Netflix: Microsoft Ads Deal as Strategy Lesson
Learning from Real Life: I like to pull stories or quotes from other writers to underscore concepts I coach and teach. In this case, Ben Thompson’s Stratechery update today was a perfect example of:
Why Google advises candidates read Ben Thompson to prep for their interviews
How to answer, if you were Netflix going into the Ad business would you build it yourself or partner?
Should Microscoft buy Netflix?
Why do you think Netflix partnered with Microsoft and not Google.
The list goes on. Read below and try to make up your own strategy question out of the Microsoft/Netflix Ads deal. It shows how the Google strategy questions apply to real, current events.
The following is the excerpt from Ben Thompson’s email today July 20. Here is the link to the full article. If you don’t already subscribe, I highly recommend you do. It is the best $150 investment in your PM future.
As you read the following excerpt, think about the prompts and questions above. Then think about how you might answer the questions. No, you will not be this perfect in your interview, but if you can practice some of the concepts below, you will properly answer the prompts.
From Ben Thompson of Stratechery: Netflix Earnings, Microsoft and Netflix’s Ad Deal
“Microsoft and Netflix’s Ad Deal
The other piece of this news that is worth discussing came out last week; from the Wall Street Journal:
Netflix Inc. said it chose Microsoft Corp. to help launch a low-cost, advertising-supported streaming plan, a surprise move that gives a major boost to the tech giant’s growing ad business. Seeking a partner was critical for Netflix to enter the ad business quickly. Microsoft will supply technology to facilitate the placement of video ads on Netflix. All ads served on Netflix will be available exclusively through Microsoft’s platforms…Netflix’s selection of Microsoft is a high-profile endorsement of the tech company’s ad business, which has grown under Chief Executive Satya Nadella. The company acquired digital ad business Xandr from AT&T Inc. in 2021 and earlier purchased LinkedIn.
The Netflix partnership came as a surprise to some ad industry executives because Microsoft is not as well known for its video ad capabilities as other companies. Other top contenders for the Netflix partnership included Comcast Corp. and Alphabet Inc.’s Google, The Wall Street Journal reported. A person familiar with Microsoft’s weeks-long pitch to Netflix said the tech company stressed one word: agnostic. Microsoft emphasized that it won’t compete in streaming with Netflix, the person said. Comcast’s NBCUniversal operates the Peacock streaming service while Google owns YouTube. Representatives for Google and Comcast declined to comment.
This was, without question, a huge surprise, for exactly the reasons stated: while Xandr does provide advertising for set top boxes and connected TVs, it is not at nearly the scale of some of the other alternatives Netflix was considering. Sure, YouTube and Peacock are competitive streaming services (along with NBCUniversal’s linear TV channels), but that also means that their ad stacks are much more fully fleshed out, relationships with ad agencies much more established, and, critically, inventory is much greater. Scale matters in advertising, and Netflix is forgoing the chance to benefit from and augment the audiences already accumulated by other providers. To put it another way, going with Microsoft has three risks: first, that its tech stack is less mature (and barely integrated — the Xandr acquisition just closed); second, that its ad sales team is less established; and third, that it is subscale relative to the alternatives.
Of course Netflix is primed to transform all of these: the company will bring its own scale, its audience will attract advertisers, and because the streaming service will be Microsoft’s most important advertising customer by far it will have a hand in shaping the tech stack. This last point came up repeatedly on the earnings interview. Peters said:
All of the ads that are served on our ad-supported offering will come through Microsoft; that’s an exclusive arrangement with them. But one of the reasons that we’re partnering with Microsoft, there’s a bunch of fundamentals. They’ve got a technical capacity [and a] go-to-market capacity, which we need to leverage, and it will be very important for us. But a key component of what we liked about this partnership was that there was sort of a flexibility in that innovation orientation that I mentioned before. And so they very much, I think, are approaching this as an opportunity to work together to collaborate and to sort of evolve both the technical capacity and also sort of what the experience is and what the go-to-market approach is. So we’ve got lots of flexibility to work together there and evolve that over time.
Peters added later on:
We saw a high degree of strategic alignment in their interest in innovating in the space and really working with us over the next several years to basically try and create a new ads ecosystem around premium TV and connected TV ads. And so both from the consumer perspective because that’s really important, and I think we’ve seen the sort of long arc of advertising toward very pro-consumer, let’s make advertising part of the quality of the experience rather than detracting from it, as well as having a really strong brand and advertiser kind of focus on what do they need to support their goals from there. And so we saw that as being a lot of alignment out of that, and we’re just excited to sort of work with them iteratively on making that happen.
Netflix, as big and important as it is, was probably not going to have a huge amount of influence on Google in particular, and even Comcast. In Microsoft, though, Netflix probably has the closest thing to their own ad team, without having to actually build their own ad team. Moreover, Netflix probably got a great deal in terms of a revenue share, and perhaps revenue guarantees.
That’s because the biggest winner of this deal is Microsoft. Instead of trudging along with Xandr, trying to pick up scraps from connected TVs and niche streaming services while being handicapped by a lack of scale, Microsoft is catapulting itself to one of the most important advertising companies in the space. It makes all kinds of sense to give Netflix a sweetheart deal, even losing money, if the payoff is a video advertising service that is legitimately competitive with the largest players in the space. And, frankly, it’s not so bad to have Netflix as a development partner, either: while cross-company collaborations are always fraught, Netflix is hugely invested to get this right, and Microsoft doesn’t really have much legacy debt holding it back (or, as the excerpt above alluded to, its own competitive product).
More broadly, this deal fits with my longstanding contention that large companies with big cash flows are almost always better off acquiring than innovating. Creating something new is hard enough; it’s even harder when you are a large organization. Startups have the advantage of flexibility and rapid iteration and, critically, no other choice. What big companies have is scale and money; in this case Microsoft is likely using the latter to acquire the former for its ad business.
That leaves one more question: while I think I covered Netflix’s primary motivations — influence, control, and a good deal — there is also the question of a potential exit strategy. Specifically, if Netflix ever wants to sell itself then Microsoft makes all kinds of sense as an acquirer. The most obvious reason is that Microsoft is, as it assured Netflix, “agnostic” in the space. That means there wouldn’t be any antitrust concerns in an acquisition. Of course a lack of antitrust concerns often means there isn’t really a business rationale for a deal, either, but this would be an exception:
First, Microsoft does have a complementary offering on the consumer-facing side in Xbox Game Pass. Obviously video games are different than video streaming, but the business model is the same, and the bundle potential is obvious. Oh, and you can stream video games now as well.
Second, Netflix still runs on AWS; switching to Azure would obviously be a mammoth undertaking, but there is a long-term potential for a Microsoft-owned Netflix to capture additional margin on infrastructure.
Third, Microsoft has those aforementioned deep pocketbooks. For obvious reasons Netflix emphasizes the positive aspects of being a pure-play streaming service, particularly relative to its network-owned competitors, but it also has to compete with Amazon Prime Video and Apple TV, which can spend lavishly with an eye towards their broader businesses, even if said spending doesn’t necessarily make sense with their subscriber numbers.
This last bit is the big one: Microsoft has been looking for a way back into the consumer space for a long time — beyond Xbox, that is. Netflix provides exactly that, and perfectly complements Xbox to boot.
All that said, I usually don’t speculate on potential acquisitions for a reason: they almost never happen, and in this case, the most obvious reason for Netflix to care about Microsoft being agnostic is because it values its independence, not potential antitrust issues; similarly, the most obvious explanation for building with Microsoft is to have outsized input on what is built, not because it is worried about becoming enmeshed with an advertising network from a company that is less likely to be an acquirer. It’s a nice bit of optionality, though.”
