Netflix (NASDAQ: NFLX) announced a new partnership with Microsoft (NASDAQ: MSFT) on Wednesday that will support the company's addition of a lower-cost, ad-supported tier to its services.
"Today we are pleased to announce that we have selected Microsoft as our global advertising technology and sales partner," Netflix Chief Operating Officer and Chief Product Officer Greg Peters said. "Microsoft has the proven ability to support all our advertising needs as we work together to build a new ad-supported offering. More importantly, Microsoft offered the flexibility to innovate over time on both the technology and sales side, as well as strong privacy protections for our members."
The announcement comes after reports arose earlier in the week that the streaming pioneer had begun renegotiating contracts with studios to allow it to place ads alongside third-party content. With a round of layoffs taking place last month and investor lawsuits making their way through courts.
According to sources who spoke with the Wall Street Journal, Netflix has already begun discussions with Warner Bros (NASDAQ: WBD), Universal Studios (parent company Comcast, (NASDAQ: CMCSA)), and Sony (NYSE: SONY) to prepare for its ad-backed service. Other studios such as Paramount (NYSE: PGRE) must still be approached before Netflix will likely begin to consider its rollout of the lower cost service.
As many experts have pointed out, many of the agreements Netflix currently has with studios were not written with any mention of content being shown alongside ads. While the company does not have an explicit ban on ad-supported content, it could be risky to go ahead without negotiating new agreements with a cut of ad revenue for studios.
Renegotiations will likely proceed without too many major issues; after all, with ad-supported content a well-established norm, studios will likely come to the table with their preferred rates already in mind, and Netflix's proactive approach shows a willingness to reach a deal quickly. Where the company might have issues is its advertising partner, Microsoft, which has far less experience in digital advertising than titans such as Google (NASDAQ: GOOGL).
"Microsoft just bought an ad tech platform a month ago; it bought Xander from AT&T (NYSE: T). It has never been in the third-party ad tech business." Needham Senior Analyst Laura Martin told Yahoo Finance, noting that despite the acquisition, Microsoft still lacked the capabilities to match other third-party ad providers. "There's going to be a lot of tech [building] required over at Microsoft, which just adds time."
Waiting for Microsoft to ramp up its own infrastructure to serve the ads Netflix needs might not be what investors are hoping to hear. The company's shares are already down 70% to date, and its attempts to shore up its finances have paled in comparison to the first-ever subscriber loss it announced earlier this year.