The Coming Wave of Bundling
The next wave of bundling is fast approaching as the bundling-unbundling cycle accelerates in the digital age
“There are only two ways to make money in business: you can unbundle, or you can bundle.” — Jim Barksdale
Bundling and unbundling are two fundamental business strategies as old as time. Companies switch between packaging their products and services as a combo deal or breaking them apart for à la carte purchases, all in the name of better customer experience and, of course, maximizing profits. It operates cyclically, as consumer desires constantly swing between more optionality (unbundling) and more convenience and lower prices (bundling). It has never been a better time to play the (un)bundling game than in the digital age, as it is inherently easier to bundle and unbundle digital products and services than it was with physical ones.
The History of Bundling and Unbundling
So far in the digital age, we have already witnessed three waves of bundling and unbundling. each triggered by a major technology breakthrough: PC, internet, and mobile. Microsoft bundled a whole suite of productivity tools and other software into its operating system, and sold the world on the promise of personal computing. Then the internet came along and democratized the distribution of information and software in the form of millions of open webpages and downloadable software. But that unbundling process produced new frictions, as information and services on fragmented webpages were (and still are) hard to find and access. That friction gave birth to the likes of Google, Facebook, and Amazon, all powerful aggregators that effectively bundled together webpages, digital identities, and online vendors, respectively.
The arrival of smartphone changed the game once again. The smartphone itself is a bundle of mobile phone, web browser, camera, and more, but when Apple introduced the App Store in 2008, it gave rise to the app economy we have today, where over 2 million iOS apps and 3.8 million Android apps have effectively unbundled many add-on functionalities of the mobile phone. Due to the limitation of screen size, battery life, and computing power, especially in the early days of smartphone, mobile naturally calls for an unbundling where lightweight, compartmentalized apps are preferred over cumbersome, all-in-one software.
Similarly, the music industry also underwent multiple waves of bundling and unbundling throughout the years. Physical copies of albums, in their various forms from vinyl records to cassettes to CDs, proved to be a great way to sell music consumers on a bundle of songs — all you needed was one or two hit singles to get people to pay for ten or more tracks. Then the iTunes store came along and made purchasing individual tracks possible, and before long album sales began to drop at an accelerating rate. By 2016, global consumer music market revenue has dropped from the high of $24 billion in 1999 to just $13 billion, according to the IFPI, marking a 63% drop when adjusted for inflation.
Luckily for the music industry, the ubiquitous connectivity that came with the mobile era also popularized music streaming, and now streaming services like Spotify and Apple Music offer the ultimate music bundle. Now, subscribers pay for on-demand access to a bundle of almost all music ever recorded for less than the cost of one album per month, and the music industry benefits greatly from all the loyalties that streaming brought to the back catalog, as well as recouping some of the revenue lost to piracy. More importantly, the streaming bundle transformed the music business from a risky, hit-driven model to a far more stable one of recurring revenue. Now, streaming services account for over 43% of all recorded music sales revenue. Altogether, the shift from bundling (physical albums) to unbundling (downloads) and back to bundling (streaming) again in the music industry is clear to see.
Digging further back into the history of modern media, one could argue that the invention of broadcast TV and its subsequent popularization marked the first time media has become bundled in the modern era. TV brought together news, entertainment, and all sorts of other content within one neat box in the living room. For a while, in the beginning there were just three national broadcast channels, then came the explosion of cable channels in the 1980s, which rapidly expanded the landscape of TV and forced the pay-TV carriers to come up with tiered bundles to allow for various price points and appeal to customers with varying content demands. Fast forward three decades, OTT streaming services are now in the midst of unbundling the TV package again. More on that in the next segment.
Throughout the history of modern media, the pendulum swings back and forth between the two primary business strategies as new technologies enable new distribution models. Bundles are often unfairly seen as consumer-unfriendly, but most of them come into existence for a reason — they respond to the consumer demand of a good combo deal, usually in times where aggregating channels take hold of distribution. All bundles start out great, until they inevitably tip over their own weight and consumers start clamoring for only parts of the bundle rather than the cumbersome whole. That’s when the pendulum starts to swing the other way again to meet the shifting distribution model and consumer demand.
The Great Unbundling of TV Content
As we discussed earlier, the content industry has been going through a great era of unbundling over the past decade or so. Thanks to the internet, content owners can now directly deliver their content to consumers without the middleman of cable companies. This disintermediation gave rise to a digital-native content juggernaut in Netflix, but it has empowered just about all the TV networks, broadcast and cable, to create their own apps and subscription services, in hopes of capturing the audience that is turning away from their TV sets.
Before long, people started to ditch their bloated cable TV packages for a handful of OTT streaming subscriptions that fulfill their content need. Declines in traditional TV subscriptions are growing faster than expected. Cord cutters will outpace previous projections and grow more than 30% this year, according to the latest report from eMarketer. Overall, 186.7 million U.S. adults will watch pay TV this year, down 4% from 2017. The report also notes that, despite some cable companies forming partnerships with OTT video providers such as Netflix and Hulu, pay-TV subscribers are still leaving in droves for cheaper digital “skinny bundles”. In other words, cable carriers attempted to retain subscribers by playing nice with the rising streaming services and incorporating them into their services, but consumers simply don’t care for their bundles as much when there are better unbundled options available.
On average, consumers today subscribe to 2 on-demand video services, and that number will likely grow as new direct-to-consumer content services continue to emerge. AT&T’s acquisition of Time Warner was recently approved and the telco giant is already talking about making changes to HBO while preparing the launch of low-cost live TV service WatchTV. Verizon is reportedly looking to team up with either Apple or Google to provide a live TV service over its upcoming 5G network. Low-cost streaming service Philo (starting at $16 per month) recently announced plans to expand to Amazon Fire TV and Apple TV after receiving over $40 million in investment funding, led by AMC Networks, Discovery, and Viacom. Even Walmart is reported to be preparing its own content streaming service to take on Netflix, and, more comparatively, Amazon Prime video. There is little doubt that the unbundling of TV content is in full swing, but there are some inchoate signs that the pendulum may be hitting its amplitude soon and ready to turn to bundling again.
Early Signs of Bundling
Skinny TV bundles are great unbundled substitutions for cable TV packages. They are cheaper, more flexible, and usually available across devices and platforms. However, as they grow and hook consumers, they are also starting to get increasingly expensive. This month alone, we saw both AT&T’s DirecTV Now and Sony’s PlayStation Vue hike their prices by $5. Last month, Dish’s Sling TV announced it is raising the base price of its core service. Back in May, YouTube TV announced it would be raising its subscription from $35 to $40 monthly, likely to offset the cost incurred when it added Turner programming. Despite its impressive growth in subscriber numbers, however, Google is still reportedly trying to figure out how to make a profit on YouTube TV.
In fact, nearly all skinny TV bundles operate on thin margins, making them more suitable as a stepping stone to transition cord-cutters to an SVOD service rather than a long-term solution. Live content, in general, is slowly unbundling from the non-live scripted content and increasingly being handled by live-streaming services. And the economics of skinny bundles simply aren’t sustainable in the long run.
Meanwhile, the OTT streaming giants are also increasing prices. Amazon raised its Prime subscription from $8.25 to $9.91 monthly in April, whereas Netflix hiked its subscription from $11.99 to $13.99 monthly in October. Variety recently reported that Netflix is even testing a premium “Ultra” plan for $16.99 monthly. Part of the problem is that there is little regulation around pricing, consolidation, and distribution fees to protect consumers from long-term price inflation. And due to the highly differentiated nature of content, most consumers end up subscribing to multiple unbundled options in order to access all the shows they want to see. And that’s not even factoring the draw of live sports content and the high price tag it carries.
If this trend continues, and there is no sign that points otherwise, consumers could be soon be paying more for digital content services in total than they do now for their traditional pay-TV package. At that point, wouldn’t it make sense for a new content bundle to emerge again?
From this perspective, Disney’s impending acquisition of Fox assets spells huge opportunities for the House of Mouse, as it will have enough highly differentiated content and franchises to build a super bundle to feed into its upcoming OTT subscription service. What would that bundle look like?
Following the acquisition, Disney will own about 40% of total U.S. box office this year, granting them enormous leverages to negotiate with theater owners. Perhaps future Disney movies could also become part of the bigger content subscription bundle. Beyond content, Disney also owns a lot of non-media products and services that it theoretically could integrate into its bundle, but then what would that supersized bundle looks like? And does this next wave of bundling apply to other industries beyond entertainment as well? Check back next week to read our follow-up piece where we explore the emergence of the so-called “super bundles.”
