The Present and Future of Bundling
Months ago I clicked on an article about Joe Rogan’s deal with Spotify and read the opening line “Joe Rogan is taking his podcast exclusively to Spotify… in a licensing deal worth more than $100 million.” Even more recently, Howard Stern is in negotiations with Sirius XM for a new deal that will pay him $120m per year.
Most people would look at these numbers and scoff at the foolishness of Spotify and Sirius XM. How could one person possibly be worth that much money to a company? The concept reminds me of the sentiment that the most inefficient contracts in the NBA are superstar contracts, but that’s a topic for another day.
Spotify recently acquired Rogan, Stern has been with Sirius XM for years, and both companies are building bundles. The question these companies should be asking themselves is “how much do we lose if they walk out the door?” This is the inverse situation that I last wrote about concerning the Oakland A’s and Moneyball. The A’s had to remove the pressure to replace big names such as Giambi and Damon and instead focus on run production. Sirius XM should not be focused on quality content in this scenario, they should be focused on big names. That’s how bundles make money.
What is a Bundle?
By this point we’ve likely encountered bundles across many industries: cable, internet, food, insurance, music, movies, and the list goes on. When we think about bundles we have to think about assembling and disassembling multiple products or services.
Next we have to think about who the consumers are and their key qualities. There are 3 types of consumers for bundles: superfans, casual fans, and non-fans. The key qualities are paying retail prices and actively searching for the products. Superfans do both of these, casual fans do only one, and non-fans do neither.
If products were to be sold a-la-carte, you would only get superfans. With bundles, you’re creating casual fan value because you are satisfying the missing key quality. It’s a confusing concept, so let’s take a look at some concrete examples. A superfan company would be Uber. You’re not only actively booking rides but paying retail prices for them. Ad supported companies and social networks are examples of non-fan companies, they resort to indirect monetization. Casual fan companies fall somewhere in the middle.
Producing Value
If you’re an NFL fan, do you know exactly what you’re paying for the ability to watch games? The NFL is built on casual fans who often receive games as part of a bundle. Other sports are built on superfans. Until recently, UFC fans had to pay full-price for each and every PPV.
You might be aware that ESPN is likely the most expensive channel you’re paying for as a cable customer. In the past I thought that someone would come along and offer a-la-carte options for TV channels, and those offerings would be much cheaper than current options. Time to dispel that notion. If you were to only pay for one channel, ESPN, the monthly cost would increase from roughly $9 to $50. That’s because of something called marginal churn contribution.
Churn
Bundle providers are always trying to keep their consumers. Churn refers to the percentage of consumers who decide to leave. This is what providers care most about, even more than the level of product usage. The reason why ESPN’s cost would go up if removed from your cable bundle is the high level of marginal churn contribution. In other words, if ESPN was removed from the bundle, a disproportionately high percentage of people would unsubscribe from the bundle. The key is not to conflate marginal churn contribution with usage. Usage of ESPN and the History Channel may be equivalent, but only one is crucial for the success of the bundle.
If we care about keeping consumers from churning, then the best way to do that is by offering a diverse range of products within a bundle. The worst bundles are narrow and contain similar products. Conversely, the best bundles minimize superfan overlap and maximize casual fan overlap. Take Netflix for example. They don’t offer only horror movies. If that was the case, then you’re paying money to add more horror movies that aren’t attracting new audiences.
Instead, if Netflix produces reality shows, dramas, movies, and documentaries, they’re generating casual fan overlap between products. Remember, casual fans are those who either would pay retail prices for products or seek them out. If I’m interested in products ABC and willing to pay $10, and you’re interested in products XYZ and willing to pay $10, Netflix is offering us ABCXYZ for $10 each. That’s how they’ve been able to create a sticky user base.
In the same vein, you’d want to bundle something like NFL Sunday ticket with knitting channels and scripted podcast dramas. This way, you’re not paying twice to acquire the same consumer. A recent example is the popular Spotify and Hulu bundle for students, or the new Disney, Hulu, and ESPN+ bundle.
The Future
Spotify and Sirius XM have all these things to think about. Sirius XM is obviously aware of the high marginal churn contribution that Howard Stern brings. Even though people may listen to other programs, losing them would not cause as many consumers to ditch the service.
There are a few companies that I have an eye on regarding potential bundles. Barstool Sports has been putting together a diverse range of offerings over the past several years. The possibility of bundling their sports betting, podcasts, products, and shows is there. Within their total audience, I bet there isn’t high superfan overlap between all their offerings.
TikTok is another interesting case. While I was not very successful with my paltry 3,000 likes, there are many creators with tens of millions of followers. Some creators even banded together in groups like the Hype House. This is not my area of expertise, but groups like the Hype House could eventually monetize their followers by bundling all their content together.
Finally, Apple recently announced the launch of Apple One, combining Apple Music, Apple TV, iCloud storage, and several other features to create a compelling bundle. I know I’m interested just for the storage.