Microsoft Barely Discusses Netflix Deal, Says Azure Is Its Biggest Growth Potential

Just two weeks after its selection as Netflix’s ad sales partner of choice surprised the entire media and ad tech industry, Microsoft closed out its 2022 fiscal year on Tuesday.

The partnership single-handedly set the stage for Netflix’s earnings report last week.

But a deal that would have dominated the discussion of virtually any other public ad tech company hardly came up in Microsoft’s quarterly report at all.

(Seriously. Microsoft’s Outlook, Bing and Teams services were all thoroughly discussed before Netflix even came up.)

Microsoft closed the fiscal year with $198 billion in revenue (18% year-over-year growth), including $52 billion in revenue for Q4, which represents a 12% YOY increase. And it attributes a good chunk of this growth to its cloud business.

LinkedIn also made a record contribution to Microsoft’s current ad revenue, with LinkedIn Marketing Solutions bringing in $5 billion in annual revenue for the first time since its launch in 2005, Microsoft CEO Satya Nadella said on Tuesday’s investor conference call.

What about Netflix?

“Just two weeks ago, Netflix chose us as its exclusive technology and sales partner for its first ad-supported subscription offering,” Nadella said halfway through the earnings conference. “This is a validation of the differentiated value we provide to any publisher looking for a flexible partner willing to build and innovate with them.”

Other than confirming Netflix’s motives for the partnership, Microsoft didn’t go deep into the deal – it had other growth drivers to discuss beyond its fancy, one-off partnership.

Headwinds

Plus, Microsoft’s stock is in flux, just like the state of its brand-new relationship with Netflix.

Shares dropped steadily throughout the day leading up to Tuesday’s earnings report, then perked up a few percent in after-hours trading.

Despite the street cred it scored as Netflix’s new best friend, there are still headwinds.

Gaming, for one, isn’t doing so hot. Microsoft lost $259 million in gaming for the quarter, most of which it chalks up to Xbox. All business revenue associated with Xbox consoles – including content and service monetization – fell 6% for the quarter. (Makes more sense why gaming had almost nothing to do with Microsoft’s new relationship with Netflix.)

Part of it’s the nature of the OEM beast – Microsoft also reported a 2% loss in Windows PC hardware. Overall, Microsoft’s market position as an OEM provider, especially in the midst of a recession-driven supply-chain shortage, likely contributed to Microsoft’s reported 8% increase in operational costs for the quarter.

In the clouds

Some in ad tech have speculated that Microsoft successfully wooed Netflix because it had an eye on a bigger prize: Netflix’s cloud business is held by Amazon Web Services.Making it rain.

Microsoft as a whole touts its cloud business as its biggest growth driver.

Microsoft Cloud grew 28% year over year to surpass $25 billion in quarterly revenue for the first time.

The growth in Microsoft’s cloud business, which also includes other products like Dynamics 365 and Microsoft Office, was mainly driven by Microsoft Azure. The tech giant’s best-performing cloud service was up 40% in revenue this quarter alone, and it is “winning record numbers of $100 million and $1 billion deals” from organizations, Nadella said.

Often, these organizations are triple-dipping: “More than 65% of Fortune 1000 businesses use three or more of our data solutions,” Nadella added.

Big-name brands and agencies, such as American Airlines, Unilever and General Motors, for example, have recently started migrating their data storage and IT workflows to Azure.

Microsoft also partnered with Oracle just last week to give Azure clients access to Oracle data, too. “We’re the only public cloud service with simplified, direct access to Oracle databases running in the Oracle cloud,” Nadella said.

Microsoft expects Azure to remain its key growth driver – and Netflix just another client win.

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