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July 22, 2022updated 01 Aug 2022 4:21am

Netflix is entering the AVOD space with Microsoft as its adtech partner

Slowing revenue growth and a declining subscriber base have forced Netflix to explore an ad-supported subscription tier. It has chosen Microsoft as its global adtech and sales partner. However, the company must invest more in emerging economies, especially Asia-Pacific. This will help it gain a significant share in the advertising-based video-on-demand (AVOD) space.

Netflix lost around 1.2 million subscribers between January and June 2022. Reportedly, the company is losing users who have subscribed to its services for more than three years. Also, price hikes in March 2022 prompted users to switch to cheaper alternatives such as Disney+, Apple TV+, and NBC’s Peacock.

Netflix faces subscriber loss and revenue slowdown

Netflix’s revenue has been slowing due to a range of factors. These include intense competition and its initiatives to reduce password sharing. As a result, Netflix recorded revenue growth of just 8.6% year-on-year in Q2 2022 compared to 19.4% in Q2 2021.

Macroeconomic factors such as the ongoing economic slowdown, increasing inflation, and the Ukraine-Russia conflict are also adversely impacting Netflix’s subscriber growth. In addition, many users share passwords and do not pay for the service. To address this, Netflix plans to charge users $2.99 for sharing accounts in several countries in Central and South America from August 2022.

However, it also understands that the increase in subscription costs will potentially steer some consumers away. In response, Netflix is working on a cheaper ad-supported tier to attract users and regain its edge over competitors.

Microsoft as an adtech partner

Netflix’s selection of Microsoft for its ad-supported tier (due to launch in early 2023) attracted media attention. That said, Microsoft could be an ideal partner for Netflix as it does not own a competitive streaming service. Other adtech giants – such as Google, FreeWheel, and Comcast – all own streaming services that would have directly contested Netflix for ads.

In addition, Microsoft boasts 129 million unique users in the US. This connects advertisers to 51 million searchers that Google simply cannot reach. It also claims that 37.6% of US desktop searches are powered by Microsoft Search Network, as well as 8.2 billion monthly searches globally. Netflix is keen to reach the maximum audience and Microsoft’s unique users could prove beneficial.

Furthermore, Microsoft has strengthened its adtech muscles with the recent acquisition of Xandr from AT&T. Xandr’s demand-side platform and supply-side platform will help Netflix monetize its services through advanced tools to manage demand from all possible ad channels.

Microsoft is a dominant player in gaming, an area that Netflix is increasingly diversifying into. Thanks to this partnership with Microsoft, in the long run, Netflix could strengthen its position in the gaming space across the Xbox network. In fact, many gamers already watch Netflix on their Xbox. Moreover, the crossover with gaming will help Netflix attract a young audience to its service, both in the US and Europe, as well as in Asia-Pacific. 

Regional content strategy is vital for Netflix to win the AVOD race

AVOD is a popular revenue model in the Asia-Pacific region, where local streaming services heavily focus on regional content. Global services such as Amazon Prime Video and Disney+ regularly boost regional content in countries like India to attract users.

In the price-sensitive Asian markets, consumers tend to supplement paid subscriptions with free AVOD services to keep down costs. AVOD subscriptions can be converted into premium accounts when customers use the service extensively. Therefore, Netflix must focus on the Asia-Pacific region, which accounts for 15% of its subscribers and will be a potentially lucrative market for future growth.

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