Since the launch of Disney+, I’ve been thinking about the limits of the “unbundle.” Disney+ joins the rank of other OTT providers including Hulu, Netflix, and HBO, which individually average about $10.00 - $15.00 per month. The cost of several OTT providers plus internet sold separately through an ISP can easily add up to a standard cable bill. What is the limit of an average OTT consumer's willingness to pay? To fully answer that question, one must first understand the mechanics of bundling and unbundling. This post will focus on the basics of the bundle.
A bundle is the combination of several products combined & sold as a single unit. The key is that the items are usually sold at a lower price when compared to the a la carte prices. Read more on the formal economic theory behind bundles.
Producers bundle in order to capture share of wallet
Consumers prefer bundling will choose a bundle because of lower prices and/or lower discovery/search costs
There are many types of bundle formats. This post outlines 9 major bundle types:
Mix & Match
New or Less Known Product Bundling
Necessity or Occasional Bundles
Old or Excess Inventory
BOGO (buy Y quantity get Y)
Real world examples of a bundle:
Bundles are present in every kind of market structure (monopoly, perfect competition, oligopoly, etc) , but manifest in unique ways.
Home & Auto insurance - Insurance is a commodity product in a near perfectly competitive market. Home & auto is sold as a bundle so that insurers can reduce customer acquisition cost. A share of that CAC savings is passed on to the consumer. Consumers realize price savings & reduce discovery (who wants to shop for insurance).
Traditional Cable Television - The consumer is sold a bundle of cable channels versus purchasing individual channels and paying per channel such as NBC, MTV, ESPN, Lifetime Network a la carte.
Microsoft Office - The most basic home version includes the lesser known, lesser used Access and Publisher
Microsoft's Office for home pricing page.
A "good, better, best" pricing strategy is often using in software. Microsoft leads with the "better" product in hopes of maximizing revenue based on a typical bundle of user preferences. In this case, the difference between the good ($69.99/year) and better (99.99/year) is storage. In either case, you are purchasing 7 apps. By bundling 7 apps into the product, Microsoft can justify a higher selling price. Importantly, marginal costs of including those extraneous apps (let's say Access and Publisher) is low as the R&D costs have already been fully realized. In this case, Microsoft has a dominant share of office suite products and has the pricing power to sell customers apps that they don't need.
Industries as Bundles
Over the past ten years, retail has been unbundled into a long tail of unique, highly specialized D2C brands. Traditionally, in the fashion industry, buyers (retailers) would pre-buy for Spring & Fall seasons. The twin catastrophes of the GFC of 08/09 & COVID-19 along with the advent of social media chipped away at the incumbent model. Read more about this in the New York Times Magazine piece Sweatpants Forever: How the Fashion Industry Collapsed