The partnership between Netflix and Microsoft has left investors cold – here’s why

Wall Street greeted the news that Netflix will partner with Microsoft, for a planned cheaper subscription package featuring adverts, with a big shrug.

The shares, which have lost two-thirds of their value during the last six months, drifted downwards after the market opened, an uncomfortably regular occurrence for the company these days.

Small wonder. Everyone’s adopting the ad-linked option.

Warner’s HBO Max, NBCUniversal’s Peacock, and Paramount Plus already offer the option as part of their packages. Disney Plus will join them later this year in the US and early next year internationally. Disney has some experience of the ad-based model through its majority ownership of Hulu, which itself offers an ad-supported subscription package stateside.

Netflix, the one-time pioneer, is playing catch up, perhaps because this is so contrary to its preferred model. Ad-free TV and films were what built the business. Customers paid up to get away from them.

But the company has been reeling since it delivered a nasty shock to the market in April – admitting to losing 203,000 subscribers in the first three months of the year. Worse still was the forecast of 2 million more deserters in the second quarter. We will find out how accurate that grim prediction was when the company updates the market next week. A pledge to crackdown on shared accounts was greeted with derision in a number of quarters at the time of the Q1 announcement.

It is all too clear that increasing prices with inflation cutting deep into household budgets wasn’t the company’s smartest move. People are getting shot of luxury purchases and that’s what Netflix is.

The ad plan? Sure, it may tempt some. Having irritating commercials suddenly arrive at inopportune moments could diminish the service. If you want to get a feel for what it’s like, try watching a film on Amazon’s Freevee service, available without any sort of subscription. On the other hand, older viewers grew up with adverts and younger viewers are accustomed to that sort of thing with YouTube.

But this will not cure what ails the group.

It still has some USPs; things it does better than the others. Its internationalism is something none of its rivals can match. Squid Game, the South Korean smash-hit drama, was a significant contributor to the group’s Emmy nomination tally, delivering 14 of a total of 105 nods. Although that was still down on last year’s 129 and a long way short of HBO Max’s barnstorming tally of 140.

But there is too much ordinary on the platform and Stranger Things (another big contributor with 13 nominations) has only one season left before the curtain falls. A replacement would be nice. Sometimes less is more, something Netflix seems to have recognised when it comes to films.

What won’t change, even with a juiced-up Emmy-slaughtering slate, is the fact that savvy consumers have worked out that they can chop and change, binging on the best of each service before dumping them in favour of another and repeating the cycle.

One does wonder whether it’s time to offer a cut-price deal not for accepting ads but for agreeing to a longer-term contract. This too would be a departure from Netflix’s preferred model, but anything’s worth trying.

However, whatever the group does, or its rivals do, the hard fact is that there are too many of them competing for too few streaming dollars, euros, pounds, yen.

They aren’t all going to survive this. Yes, this is still a growing industry – but a clearout is looming and it is looking closer by the day. The uncomfortable truth for Netflix is that it is no longer impossible to see it among the casualties. Remember, things don’t always end well for corporate pioneers.

Netflix bosses built a disruptor, which is now being disrupted. The late-to-the-party ad plan is another sign of that.