Netflix talks with Google about ads as Sarandos is set to address Cannes this week

CANNES, France – As the world’s biggest advertising conference gets underway here this week, all eyes will be on Netflix for clues on how the streaming giant plans to break from its ad-free business model to offer a cheaper subscription for the first time.

Netflix Co-CEO Ted Sarandos is scheduled to cap off a week of panels with a talk on Thursday at the Cannes Lions festival, which is returning after a two-year hiatus during the pandemic and has named Sarandos its “Entertainment Person of the Year.” The panel comes amid expectations that demand will grow for cheaper, ad-supported streaming subscriptions as inflation pressures people to cut costs.

Attendees will also be looking for clues on who Netflix will partner with for its foray into the advertising world, which it plans to ramp up quickly to start selling ads as early as the fourth quarter. Sources told CNBC that Netflix has met with Google, which makes most of its revenue from ads. It has also met with Comcast/NBCUniversal and with Roku to discuss ad-sales partnerships, as previously reported by The Information. NBC Universal and Google declined to comment.

“We are still in the early days of deciding how to launch a lower priced, ad-supported option and no decisions have been made. So this is all just speculation at this point,” Netflix said in a statement.

The company is looking to secure a marketing partners in the next two to three months and quickly hire a senior executive and assemble a team to manage the relationship with its partners, according to a source who requested anonymity.

Making the ad dollars flowing into streaming entertainment is top of mind for many festival attendees. In April, Netflix said it would offer a cheaper ad-supported option after it reported losing subscribers for the first time with competition intensifying in the streaming space. Sarandos’ talk at Cannes was scheduled before Netflix announced its coming move.

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Disney+ is also preparing to launch an ad-supported service later this year. Paramount+ has an ad-supported tier and free ad-supported Pluto. The newly merged Discovery Warner Brothers with a combination of its streaming services expected, and Roku, with its growing ad business. CNBC’s parent company NBC Universal also already offers a cheaper ad-supported subscription for its Peacock service.

The company will need to weigh the advantages and disadvantages of each of the potential partners. Google, for example, has the advantage of being the world’s largest ad giant, but has less experience with entertainment content despite its recent push into the space.

Comcast does not have the global reach as Google, but its NBC Universal unit is a leader in selling ads for that premium TV content. The cable giant’s Freewheel ad tech platform is also used by many media companies and could offer Netflix its programmatic ad-buying tools. Plus, NBC Universal just expanded partnership with Apple to sell its ads, establishing precedent for it partnering to sell ads for premium content at scale.

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Another option is Roku, a longtime partner of Netflix that was previously spun off from the streaming giant. As the largest TV operating system in the U.S., Roku has the advantage of its scale in the U.S., Canada and Mexico and its insight into ad-supported subscription trends.

The potential partnerships would continue a long history of rivals teaming up in the media industry. As a content distributor and an entertainment company, for example, Comcast regularly strikes distribution deals with rivals to its NBC Universal. And Roku partners with streaming apps while offering its own free ad-supported alternative in the Roku Channel.

The stakes are high for Netflix. Its stock is down nearly 50% since it warned of its contracting subscriber base. Offering a cheaper ad-supported service is one way to stop the cancellations from continuing as people look to trim costs, but Netflix has to ensure the advertising experience won’t turn off viewers.

Disclosure: CNBC is owned by Comcast’s NBCUniversal.