Netflix has announced that it will be partnering with Microsoft for the streaming service’s new ad-supported subscription tier. Cheddar News anchors break down what this means and discuss the reasons why Netflix might have ruled out other contenders.

Closing Bell

Netflix Announces Partnership With Microsoft for Ad Subscription Tier

back to closing bell on cheddar news everyone while significant changes soon coming to the world's most popular stringing service just less than an hour ago netflix announcing its selected Microsoft as its global advertising technology and sales partner. Well according to a new report from the Wall Street Journal, the company has started negotiations with several studios to include advertising next to their content and joining me now Center News senior reporter Michelle Castillo Leo with the latest Michelle. It's good to see you. Um So look previous reports claiming google and even nbcuniversal were some top contenders to partner with netflix on this. Ad supported tier. Talk to me a bit more about what Microsoft has to offer in this tie up. Well you know what? This is a really interesting move. We know that Google is actually the top advertising giants in the US market. Actually the global market they earned about $210 billion 2021. Now let's look at Microsoft which is a really trusted partner. That's one of the things that netflix pointed out that they like their brand safety that they know that they can get the job done. But in total Microsoft only made $10 billion on advertising. So this is a huge boon to Microsoft a way for them to really grow that ad business Now Microsoft again is a trusted name. They're just not one of the giants out there that we always talk about the tri op Aly which is google of course facebook and um sorry google facebook and amazon. But Microsoft is actually nowhere near that top of the list. So this will actually get them more into the conversation. So I think this is a big win for Microsoft going forward, interesting. And of course as it's coming on the heels of a Wall Street Journal report that the company is in talks with several studios to renegotiate deals to show ads next to their content. What does that mean? So let's back this up a little bit. I know a lot of people realize that there's shows on netflix that are exclusive. Think shows like the Russian doll or start like Russian doll or the Crown. The interesting thing about that is they're not exactly owned and made by netflix, they're usually owned by another studio. So I'm pretty sure Russian doll I think is owned by Warner Brothers. The Crown is made by Sony pictures. So the Wall Street Journal report said that netflix is talking to Warner Sony Universal about adding that ad supported con ads next to these shows because that wasn't originally written into the contract. You can expect that these companies that are making these shows are going to probably want 15 to 30% more than they're currently making because they know that netflix is going to make more revenue with that ad supported tier. This just shows you that netflix is really so interested in this uh this ad supported here that they're going to release later this year. We know that netflix is reporting earnings next week. So that's probably why you're hearing a lot of these leaks right now because they want people to know that they are serious about adding that revenue stream especially because they've been hit hard and they're losing a lot of subscribers. Well, I know a lot of brands Michelle starting to scale back on spending on ads because of worries about a potential recession. Is it bad timing for netflix to launch this product now? Well, let's look at the data from Magna, which is a media agency. They are predicting that global media ad revenue is gonna go up 9% year over year now that's pretty good. But it's actually in December 2021 when they initially released this report, they thought it was actually gonna go up 12%. The reason why they revised their report was because of concerns over the upcoming recession that a lot of people are predicting, they're starting to notice that brands are scaling back on their marketing budgets, they're deciding, hey, if consumers aren't going to be shopping a lot, why should we be promoting our products? And so the revenue pie isn't as big as it was going to be as people were predicting at the beginning of this year, that being said, the average revenue growth rate for media advertising from 2015 to 2019 was about 7%. So the good news is, it is above the previous years, but it isn't as big as it used to be. And with another giant like netflix entering the arena, it does mean that things are going to be split up a little bit further between the big media companies, interesting. I know netflix shares, hitting a 52 week low in mid May and there are concerns leading up to the company's next earnings report predicting it's gonna lose two million subscribers. So besides ads in new shows, Michelle doesn't have anything else up its sleeve to try to keep viewers on board. You know, one of the things that I think people are very curious about is whether or not netflix will be able to crack down on that password sharing and they talked a lot about this in the report. I talked to some of my sources and I think that this can go one of two ways. One, it could encourage people to buy their own netflix accounts, but they might also be like, hey, if I can't share a password, I might just move my money to another service that I'm more interested in. That might be a little bit cheaper that I watch more content from. And netflix could lose subscribers overall. The second way this could go is that people would be really interested in that ad supported tier because they can't get it for free anymore with that password sharing. But now it's going to move over to um, this ad supported tier. So there's a lot of weight and see, especially with the password sharing crackdown among the advertisers I've spoken to. There's definitely interest in netflix. The question is though, however, is how expensive netflix is going to be to advertise on. They could do something like a programmatic automated by which would be supply and demand pricing, That's a little bit easier for people to buy into or they could require a buy in of something like $1 million, which would mean only the top brands could advertise there. So a lot of people are curious to see they haven't really heard much the conversations are just starting. So um any insight as to whether or not the content library would be less robust for the ad supported tier versus the subscription ones. Well, this all goes back to that Wall Street Journal report that you're seeing where they're negotiating with the producers to allow ad supported content. Again, that uptake on that price would be about 15 to 30% according to the Wall Street Journal. So I'm sure netflix is going to pick and choose which shows it thinks it can get top dollar for advertising because they're going to have to pay more for those shows in the end of the day, it will mean more revenue and another revenue stream for them. So that's good. But I wouldn't expect that all shows would get on this ad supported tier because all those negotiations have to happen, you probably will see a little bit more flexibility with the shows and franchises that Netflix owns and operates and that I think includes squid game and Stranger Things. But a lot of those other deals, like shows like you, those are gonna have to be negotiated separately, so maybe not even at launch, we'll see what we'll have to stay tuned. Alright, Cheddar News is a senior reporter, Michelle Castilian Michelle, thank you for that report.