There's no going back now. Netflix (NFLX +3.25%) is committed to its idea of adding a lower-priced subscription plan supported by digital advertising, and the company has tapped Microsoft (MSFT +1.11%) to help with ad sales and the technical side of the advertising platform.
While Microsoft clearly has the cloud-computing muscle and sheer business scale to assist Netflix in its ad-sales project, it was far from the only option in a crowded ad-platform market. Disappointed investors dropped share prices of video-based advertising experts Magnite (MGNI +0.85%) and The Trade Desk (TTD +0.27%) by 10.4% and 6.7% on the news, respectively. Many also saw longtime Netflix collaborator Roku (ROKU +2.91%) as a sensible choice of ad-platform partners, and that stock dove 5.4% on Thursday. After all, several of these companies have reportedly been discussing potential advertising deals with Netflix recently.
This move made me want to explore two critical questions:
- Should we have seen the Microsoft deal coming?
- Is there any room in that deal for additional partnerships between Netflix and one or more of the other ad-technology specialists?
NASDAQ: NFLX
Key Data Points
Signs pointing to a Microsoft deal
Netflix has a long history of close Microsoft relations. Reed Hastings, the video-streaming company's co-founder and co-CEO, served as the lead independent director on Redmond's board between 2007 and 2012. He left that appointment to focus his time on education programs and the rapidly growing Netflix business.
That was a long time ago, but personal relationships tend to have staying power. If nothing else, Hastings should have a solid understanding of Microsoft's capacity to innovate and deliver on its business promises. Those five years on Microsoft's board surely didn't seal the deal a decade later -- but that background didn't hurt, either.
Microsoft may not be a powerhouse in advertising, but the company acquired a data-driven ad technology unit named Xandr from AT&T in December. I find it interesting that Microsoft announced the Xandr buyout and the Netflix partnership through the same spokesperson, web experiences president Mikhail Parakhin. It's easy to imagine that the Netflix ad platform might be built around technologies from the Xandr group.
Furthermore, Netflix likely wants to build its ad service on a global scale with minimal friction in the worldwide rollout. Microsoft's Azure cloud computing service provides a suitable technical foundation for that type of large-scale service implementation. If one quality sets Microsoft apart from the Magnites, Rokus, and Trade Desks of the ad-tech world, it's this direct connection to a globe-spanning cloud computing platform.
So some signs pointed in this direction, but Microsoft was still a surprise pick for this role.
NASDAQ: MSFT
Key Data Points
Will there be more partnerships?
The details of the Microsoft deal are not public knowledge. We may get some more information over the next two weeks, as both Netflix and Microsoft are reporting quarterly results in that span. Meanwhile, let's see if the published announcement leaves any wiggle room for a larger ecosystem of advertising partners.
Netflix COO Greg Peters called Microsoft "our global advertising technology and sales partner." That's not a promising start if you want Netflix to give Magnite or Roku a call later. The software giant isn't "one of our partners" but simply "our global partner." So far, that sounds pretty cut-and-dried.
From Microsoft's side, Parakhin seemed to fortify that conclusion even further (emphasis added):
Marketers looking to Microsoft for their advertising needs will have access to the Netflix audience and premium connected TV inventory. All ads served on Netflix will be exclusively available through the Microsoft platform.
So Microsoft's ad service appears to be the only way for advertisers to put their marketing content in front of Netflix viewers. Unless Parakhin overstates the exclusive nature of Microsoft's contract, it doesn't look like their deal leaves much room for additional ad-tech partners. As a shareholder of Roku and The Trade Desk, I'm not thrilled to reach that conclusion. But until further notice, that's what I see.
