Netflix to launch ad-supported tier with Microsoft in 2023

Netflix lost nearly another million subscribers during the second quarter of 2022, but it hopes the launch of a new ad-supported streaming tier in partnership with Microsoft early next year can boost growth.

The new budget service will launch early in 2023, starting in a select number of regions where advertising spend is strongest. This will join the existing ad-free basic tier, as well as paid standard and premium subscription plans.

Netflix chief operating officer Greg Peters told analysts during the company's earnings call yesterday that “all of the ads that are served on our ad-supported offering will come through Microsoft. So that's an exclusive arrangement with them.”

Forrester research director Mike Proulx sees this reversal over hosting ads on its platform as being largely driven by the greater competition in the market, as Amazon Prime Video, Disney+ and a host of new streaming platforms continue to put pressure on Netflix.

“The competition has forced Netflix to reverse its longtime stance against ads. When the company launches its ad-supported tier in early 2023, it will provide cost relief to its ad-tolerant users who are feeling the price pinch while also attracting new, price-conscious users who have been reluctant to pay a premium price point,” he said.

Subscriber losses less than expected

Netflix still lost 970,000 subscribers during the quarter, which was lower than the two million losses the streamer said it expected last quarter. It now has 221 million subscribers. The business also reported revenues of $8 billion for the quarter, up nine per cent year-on-year, at a profit of $1.6 billion.

Co-CEOs Reed Hastings and Ted Sarandos both highlighted the latest season of hit TV show Stranger Things as a key contributing factor towards stemming subscriber losses, during a call with analysts. Still, Hastings admitted it was “tough in some ways, losing one million [subscribers] and calling [that] a success.”

Why did Netflix choose Microsoft?

Microsoft’s “technical capacity” was identified as a key factor behind their selection as Netflix’s advertising technology partner over alternative platforms such as Google Cloud or Roku.

“This is an opportunity to work together to collaborate and to evolve both the technical capacity and also what the experience is and what the go-to-market approach is,” Peters said.

Peters also sought to clarify that this deal with Microsoft won’t impact Netflix’s long-standing relationship with Amazon Web Services (AWS).

“We haven't changed our focus on AWS as essentially our cloud infrastructure partner,” he said. “This doesn't foreclose on anything like that. But you should think about this being about a great ads partnership deal at the end of the day.”