEO, Reed Hastings, served on Microsoft Corp.’s board of directors from 2007 to 2012.

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