Morning War & Peaceniks!! Welcome to our BREAKING NEWS Q&A edition!
Yesterday, I made a bold prediction about the agendas behind the Netflix/Microsoft Ad deal. Since then I’ve gotten a LOT of questions about it. Below are some of those questions with answers.
Why did Netflix choose Microsoft over Google & Roku Inc.?
A: #Netflix was never going with either of those two. They are DIRECT competitors. Plus, Netflix desperately needs cash. While #Microsoft brings the ad tech to the yard (via Xandr); Netflix still needs to pay their studio partners tens of billions of dollars in fees for the RIGHT to insert ads in their content.
AND, with subscriptions falling, fast, Netflix’s one-year streak of positive free cash flow is coming to an end; and their debt is mounting. Roku likely came nowhere near the minimum guarantee Microsoft offered. Google may have made an MG offer, but again, they are a direct competitor. Microsoft, today, is not.
PLUS: A gaming/TV bundle.
Does Microsoft really want to be in the TV #advertising biz long term? They abandoned TV a decade ago.
A: This is the first step to buying Netflix. They’ll wait until the Activision deal closes, then announce this one.
Microsoft’s emerging GamePass & Console-less XBox gaming platforms, combined with the largest TV sub product on earth… that’s a damn fine sandwich. This takes Netflix’s gaming strategy and makes it, y’know, plausible ‘n’ stuff.
So when will ads start on Netflix, and what will they be like?
A: This allows them to hit the 4Q deadline. BUT with a VERY late start; ad rights for licensed content UNlikely to be set by 4Q; and zero ad breaks in place right now…
They will likely start with unskippable pre-and-post-roll ads, exclusively on their wholly-owned content. It’s doubtful they will have a fully functioning ad model with breaks in place until the end of 1Q.
What’s next in this 🐐 rodeo?
A: Netflix gets the stock bump they long for (+ 5% yesterday). On their earnings call, they’ll announce specific plans for launching ads, including pricing for the ad-tier. They’ll also announce that they lost net 3-4 million subs in 2Q; higher than they projected.
Their stock will fall again.
Look for a bundled subscription of GamePass + Netflix as soon as this fall. Likely also announced on their earnings call. Netflix mentioned that Microsoft was going to “aid in customer acquisition.” This is that.
Look for Netflix to move a substantial amount of their backend off Amazon Web Services (AWS) and onto Microsoft’s Azure. I am 99.967% sure this was part of the deal.
Look for Microsoft to funnel all gaming IP adaptations for TV and film through Netflix.
Depending on when Activision closes, I believe Microsoft and Netflix will consummate a marriage some time next year.
Do you know these things for certain?
A: I have zero inside information. There are no certainties. But IMHO, most of what’s above is 90-100% likely: Especially the cash upfront; the upcoming bundle deals; & the cloud moves.
The acquisition? Look, I’ve been wrong many times. I’ve also been right many times. That said: This one feels pretty, pretty, preeeeetty good.
If YOU have any questions or thoughts about this deal, my predictions or anything else - please add them below!
Enjoy The Weekend!
ESHAP
totally agree on the Azure migration from AWS being a critical tenant of the deal ...
I love your logic Evan. It's a beautiful marriage, in that the CEOs of both organisations are so heavily focused on value creation / customer delight, (rather than simply segment leverage). They both really understand consumers, (Netflix arguably better than anyone), and the verticals complementarity is perfect.....so I don't doubt that they are thinking along the lines you describe.
Whether the beautiful plan will work is another thing though. Neither company has any chops in the ad space. They are up against behemoths that have completely reinvented the industry and have decades of hard-won innovations and learnings. From my corporate experience, advertising requires a closed (or "unfair" if you prefer) mindset which has never been part of the DNA of Netflix and is no longer in the DNA of Microsoft since Nadella reinvented it.
In short, I think you're right about the plan, and I would love to see their plan work. But I think this deal might end up looking like the Nokia acquisition