What Media Companies Could Learn From Microsoft: Smart Bundling

The media industry is desperately trying to find new business models for the online age. A lot of the current discussion revolves around micro payments: Is it possible to get users to pay small amounts for each newspaper article? The metaphor “iTunes for news” seems to become a favorite model of many media people, and major players such as News Corp. are already planning to roll out micro payments.
I think they couldn’t be more wrong about this. It’s actually amazing that traditional media companies seem to be largely blind to the factors that made their traditional business models successful.
One factor is the control of distribution channels (I blogged about this earlier). This is difficult to replicate in the digital world, because digital content is so easy to replicate and distribute.
But the second element is actually much easier to implement for digital content: Bundling.
When you buy a CD (if you are still old-fashioned enough to do that), you pay $15 or so for a collection of around 10 songs. Chances are that you are only interested in one or two of these songs. So why don’t you just buy the single? Mainly because the music industry since the 50s consciously pushed the album format, suggesting more value. Look, you only pay $1.50 per song on the album, but singles often cost $5 or more for just one song.
How about your newspaper (if you still read one)? How much would you be willing to pay for today’s front page story in the New York Times? How much for the top article in the business section or sports section? A dollar? A few cents? Nothing at all? This probably depends strongly on your interests. On any given day, there are probably a handful of articles in a newspaper that you would be willing to pay for specifically. Most of the rest are worth almost nothing to you. But you are willing to pay a couple of dollars for the whole thing.
This is bundling at work. It’s extremely difficult to set the right price for a piece of content, since different people will see very different value in it. Therefore, it’s often the most profitable solution to sell bundles of content items at a relatively low total price to extract the maximum value from customers.
A great example for this from another industry is Microsoft Office. This suite of productivity programs today completely dominates the market. Most people would probably agree that that’s not because Microsoft had the best programs –some people still have nostalgic feelings for WordPerfect and Lotus 1-2-3. It’s because Microsoft sold the most attractive bundle of adequate programs at a very nice total price.
Here’s a simplified example that explains why this is smart: Let’s assume that User A wants to do a lot of word processing. He’s willing to pay $250 for a good word processor. He also wants a spreadsheet program, but is only willing to pay $50 for it.
User B is a finance guy and needs a good spreadsheet, for which he is willing to pay $350. He has no use for a word processor, but will pay $50 for a presentation program. And User C, a consultant, is willing to pay $200 for a presentation program, $100 for a word processor and $50 for a spreadsheet.
So, if you’re a spreadsheet vendor, what’s your ideal price? You could charge $350 and only sell to User B. You could charge $50 and sell to all three users, but that would leave money on the table. It’s really difficult to set the right price.
The best solution for this is to sell a bundle of a word processor, spreadsheet and presentation program and charge $300 for it. At this price point, all our fictional users will buy the whole package and will be very happy, because they get a solution at a price they are willing to pay, but with much more overall functionality. The vendor could only make more money if he were able to charge each user an individual price (what economists call perfect price discrimination), but in most markets, that’s impossible.
Microsoft is great at coming up with bundled editions of its software. There are five different versions of Microsoft Office, all with different elements and at different price points, but of course all based on the same code base. Of course, it’s dangerous to overdo this. The seven different versions of Windows Vista were just confusing.
Obviously, bundling works for software. It also works for most forms of content, and it can work particularly well for digital content, because it’s so easy to build bundles of digital content at almost no additional cost.
Unfortunately, the music business largely missed the boat on this. By allowing Apple to sell individual songs through iTunes, the music industry broke the album model, and there’s probably no way to get it back. The new subscription models that some record labels are experimenting with are of course nothing but another form of bundling, although at a much lower average price point.
Newspaper publishers don’t seem to get bundling at all. That’s probably because in the world of the physical paper, they can only sell a very limited number of different bundles (maybe a local and a national edition). Even the only two newspapers that successfully charge for online editions, the Wall Street Journal and the Financial Times, only sell one or two different online bundles. That’s simply stupid. Why isn’t there an expensive Pro version of the FT with full access to all market data, maybe even bundled with additional data sources? A cheap student version? A standard version just with the news and opinion columns? A version for people who want to read the FT primarily on their mobile device and just want the most important headlines? This kind of creative price differentiation would certainly extend the number of subscribers dramatically.
And the same applies to other parts of the media industry: Why doesn’t Hulu (or iTunes) sell an attractively priced subscription for its most popular shows, for instance a bundle that gives you The Office, Family Guy and Saturday Night Live, but also throws in a number of less well-known shows? If that’s the easiest way to get these shows, many people will sign up. The TV industry seems to believe that many people are going to pay $2 or more per episode on iTunes, they are almost certainly wrong. Nobody does that in traditional media. People pay for a satellite or cable subscription, which is a classic bundle. Deciding for each show individually if it is worth $2 is simply too much work. Pay-per-view only works for big-ticket items, and there’s no reason why this should be different in online media.
It’s really remarkable how little media companies seem to get the basic rules of bundling: Sell a bundle of products that have different value to different people at a price that seems really, really attractive when compared to the prices of the individual items. Make sure that you offer different editions that appeal to different target markets. That’s all. Just ask Bill Gates.

Source: Andreas Goeldi