The news: Microsoft’s ad business is enjoying newfound attention after last week’s announcement that Netflix chose the tech giant as its partner for its upcoming ad-supported subscription tier.

Let’s try that again: Microsoft has a history with digital advertising that stems back to its 2007 acquisition of digital ad firm aQuantive Inc., but its early attempts at ad dominance paled in comparison to its competitors.

• AQuantive ultimately turned out to be a failed endeavor for Microsoft, which turned its attention elsewhere and left a gap for competitors to swoop in and establish a decades-long hold on the industry.
• Today, Microsoft is the fourth largest US ad seller and will generate $9.27 billion in digital ad revenue this year. But that’s a distant, distant fourth behind Amazon ($31.43 billion), Meta ($55.54 billion), and Google ($70.15 billion).
• But in the last year, Microsoft has developed a renewed interest in the $602.25 billion global digital advertising market. In January, Microsoft acquired adtech firm Xandr from AT&T, which became the foundation of its new advertising business and paved the way for its partnership with Netflix.
• Microsoft also has few conflicts of interest with Netflix—especially compared with Disney’s chosen streaming ad partner The Trade Desk, which works with video competitors like Fox, Major League Baseball, and even competing advertising companies like Nielsen.

Filling the gaps: With both an established history in tech and advertising acquisitions under its belt, Microsoft has the foundations to build a strong ad business. What it lacked until now was an in-demand, scalable inventory of content to apply it to.

• Before the Netflix partnership, one focal point of Microsoft’s advertising efforts was search. In Q1 2022, its search ad revenues (where it again lags far behind Google and Amazon) grew 23% to $544 million. We expect that the search advertising market will continue to grow healthily throughout the year, even as the industry faces a period of anxiety.
• Video games were another focal point. Microsoft plans to launch an ad platform for free-to-play games on Xbox consoles and PCs, and could also introduce ads to its cloud gaming service, which has been used by 10 million consumers.
• Ads could also come to games subscription service Game Pass, which has 25 million subscribers as of January 2022 and will likely see its catalog bolstered by exclusive, day-one releases from Microsoft’s new major subsidiaries like Activision Blizzard and ZeniMax.

But games take much longer in the oven than most TV shows do, and Game Pass hasn’t seen a major, “Triple-A” release in quite some time. Netflix, meanwhile, remains the most widely used subscription-based streaming service and is planning to launch its ad platform by the end of the year.

The big takeaway: Committed to fighting for a larger share of the ever-growing digital advertising market, Microsoft with its Netflix partnership gains a testing ground and broad base of content to apply its technology to.

• Microsoft can rely on Netflix’s user experience expertise to focus on further developing its ad stack, and then apply those UX lessons to its in-game advertising efforts to help smooth things over with anxious consumers.