Microsoft (NASDAQ: MSFT) was the surprise winner among those vying to handle netflixit is (NASDAQ:NFLX) future advertising activity. The streaming company plans to launch an ad-supported tier of its service soon. The SVOD leader had been in talks with companies more associated with digital video advertising like Alphabetit is (NASDAQ:GOOG) (NASDAQ:GOOGL) Google and Comcastit is (NASDAQ: CMCSA) NBCUniversal, which operates Freewheel.

Although Microsoft’s choice has some advantages for Netflix, it could give Microsoft a more significant boost.

Start a Digital Video Advertising Business

One of the big reasons why Netflix probably went with Microsoft is that there aren’t any big conflicts of interest. Unlike Google and Comcast, which have their own video streaming businesses, Microsoft does not operate a direct competitor to Netflix.

Importantly, it gives Netflix and Microsoft a cleaner starting point to build a digital video advertising business. In a blog post announcing the deal, Netflix COO Greg Peters said, “Microsoft has provided the flexibility to innovate over time, both on the technology and sales side.”

Microsoft will build on its existing advertising business, anchored by its Bing search engine and MSN portal. The addition of Xandr, which he took over from AT&T recently, provides important advertising technology for connected TV that will deliver video ads and link targeting and measurement data across platforms.

Microsoft already operates a major advertising business, generating $10 billion in revenue last year. But that pales in comparison to giants like Google, which earned $209 billion in ad revenue in 2021. And while Google’s YouTube generated more than $28 billion last year on top of other Google when it comes to streaming and connected TV, Microsoft doesn’t generate much video.

In other words, Microsoft has a pretty big ad business with a lot of established technologies, but it should be more willing to work closely with Netflix to develop new technologies and services around video. This can benefit both Microsoft and Netflix.

With Netflix, Microsoft can build tech and sales teams with a guaranteed customer — and a big customer to boot. This is Google’s advantage in building its video ad services because all of the demand is built into YouTube. Likewise, Comcast is able to support Freewheel because it won’t lose NBCUniversal as a customer.

As Microsoft develops technology and sales practices to support Netflix, it could become a more significant force in the rapidly growing digital video advertising market. This makes the deal much more valuable than just the potential income it could generate directly through Netflix.

A win-win for Microsoft and Netflix

Netflix probably got a pretty good deal from Microsoft compared to what more established rivals might be offering. In exchange, Netflix will help establish Microsoft as a major player in connected TV advertising. The streaming service could generate more than $1 billion in ad sales worldwide in just a few years, according to an estimate by analysts at MoffettNathanson.

That said, investors in either company shouldn’t expect an immediate gain.

Netflix already has 220 million subscribers worldwide. As such, it will take some time before the ad-supported tier becomes a significant contributor to Netflix’s subscriber base. The company might see some customers migrate from ad-free tiers to the ad-supported tier, and it might be able to improve churn by giving existing customers a cheaper option to stay. Still, it will take some time for Netflix to roll out the ad service globally, understand its marketing message, and drive subscriber growth with the new offering.

But as Netflix and Microsoft reiterate their practices over the next few years, the company could become an important part of both companies. Netflix could see its subscription prices improve as Microsoft expands its advertising business in a growing market.

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Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Adam Levy has positions in Alphabet (C shares), Microsoft and Netflix. The Motley Fool has positions and recommends Alphabet (A shares), Alphabet (C shares), Microsoft and Netflix. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.