“Microsoft has the proven ability to support all our needs as we together build a new ad supported offering. 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,” Netflix COO Greg Peters said in a statement.
The “Stranger Things” streamer, which has been struggling to retain and add subscribers, announced in April that it was planning on rolling out an ad-supported tier after years of resisting the move.
Co-CEO Reed Hastings has long been opposed to adding commercials or other promotions to the platform but said during the company’s prerecorded earnings conference call that it “makes a lot of sense” to offer customers a cheaper option.
Read more: Netflix announces ‘Stranger Things’ spinoff
The offering has a lot of profit potential for Netflix as it works to sign up more users. In an effort to lure more subscribers, Netflix has increased its content spend, particularly on originals. To pay for it, the company hiked prices of its service. Netflix said those price changes are helping to bolster revenue but were partially responsible for a loss of 600,000 subscribers in the U.S. and Canada during the most recent quarter.
Unlike Google, which owns YouTube, and Comcast, which owns NBCUniversal’s Peacock, Microsoft doesn’t operate a competing streaming service to Netflix.
Peters said the ad-efforts are still in the “very early days,” with “much to work through.”
Netflix is slated to release quarterly earnings Tuesday. It had previously warned it could lose 2 million subscribers during the second quarter. Netflix shares have dropped more than 70% year-to-date. The company’s stock was up more than 1.5% in Wednesday afternoon trading on an otherwise down day for the markets, after June inflation data came in higher than expected.
The new business is a boon for Microsoft’s advertising division, which contributes 6% of the software company’s total revenue.
The Bing search engine, where Microsoft picks up revenue by showing ads in search results, is not as popular as Alphabet’s Google, and in 2015 Microsoft exited the display-ad market as Aol took on that unit.
—CNBC’s Sarah Whitten, Jordan Novet and Alex Sherman contributed to this report.