Yesterday Netflix’s Chief Operating Officer and Chief Product Officer Greg Peters announced that it had selected Microsoft as our global advertising technology and sales partner. The fact that it was Peters making the announcement reminded me of something I wrote last July [NOTE: on the PARQOR Substack archive] when former Oculus and EA game development leader Mike Verdu was hired as vice president of game development, reporting to Peters:
What makes this move so interesting now is that with gaming to appear “alongside current fare as a new programming genre”, Peters and Verdu are going to have influence over content in the Netflix interface. To date, that has been dictated only by both Co-CEOs Reed Hastings and Ted Sarandos.
The surprising announcement emerged in the context of Netflix’s iterative progress into gaming, and of Microsoft having the best-selling game console worldwide and being one of the world’s largest (and best) gaming publishers [NOTE: and is soon to be larger when (or if) its acquisition of Activision Blizzard is finalized].
In this light, the partnership is about both monetizing programming with advertising and gaming. It implies Peters and his team now have more influence over Netflix's interface than Hastings and Sarandos (even if the new line item for advertising will launch at levels "flat-out tiny" for "streaming-video land", as The Information's Jessica Lessin estimated).
The Microsoft partnership has the optics of an incremental move into advertising. But, it has enormous implications not just for the future of Netflix's streaming business, but whether and/or how Sarandos and Hastings loosen their control over Netflix.
Here’s why.
Greg Peters taking the reins?
I don’t think it’s tin-foil-hat-thinking to ask why it was COO Greg Peters’ name on the press release and not that of Co-CEO Reed Hastings. Notably, it was Hastings who made “what appeared to be an unscripted move” to announce he was now in favor of pursuing ad-supported Netflix solution after years of saying Netflix would never pursue it. Perhaps most notably, he said this right after Peters had told investors, “We generally plan to continue doing what we’ve been doing.”.
Is the Microsoft announcement from Peters a signal from Sarandos and Hastings that they are loosening their control after the bungled communication on the earnings call, and the subsequent 50%+ collapse in share price?
It is important to recall my essay last month arguing that both Hastings and Sarandos have failed Netflix’s Keeper Test: if a team member was leaving for a similar role at another company, would the manager try to keep them?
I concluded, “If the evolution into a next-generation Disney is a necessary objective to accomplish in order to create marginal value for consumers and marginal revenues for shareholders, then Hastings and Sarandos have proven to be the wrong management team for accomplishing that objective.”
So, one way to read the tea leaves of the Microsoft partnerships is that Hastings and Sarandos see the future of Netflix as having less in common with Disney and more in common with Microsoft’s gaming strategy. Having failed in the Disney objective, and seeing more promise in Microsoft objectives, Hastings and Sarandos have begun the process of handing over control of Netflix to Peters, the architect of Netflix's emerging gaming business.
Next week's earnings call will be an important listen on this point.
Gaming & Not Disney
Both the Microsoft and Netflix announcements seem to go out of their respective ways not to mention gaming, probably to keep the messaging tight around advertising. Netflix's announcement was worded to leave things a little more open-ended: "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.”
On this point it is notable that The Hollywood Reporter's Alex Weprin reported, “there were a pair of things Netflix was looking for that may have given Microsoft an edge in the conversation, according to someone familiar with the talks that the streaming service had held in recent months: Privacy, and a willingness to iterate quickly.” That reads like a partnership focused more on broader product development than advertising, alone.
As I wrote in Why The Quantity vs. Quality Criticism Misses Netflix's Deeper, More Structural Issues, "If I were to rephrase Netflix’s business logic of fishing with hand grenades more favorably, I would describe Netflix as a software company that funds culture to feed its distribution software." Based on this point, we could assume this is a win-win partnership focused on "feeding" both Netflix's and Microsoft's distribution software with more gaming, TV series and movies, and better monetizing that content with Microsoft advertising software.
Xandr Emerges Out of AT&T Purgatory
Xandr is a fascinating piece of the puzzle here.
AT&T launched it in 2018 after acquiring programmatic ad platform AppNexus and audience-based sales platform Clypd. AT&T sold it to Microsoft last December after neither AT&T nor WarnerMedia could figure out how to build a Connected TV ad business with the technology. The deal closed last month, and less than a one month later Xandr is the foundation of Netflix’s ad future.
Notably, HBO Max management opted to launch HBO Max with Ads on a less sophisticated ad platform inherited from Turner and not on Xandr (I wrote about this last May in HBO Max's AVOD, DotDash, and Unlocking Value Through Fewer Ads).
Neither press release mentions Xandr. The Wall Street Journal reported why this may be:
Microsoft has long been a player in the online-advertising business, due in part to its search engine, Bing. It was the Xandr purchase that gave Microsoft the technology necessary to become a contender for the Netflix deal, people familiar with the matter said.
Meaning, there is little reason to play up Xandr given all the other online advertising assets Microsoft has in place.
With this deal, Netflix now has a strong say, if not equal to Microsoft, on how the platform will evolve. Xandr seems fundamental to that, and it officially has been within Microsoft for less than 30 days. If folks in the advertising industry are scratching their heads over the deal, as Digiday reported, Xandr is a big reason why.
Scott Schiller - Global Chief Commercial Officer, EMX/Big Village and Adjunct Professor Stern/NYU - suggested to me in a conversation yesterday that the partnership could product a one-stop shop for advertising inventory on Netflix, the Xbox platform, and existing connected TV via Xandr. I think that's a helpful way to think about potential outcomes for the deal, and one that reflects just how fundamental gaming may be to the Netflix-Microsoft partnership.