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Four Myths of Bundling


Myth 1. Bundling is bad for consumers

(as well as providers)

In the video space, this is generally phrased by our Myth-maker as something like: “Comcast is screwing their customers by forcing them to purchase channels A and B, when all they really want is C.” And moreover “The provider of Channel A would love to be a la carte, but Comcast won’t let them.”
Consider this scenario. Imagine there are four products each delivered as a monthly subscription. We have a choice to deliver them each a-la-carte, or to produce a bundle across all of them.
Now let’s divide the population for each good into 3 parts. Imagine that for each good, each prospective customer is one of these 3:
SuperFan: This is someone who fits two criteria:
They would pay the a-la-carte price for the channel. This means that they are fairly far along the price elasticity curve for the good (perhaps to the inelastic point)
They have the activation energy to seek out the good and purchase it.
CasualFan: Someone who would value the good if they had access to it, but lack one of the two SuperFan criteria ー either they aren’t willing to pay the a-la-carte price for the good, or don’t have the activation energy to seek it out, or both.
NonFan: Someone who will ascribe zero (or perhaps negative) value to having access to the good. [Sidenote: more on the negative case in ]

Here's a quick visual:
Now if we offered these goods a-la-carte, then:
The providers would only provide service (and collect revenue) from their SuperFans (the blue highlights), and
Consumers would only have access to goods for which they are a SuperFan
The a-la-carte model clearly doesn’t maximize value, as consumers are getting access to fewer goods than they might be interested in, and providers are only addressing part of their potential market.
On the other hand, the bundled offer expands the universe and not only matches SuperFans with the products they are SuperFans of, but also allows for those consumers to get access to products of which they may be CasualFans. From a providers perspective, it gives access to consumers much beyond their natural SuperFan base.
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.
Let’s take a simple example of the McDonald’s value meal. Picture a set of customers standing in line. The first customer remarks: “I really want a Big Mac, I kind-of want fries, and if I get those, then the drink is free”. Directly behind them is a second customer who is thinking differently: “I really want a drink, I kind-of want a Big Mac, and now the fries are free!”. And finally, behind them is a third customer with a crying child who is thinking “I really need a toy for my kid, and if I get this deal, then not only do I get a toy, but the whole meal is free!”. We’ll come back to this psychology in , but for this purpose the primary observation is that the McDonald’s bundles are enabling CasualFans to get access to a broader array of products.
As another example, take the UFC. Ask a random person if they are a fan of the UFC, and you will likely get a binary answer - they will either say they are a huge SuperFan and pay to watch the fights every Friday, or they will ask you what the letters UFC stand for. This is because UFC has very few CasualFans - which I attribute to the fact that the UFC has very little bundled distribution. So if you are a fan of the UFC, you are likely a SuperFan. By contrast, ask a random person if they are a fan of the NFL. Here you will find a wide range of answers ー from people who "only tune in for the SuperBowl", to fair-weather fans that like to watch when "their home team is winning", all the way out to the fantasy sports fanatic who watches multiple games simultaneously every Sunday. The NFL definitely has some SuperFans (e.g. subscribers to DirecTV’s Sunday Ticket) but also has tens of millions of CasualFans. Interestingly most of these fans have no idea how they pay for the NFL ー it appears to be free to them as a virtue of paying for some other service. Over time, this has led to the NFL being a significantly bigger business than the UFC.
So our first thesis is
Thesis 1: When done well, bundling produces value for both consumers and providers by giving access for (and revenue from) CasualFans.
An obvious question is “ok fine, but what does ‘when done well’ mean?”. Please hold this question till we get to Myth #3, we need a few more constructs first.

Next Section: on the provider perspective of bundling

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