Netflix Reworks Microsoft Pact and Lowers Ad Prices

Netflix is restructuring its advertising partnership with Microsoft a year into their deal and lowering ad prices in a bid to jump-start that fledgling corner of its business.

The streaming company launched a $6.99 a month ad-supported option for consumers last year. Microsoft won a competition to provide technology for the service and sell ads on Netflix’s behalf, in part because it offered to pay a “revenue guarantee,” pledging to deliver a large amount of money to Netflix.

With the new ad tier gaining traction slowly, Netflix has had preliminary discussions to sell ads through other partners, in addition to Microsoft, people familiar with the matter said. Netflix is reworking its pact with Microsoft to reduce the revenue guarantee. Those terms are still being settled.

Meanwhile, Netflix is offering advertisers better deals. Some advertisers agreed to pay roughly $39 to $45 per 1,000 viewers in recent ad deals, according to ad buyers. Netflix previously charged some brands around $45 to $55, The Wall Street Journal has reported.

Combined, the reworked Microsoft pact and lower prices could draw to Netflix new advertisers who previously had been on the sidelines.

Netflix surprised Madison Avenue by selecting Microsoft as its ad partner last summer, instead of Google, the unit of Alphabet, and Comcast. As part of the companies’ initial deal, Netflix secured a “minimum guarantee,” a promise that it would get a large influx of ad revenue to limit its financial risk, the Journal has reported.

Some Netflix executives have been frustrated that Microsoft hasn’t sold more ad inventory, some of the people familiar with the matter said. Those soft sales and the weaker than expected ad market have so far led Microsoft to pay out the maximum amount required under the guarantee it agreed to a year ago when Netflix selected the company as its partner in launching the ad business, one person familiar with the partnership said.

The lower rates Netflix is offering, which are more in line with what some other subscription video services charge, have enticed new advertisers to buy ads from Netflix, some of the ad buyers said.

Netflix Chief Financial Officer Spencer Neumann said last week that the company’s ad revenue isn’t material and that he doesn’t expect it to be a big contributor this year. Since the $6.99 a month ad-supported plan was launched, executives have said Netflix would take a gradual approach to expanding the business.

Netflix shares tumbled last week after the company reported second-quarter revenue that fell short of projections, despite adding almost six million subscribers. While Netflix is profitable, unlike many of its rivals, its revenue growth has slowed in a crowded streaming market.

Expectations for the rapid growth of Netflix’s ad business had been overly optimistic for some time, Morgan Stanley analyst Benjamin Swinburne said in a recent note to investors. Netflix’s ad business is currently immaterial to the company’s revenue, and it will take time to draw subscribers into the ad-supported plan, though selling ads might help the company grow faster in the long term, he wrote.

The ad tier represented 3.3% of Netflix’s U.S. subscribers at the end of June, according to the subscription analytics company Antenna, up from 1.7% at the end of March. 

Netflix executives have said that the ad tier brings in more average revenue per user than its $15.49 standard plan. Ad buyers and analysts expect Netflix’s moves to limit password sharing and end its basic $9.99 ad-free offering for new customers in the U.S. and the U.K. will nudge consumers to sign up for the cheaper, ad-supported plan.

The company sold ad packages in the spring, timed for the “upfront” season when advertisers have traditionally committed to buying commercial time on TV programming for the coming season. Many advertisers cheered Netflix’s entry into the ad business because they were long shut out from reaching people who watch the streamer’s buzzy entertainment programming. 

Netflix accounted for 8.2% of U.S. television viewing time in June, according to the ratings company Nielsen, the second-largest share among streaming services after Google’s YouTube.

Some ad buyers are taking a cautious approach. One ad-buying agency that represents major brands is expected to reduce the size of its upfront ad commitment because of the limited number of users of Netflix’s ad tier, according to some of the people familiar with the matter. The agency will buy additional Netflix ad space closer to the time its ads run, as the subscriber base grows, one person familiar with the matter said.

The relatively small number of subscribers to Netflix’s ad tier makes it difficult for advertisers to spend a lot on the platform. Brands risk having viewers see their ads too frequently and can’t effectively target swaths of specific groups of subscribers, according to ad buyers. As a result, many brands only spend a few million dollars on the service, with some larger deals in the $6 million to $8 million range, ad buyers said.

Large advertisers, by comparison, often commit to spending tens of millions of dollars each during TV’s upfront ad sales season.

Like other media companies, Netflix wined and dined deep-pocketed advertisers in June during the Cannes Lions ad festival, which takes place on the French Riviera. 

Netflix has asked brands to be patient because the ad business is still developing, according to ad buyers.  

In addition to lowering rates, Netflix is exploring ways to make it easier for advertisers to purchase ad space. 

While advertisers must currently buy through Netflix or its partner, Microsoft, the streaming company has had preliminary discussions with ad-tech companies including Trade Desk and Comcast’s FreeWheel about allowing them to sell Netflix ad space as well, people familiar with the matter said. In those situations, Microsoft’s Xandr would continue to have a role including the provision of the technology that serves the ads viewers see.

The ad market has been stung by some companies’ move to trim ad spending in the midst of economic uncertainty. Shares of Interpublic Group tumbled Friday after the ad company reduced its 2023 growth forecast. The company said it now expects organic revenue growth of 1% to 2% after previously forecasting 2% to 4% growth for the year. 

Advertisers are also being cautious with their ad dollars given concern about how the strike by actors and writers—Hollywood’s biggest labor action in 60 years—will affect the marketplace, with fresh broadcast programming on pause and reruns and reality fare expected to feature heavily in the fall lineups. Ad buyers said that streamers such as Netflix would likely benefit from a prolonged strike.

Despite the soft ad market, Netflix is “seeing good demand and good progress on the upfronts,” said Greg Peters, co-chief executive officer, during the company’s earning calls with analysts last week.

Write to Suzanne Vranica at [email protected], Jessica Toonkel at [email protected] and Patience Haggin at [email protected]