• by Wayne Friedman , Staff Writer, July 31, 2023

Last November, Netflix jumped at the chance to partner with a big name -- Microsoft, which has been looking to make a big leap into premium video advertising. 

But did it trip up from that high step? 

It is now unhappy with Microsoft because it has not sold enough advertising inventory, and it has to pay Microsoft a “revenue” guarantee for the work in selling that ad time, according to The Wall Street Journal.

At press time, Netflix representative had not responded to inquiries from TV Watch.

Prior to its “Basic With Ads” option launch last fall, Netflix had no experience in selling advertising time -- starting and building its business exclusively as a subscription-only service, and getting to an eye-opening 73 million plus users. 

This came while desperate TV advertisers for years had been searching for much needed scale -- eyeing the prospect of the strong new premium video platform moving to an advertising model.

And they were willing to pay big for it. How much? When Netflix started up their ad-supported option, TV analysts and observers were shocked to learn Microsoft platform coupled with Netflix would be charging a big $65 CPM (cost per thousand viewers) for its ad inventory.

The starting point may have been lower than that -- around $55 CPM. And more recently, media-agency executives say it was around $35 to $45 -- this according to The Wall Street Journal. 

If that wasn’t enough of a problem for Netflix, early on, there was under-delivery of those media plans on the service. Right out of the gate, Netflix had a sudden ‘makegoods’ issue. 

The good news here was that it wasn’t exactly a “cash back” issue, according to Maureen Bosetti, chief partnership officer of Initiative, at the time in speaking to MediaPost: “They are not just making you spend all the money.”

All this is because Netflix was still in the process of re-configuring content deals to allow for TV commercials in those shows. In addition, Netflix also believed it would have more initial subscribers.

Typically, TV network makegoods, or offering cash back to advertisers, come from undelivered on ratings point as measured by Nielsen -- in other over estimating the performance of TV shows.

Netflix issues were just not about initial advertising inventory. It was also a demand issue.

Speaking to TV Watch, Jason Kanefsky, veteran media agency executive formerly of Havas Media, says: “Last year, the ‘shiny new object’ became available with a limited inventory model with more clients that wanted to be ‘first and innovative’.”

This is all happened as the premium TV-video advertising marketplace continues to weaken -- affecting everyone from YouTube and Roku to legacy TV companies, NBCUniversal, Paramount Global, Disney-ABC Television, and AMC Networks.

Now, more than eight months into this work, Netflix wants to make a noticeable change: Broadening efforts beyond Microsoft, looking to add more veteran video advertising selling companies to help out.

This might be good for all parties concerned.

Kanefsky again:  

“Now that the market is stabilizing, price will come down as demand softens and supply increases and Netflix should have control of their sales force. Microsoft has dozens of projects and a sales model that most likely carries contractual risk is probably not in their top ten things to do list either.”

Wonder where this goes from here, what with just 1.5 million users taking Netflix's “Basic With Ads” $6.99 a month low cost plan?  Industry experts expect big growth -- which will result in higher average revenue per user (ARPU).  

The stock market loves those words. 

But will the love continue for legacy TV advertisers -- for the long term -- if their industry-wide scale issues are not resolved, and if big streaming provider's Netflix's ad-supported subscribers do not quickly move up into tens of millions of subscribers soon?