Thread by @borrowed_ideas

1/ Thread: The myths of bundling

"Gentlemen, there’s only two ways I know of to make money: bundling and unbundling." -Jim Barsdale

I spent the afternoon reading a fascinating piece on bundling by @shishirmehrotra

Here's a thread on bundling, its four myths, and thesis points.

2/ Myth 1: Bundling is bad for consumers (as well as providers).

Why can’t I just have ESPN instead of paying for all these other channels I don’t watch?

Comcast pays to ESPN $4-6 for each subscriber; I am willing to pay $7-8. Why don’t I have this option?

3/ First, we need to understand 3 types of consumers:

A. SuperFan: 2 criteria: a) Willing to pay a-la-carte, and largely price inelastic, b) willing to seek out the product themselves

B. CasualFan: Values access to the product, but lacks one of the two criteria of SuperFan

4/ C. NonFan: Ascribes zero (or negative) value to having access to the good

Here's a visual illustration.

5/ If there’s no bundle, it’s mostly the SuperFans who would be consumers of the product.

A bundle allows CasualFans to have access to the product. Providers also get access to much wider base of consumers.

6/ “This is the heart of how bundles create valueーit’s not about addressing the SuperFan, it’s about allowing the CasualFan to participate.”

UFC caters mainly to SuperFans, but NFL, in addition to SuperFans, reaches tens of millions of CasualFans. As a result, value of NFL>UFC

7/ So instead of the myth, Shishir provides the first thesis point: When done well, bundling produces value for both consumers and providers by giving access for (and revenue from) CasualFans.

8/ Myth 2: Revenue from bundles should be allocated based on usage.

Even though History channel and ESPN have similar usage (rating points, viewership share), ESPN gets 20x carriage fees from cable companies.

That sounds unfair, right?

Nope!

9/ Thesis#2: The most fair way to distribute revenue to providers in a bundle is by Marginal Churn Contribution (MCC), not Usage.

MCC: “if I were to remove X from the bundle, how many people would churn?”

Here's an example.

10/ If 100M HH subscribe to cable which costs $50/month, and 10% churns if ESPN is removed from the bundle, that’s a 10M*50*12= $6B revenue-at-risk. So bundlers pay $6B to ESPN and distribute the cost across 100M HH.

This can be expressed via this formula.

11/ Since MCC can be tricky to estimate, a better way to calculate this is to predict what % of bundler’s subscribers is SuperFans of a particular Product.

Here's the formulaic expression.

12/ The best case for bundler is to add enough individual products to the bundle that removing any one of them leads to negligible impact on MCC. Having a lot of products in the bundle also makes it difficult to measure MCC which can skew the negotiating leverage to the bundler.

13/ Myth 3. Bundles will always feel like a rip-off to consumers since they represent a lack of choice:

Transparency is key to bust this myth. Bundles won’t seem like a rip-off if consumers can see the a-la-carte prices would be higher than the bundle.

This leads to thesis#3

14/ Thesis 3: For a Consumer to properly value a bundle, there must be a transparent (and reasonable) a-la-carte price for each of the products in the bundle

Again, here's the formula.

15/ But two considerations:

a) CasualFans ascribe some value to products for which they are not SuperFan

b) negative value goods (having kids content and porn in the same bundle)

16/ These can be tackled by using a discount factor from -1 to +1.

+1 being SuperFan, CasualFans reside between 0 to +1, and negative values indicate negative value goods.

Formula here.

17/ There are some other considerations as well which Shishir discussed in his piece, but for the sake of simplicity, I’ll stop on thesis #3 here, and the core essence of it is captured quite well in the above formula.

18/ Myth 4: The best bundles are narrow and have very similar products so they make sense to consumers.

If you want to insert UFC to a bundle, what type of content should the bundle contain? Other sports contents, right?

Shishir thinks the opposite which leads to his thesis#4

19/ Thesis 4: The best bundle is one that minimizes SuperFan overlap and maximizes CasualFan overlap.

Here’s a visual explanation.

20/ This myth is very counter-intuitive, and hence more controversial. But there are already examples of this happening.

MSNBC and Fox News have very different sets of viewers. If you ask a Fox viewer to pay for MSNBC, you’ll lose that consumer.

21/ So the best outcome for the bundler is to have as many of these mutually exclusive sets of SuperFans in your bundle.

Overall, the best bundles have minimum SuperFan overlap but maximum CasualFan overlap. CasualFans allow bundlers to enjoy the scale benefits.

End/ Link to the piece: coda.io/@shishir/four-…

Relevant podcast: investorfieldguide.com/shishir-mehrot…

Typo here

*Jim Barksdale