The Age of the Super Bundle
How the future of television will test consumer loyalty and rebuild every industry
Last week we looked at the history of bundling and unbundling in the media industry, from Jim Barksdale’s iconic business advice to the current forces that are slowly unbundling the pay TV business model. Interestingly, the market forces which have traditionally forced media into and out of bundles are speeding up. With television, we’re about to see a new type of bundle emerge well before the old bundle is undone — something we’ve been calling a “super bundle.” And just as cable TV permanently altered how we discover new products and services in every industry, so too will super bundles change those dynamics again.
The traditional cable TV bundle that also includes landlines and internet services made economic sense in a world where we had to build physical infrastructure to get television to peoples’ homes. But as TV moves to streaming services, there’s no reason for it to be bundled with internet service in the traditional sense (though we will see some try to recreate this bundle with 5G). Instead, business logic would dictate that TV would remain unbundled, as a stand-alone service distributed online, with healthy competition between a few large platforms providing the best deal for viewers and content creators alike. This is what Netflix is aiming for…perhaps minus the healthy competition. Their end goal is to provide so much content that there’s no need to look elsewhere — Netflix wants to become all of TV. And they might succeed.
Netflix’s Ambition
Netflix is the first and best example of an aggregator in television, having used a great experience to amass a large user base, and leveraging those users to modularize their suppliers (in this case, content creators). Due to the unique nature of television, where the creative vision of directors and producers is used to differentiate platforms, content creators will never be truly commoditized. Without the restrictions of time slots and linear feeds, Netflix hopes to one day have enough content of interest to occupy all of our leisure time. As Reed Hastings has said, Netflix’s biggest competition is sleep. And as the premiere aggregator of TV, they are the ones driving consumer expectations in the entertainment industry.
Netflix is the first and best example of an aggregator in television.
But there are other market forces at work, which may stymie Netflix. There are two looming entrants into the TV space, which the media likes to say are preparing “Netflix-killers.” But as the saying goes, if you can’t win the game, just change the rules.
Disney’s Manifest Destiny
The first is Disney, who is removing their content from Netflix, and will launch their own streaming service next year. While it will most likely start out looking very much like Netflix, Disney also owns a lot of assets that Netflix doesn’t have — such as books, comics, music, theatrical releases, video games, toys, and theme parks — all of which Disney can add to the streaming service to create a super bundle that delivers a full 360 Disney experience to the biggest fans. Other digital media will be bundled first, but Disney can out-differentiate Netflix by leveraging the rest of their ecosystem. By 2020, you might need to be a subscriber if you want to be the first to see a new Marvel movie in theaters, or get into the parks early, or get access to exclusive merchandise. And it’s really not hard to imagine that if you spend a few thousand dollars to take your family to Disney World, that you just might get a year of membership for free — that Disney’s biggest fans might never actually pay for the service directly, because they’re spending so much in other parts of the ecosystem.
The thought of Disney giving away their most valuable content — 40% of the US box office — as part of a bundle may sound crazy, but there are actually two very good reasons for Disney to do it. First, a super bundle might actually be the purest expression of Walt’s vision yet. Right from the beginning, Walt set up the company to use the films to establish iconic characters, which would then be monetized across a variety of types of media and, eventually, theme parks. Disney has grown to be experts at this, deeply ingraining their characters in culture, and proving themselves worthy stewards of trusted stories like Marvel, Star Wars, and soon Fox’s stable of content. The Fox acquisition is, in fact, about extending Disney’s reach beyond childhood and adolescence, and into more adult mythology, providing a cradle-to-grave repository of our most important stories. Disney was made for an age of super bundles, and has spent the last century preparing for it.
And second, the economics of streaming are such that it makes more sense for Disney to keep the cost of access to content minimal and monetize elsewhere in their ecosystem. For Disney’s IP to remain highly relevant to global culture, it has to be widely seen and widely available, so expect the cost to be low, the free trials to be generous, and for Disney whales to never pay for it directly, even as they’re given more and more opportunities to spend on their favorite characters elsewhere. After all, the point of any bundle is to reduce churn and increase loyalty. Disney is attempting to transform itself from a legacy distributor into an aggregator — and if anyone can survive that transition, it’s them.
Disney was made for an age of super bundles.
Once a Disney streaming service is well established, and the other parts of a super bundle begin to form, the economics of theatrical distribution versus direct-to-consumer mean that Disney will be very incentivized to flip the script, and prioritize distribution on their own platforms, especially must-see blockbusters from Marvel and Star Wars. This would effectively reverse the theatrical window and the home VOD window, something which other studios are also toying with. Luckily for exhibitors, an unlikely hero has appeared, as the Justice Department may roll back the case law that prevents studios from owning movie theaters. You can bet that Disney will suddenly be in the market for an established chain, in order to better bundle theatrical tickets into their offering, and other studios are likely to follow suit. MoviePass may fail, but its subscription model is clearly appealing to consumers, and can easily live on in the warm embrace of a super bundle.
Apple’s Next Halo Effect
The other pending entry into the streaming TV space is Apple, who has green-lit over two dozen original shows. Like Disney, the media narrative is that they’re going to compete with Netflix directly. But what’s missing from that prediction is that they haven’t licensed any back-catalog content at all, and you can’t build a new subscription off of twenty or thirty shows, even if they’re great — it just isn’t enough content to keep people subscribed year-round.
So, what’s most likely is that Apple’s TV service isn’t something new, but will instead be rolled into a larger media bundle, along with Apple Music and a premium Apple News subscription. Since Apple Music and Spotify have almost identical catalogs, this bundle would give you a reason to choose Apple if you also want to watch new TV shows from Oprah or the creator of Battlestar Galactica. And it probably won’t cost much more than Apple Music does alone, today. Because Apple’s media bundle won’t be about making more money per subscriber at first, it will be about making sure that everyone with an iPhone is also an Apple bundle subscriber.
Apple’s super bundle may finally also solve the longstanding issue of convincing users to pay for additional iCloud storage, by bundling it as a line item in a much larger offering. Rumors that it will include AppleCare seem misplaced, and more an indicator that Apple is going to get more serious about hardware subscriptions. They already sell the iPhone on a subscription plan, allowing users to pay a monthly fee to always be carrying the newest iPhone. It’s not hard to see how that approach might benefit a lot of other products: outfitting your house with HomePods is expensive compared the the competition, but what if it was just a few more dollars per month on top of your phone? Or an Apple Watch and AirPods for another ten dollars? A hardware subscription tier could change a lot of the common knowledge about the size of Apple’s ecosystem, lowering the barrier to entry, expanding their addressable market, and accelerating the adoption of accessory products. And of course, this just increases ecosystem lock-in — remember, all bundles are all about reducing churn and increasing loyalty, and super bundles take that to the extreme.
An Apple bundle could expand their addressable market and accelerate the adoption of accessories.
A decade ago, there was a lot of talk about “the halo effect” — the ease with which Apple sold first the Mac and then the iPhone to their growing army of iPod-loving young people. But the iPhone is the most successful product of all time, and while the success of the Apple Watch and AirPods can be attributed to a halo effect from the phone, it seems like much more should be possible from such a juggernaut. An Apple super bundle will start with media, but leverage the iPhone’s halo effect into increasing sales of hardware in emergent categories. Just as Apple stores were designed to sell the iPhone, the Apple super bundle may be a key part of the go-to-market strategy for its forthcoming AR glasses (by amortizing the cost) or autonomous cars (by adding a ride-sharing tier to the bundle).
Amazon’s Incumbency
If super bundles are the ultimate expression of Disney’s mission and Apple’s halo effect, there’s one incumbent who beat them both to the punch in execution: Amazon, when they launched Prime in 2005. The only common thread linking 2-day shipping, TV, ebooks, music, games, and an AI assistant is that they’re all owned by and run on Amazon. More than 50% of US households — and over 80% of high-income households — are already Prime members. In 2005, this might have seemed crazy, but in 2018, it looks like Amazon is well ahead of the curve. In the next five years, everyone else’s new bundles — and the future of television, music, and other media — will look a lot less like cable TV and a whole lot more like Prime.
In a digital world, bits are just bits, so it makes sense that different types of media might be bundled together. But why would Amazon, Apple, and Disney bundle non-digital products and services with their media bundles? Why will the replacement for the cable bundle come with watches and vacations? The answer is that consumers are increasingly consolidating their trust in a small number of brands, and in turn granting those brands access to more and more of their money, their data, and their lives. This is why super bundles have the potential to impact every type of consumer product and service, not just media.
Consumers are consolidating their trust in a small number of brands.
As the most trusted US tech company, Amazon is able to leverage that brand trust to enter new markets and new areas of our lives that would previously be off-limits. And as they expand their purview, new products and services will be added to Prime, expanding it into a far-reaching bundle that may touch many disparate aspects of our lives. Some consumers may trust Apple for their industrial design and cohesive experience across product lines — a skill which will serve them well in the age of the super bundle. Disney has long stood as the most trusted brand for children and families, and they will no doubt continue to leverage that family-friendliness to infiltrate deep into family leisure time.
One thing that all super bundles are likely to contain is premium television content. For the bundle creator, this is because video content is still highly differentiated, and television in particular is highly sticky: TV shows are exclusive to a service, and hold their audience’s attention for years, reducing churn. Conveniently, consumers are shifting their TV viewing to digital platforms, where the content can be divorced from the distribution, and offered up as part of a new type of bundle. It’s also noteworthy that for companies the size Apple and Amazon, Netflix’s $13 billion content budget is easy to justify as a customer acquisition expense. Just as streaming turned the entire music industry into a feature on a smartphone, so too will it turn all of television into marketing for super bundles.
So are Amazon, Apple, and Disney competing with Netflix? Kind of, in that there’s only so much time we can spend watching TV. But in a world where Netflix already consumes so much attention, they’re wisely taking an asymmetrical approach, and aiming for an even larger prize. And if this strategy proves successful, Netflix may be forced to respond. Along with everyone else.
You Get a Bundle! And You Get a Bundle!
That’s the thing about these super bundles — though the fight may begin in television and media, it will quickly extend to other industries entirely. If Apple is successful at bundling consumer electronics into media, the battle for the home could turn them into the gatekeepers for every networked device. If Disney is successful at bundling vacations into entertainment, it will impact destinations, hotels, and maybe one day airlines. And if Amazon is successful at bundling their disparate offerings, they could succeed in taking a cut of all economic activity. Even an inkling of success should be enough to have competitors organizing a counter-offer for consumers.
It’s not hard to squint and see how similar bundles from incumbents might emerge, as some of the counter-moves are starting to come into focus. Walmart is exploring extending their Vudu VOD service into streaming. DC Universe is a tidy bundle of good comics, good TV, and bad movies. CBS All Access is becoming the Star Trek bundle. And AT&T really hopes HBO can go it alone like Netflix.
The incumbents are certainly not just going to give up their customers to upstart super bundles without a fight. What is less certain, however, is which strategy they may adopt to compete with the likes of Disney and Amazon. Walmart seems to be exploring a high-end market with the acquisition of Bonobos and the launch of Jetblack, but perhaps a better strategy would be to lean into their heritage and create a low-cost alternative to Prime, bundling ecommerce with budget cellular service from Cricket or MetroPCS, which they already sell in stores. Facing hydras like Apple and Amazon, it may make sense for established independents like Netflix, Spotify, Roku, and Sonos to band together to form a super bundle. Integration may be a challenge in this case, especially when competing with Apple, so the sooner they start working together, the better. Or Netflix, as the current leader in their industry, may choose to go it alone. Only time will tell if that’s a truly viable strategy.
Though super bundles may begin in television, they will quickly extend to other industries.
Beyond the media incumbents, the rise of super bundles will also spread to other industries. Microsoft already has a bundle for the enterprise, but needs to acknowledge how disliked some of their user offerings are and fix them to appeal to a modern workforce. Gaming is a huge sector of entertainment which has not been well-bundled in the past. Sony, Nintendo, or Microsoft could seize the mantle, or else should offer up their games as a cornerstone of another bundle. Peloton and ClassPass have established a footing in fitness bundles, though they will likely be rolled up into something larger — whether it’s media or health is unclear, and may vary by region. Transportation as a service is quickly being bundled with the shift towards multimodal on-demand services that include cars, buses, bikes, and most recently, electric scooters.
Importantly, since super bundles are becoming a key part of the next wave of TV, it’s notable that most of them don’t carry advertising in their video services. For non-media brands, this shift in viewership is also a shift in how to reach consumers. Marketing will still exist in these platforms — just as it does in Netflix — it just may be more subtle, and over time more slanted towards bundle participants.
The most easy, obvious solution is to join a bundle — the thrust of super bundle competition will drive the bundle leaders into the arms of willing suitors, so anyone with a complementary product or service portfolio is a target for partnership, if not outright acquisition. For some, this may mean an uncomfortable 180 on business model, while for others the concept of not being in the driver’s seat may simply be unpalatable. For brands to connect with their prospective customers in the age of ad-free super bundles, they may need to take a page of the direct-to-consumer brands and become a content creator that can directly engage with the customer base via digital channels.
The alternative is to look elsewhere for the scale of TV. Specifically, the reigning duopoly of digital ads: Google and Facebook. While super bundles may steal the attention given to premium content, YouTube and Instagram stand to benefit from the long tail of video content shifting to digital, and are well-positioned to help brands and advertisers adapt to the new paradigms. And unlike TV, digital video ads are easily targeted, measured, and optimized.
Google and Facebook will undoubtedly try their hands at creating super bundles of their own, but their ad supported business models are unlikely to set them up for success. YouTube has attempted to create a premium offering several times, bundling original content with music and other features. Facebook has never attempted a subscription service for consumers, but they do have a formidable bundle for advertisers, with an integrated ad ecosystem that runs across the most popular mobile apps. With Amazon, Apple, and Disney leaning into their business models might spur Google and Facebook to attempt their own premium bundles, they would do well to focus on their strengths, building products to secure the large ad budgets that the shift from ad-supported TV will slowly free up.
Not without note, one effect of super bundles will be that if a viewer wants to have access to everything on TV, they’ll likely be paying much more for this privilege than they would in the era of cable. Yes, those subscriptions will also include amazingly designed housewares, breathtaking vacations, easy transportation, and 24/7 health and wellness services. But what if there’s one day a new startup that offers a fitness class without any Emmy-winning TV shows, at a fraction of the cost? What if down the line It doesn’t make sense to buy a couch from the same place you buy milk? What if I want to take a vacation to someplace that isn’t a theme park? To return to Jim Barksdale, there’s only one solution to that problem: unbundling.
