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The Fall and Rise of Bundle-Based Businesses

In 2003, when we came up with the idea for the Take Control electronic book series, one guiding principle was that individual books should be relatively short, such that they could function like chapters in an ├╝ber-book. Our thought was that shorter books would be faster to write (and thus quicker to market), easier to update, and less expensive. They could also be simultaneously more focused and more detailed than traditional books. In aiming to break apart the traditional computer book into its component chapters (albeit with more depth than a book chapter would have space for), we were channeling the bundle-busting trend.

Some years later, we would repeat the process with TidBITS itself, taking our traditional email newsletter with its collection of articles written over the previous week and breaking it apart into its constituent pieces (see "Designing a Modern Web Site for TidBITS," 10 September 2007). In this new approach, instead of articles appearing fully formed in each email issue, we would write and post each article on our Web site as it was done, collecting them back into the issue each Monday.

We made this change to enable coverage of breaking news, spread out our writing and editing effort throughout the week, bring our publishing approach in line with how readers interacted with our content, and, honestly, to modernize what was seeming like an increasingly quaint publication model. (The irony of ironies is that when we started TidBITS in 1990, our use of Internet distribution meant that we were more timely than the lumbering monthly magazines and even than the edgy weeklies, with their printing and mailing delays.)

Bundling Breaks Down -- Outside of our little world, bundle-busting was going full tilt. In 2003, Apple introduced iTunes with the innovation of selling each individual song on an album for $0.99, side-by-side with complete albums for $9.99 (some songs weren't available individually, and some larger albums had higher prices, even before 2009, when Apple agreed to different pricing levels). Even before iTunes, newspaper and magazine publishers starting moving online in a big way, essentially untethering their articles from the bundled pieces of paper that made up a daily, weekly, or monthly issue.

All this unbundling happened due to customer demand and because new technology, largely the Internet, made it possible. After all, who hasn't felt slightly cheated after buying an album and discovering that some of its songs are far less appealing than others, or realizing that none of the articles in a magazine were compelling enough to read? This shouldn't be surprising: enabling each member of a family to order a completely different meal in a restaurant has long been seen as "better" than a home-cooked meal where everyone is forced to share the same dishes, whether or not they are equally well liked. Unbundling promotes choice, and, within reason, people like choice.

To understand why the Internet enabled so much unbundling, it's worth considering briefly why bundling happened in the first place. It comes down, as so often happens, to the essential awkwardness of atoms. Before the Internet, it was certainly possible to write and publish a single article, or record and distribute an individual song, but it wasn't significantly more expensive, once the words or notes became instantiated on a physical medium, to publish 100 articles, or to distribute an album containing 12 songs.

In other words, bundling came about because of economies of scale, but the Internet, and perhaps more aptly, the all-you-can-eat pricing schemes that have grown up around the Internet, have radically changed the game. The economic advantage of publishing a bundle - a newspaper or an album - is no longer significant.

Bundle-Based Businesses -- All this unbundling sounds like a good idea, but let's change gears for a moment and consider the benefits of bundling from a business perspective. There are many ways to set prices for a product, but in the end, the economists tell us, Adam Smith's invisible hand will cause prices to settle at a point where customers are willing to buy and where producers can turn a profit. It's worth noting that there is always a floor below which prices cannot drop, regardless of other factors, because of the cost of collecting payments. One of the advantages of the digital revolution, and the Internet in particular, was to reduce the cost of collecting payments, which in turn dropped that price floor.

It seems to be a truism that people place relatively little value on content, whether it's writing, music, or video, perhaps because we intuitively know that the very same content can be sold to many people. Whether you're reading an article in the New York Times, listening to your favorite artist's latest hit single, or watching a TV show, you know that hundreds of thousands of people, if not more, are enjoying the exact same content. In other words, content isn't scarce, and we value scarcity, which is why we're happier to pay for one-on-one training from a consultant or a live concert.

But we also place value on volume, so while we may not be willing to pay $1.00 for an article in a newspaper, we have much less problem paying $1.00 for the entire newspaper, containing tens or hundreds of articles. And while $10 feels wrong for a single song, it's not unreasonable for an entire album.

So publishers and record companies figured out that they could take advantage of the economies of scale and bundle multiple articles or songs or whatever into physical products - newspapers, magazines, some books, music albums, VHS and DVD sets of old TV episodes, and so on - that could then be sold for a sufficiently high price to turn a healthy profit while still offering enough value to customers that they didn't complain too much about prices.

But then came the Internet, and it didn't take long before people realized that bundling was largely artificial, that there was too often no real relationship between the different articles in a newspaper. And even when the bundle was less arbitrary, as in a themed magazine or a well-conceived album, the irritation of paying for content that you didn't want to read or listen to contributed to the decline of the bundle.

Babies and Bundle-Based Bathwater? Alas, bundle-busting doesn't come for free, and bundle-based businesses like newspapers and the recording industry have come upon harder times. (It's hard to blame all woes purely on the breakdown of the bundle, but at least Anita Elberse's research into unbundling controls for illegitimate copying in the recording industry still points to unbundling as the cause of the industry's declining profits.)

Bundles may have boosted profits for those industries beyond what would have been possible without bundling, but those profits made certain things possible. Although we're proponents of the Internet enabling small publishers and individual writers to publish content that wouldn't have survived in a large publisher's newspaper or magazine, it's absolutely true that some of the serious reporting and journalism we've become accustomed to requires the significant investment only a well-heeled company - bolstered by bundle-based profits - can afford.

There's no question that these bundle-based companies will have to change, but we can hope that the bundle-busting trend doesn't eliminate content that is socially worthwhile, even if it cannot compete on its own in the marketplace.

Will Bundles Survive? This desire to create socially useful works that cannot earn their keep is one reason the iPad (and to a lesser extent, the Kindle before it) is seen in some circles as the next great hope for bundle-based publishers. It will be devilishly hard to stuff the genie of unbundled (and free) content back into the Internet bottle, but the iPad offers a blank slate on which newspaper and magazine publishers can once again bundle content and charge for a subscription to the entire collection. And if that gives great content a business model on which it can survive, that's a good thing.

Even as the iPad inches closer to the time when we'll see if it can fulfill these grandiose rescue fantasies, it seems clear that the bundle, as many businesses are accustomed to it, is on the way out.

That pronouncement should not cause undue distress. Breaking apart bundles can provide all sorts of benefits, not just to customers, but to producers.

Here's where we come full circle, since the unbundling movements we made when creating the Take Control ebook series were as much about improving the business side of things as they were about meeting customers' needs for detailed discussions of highly focused topics. Unbundling the book helps us and our readers.

Similarly, changing the unit of publication from a full TidBITS issue to the individual article helped us speed up production, increase Web-based revenues, and attract new readers, but it also gave our readers more timely articles, an article-based forum for discussion, and more accurate articles (as we integrate new information and address reader comments). Again, everyone wins.

At the same time, we're still bullish on bundles made for the right reasons. One of those is price; if you're going to sell lots of products that don't have individual production costs (any sort of digital content), bundling multiple items together at a discount increases overall revenues for the publisher even as it reduces individual unit costs for the purchaser.

Looking forward, even as we think about ways of further unbundling our content (is there that much difference between an article and a book chapter?), we're simultaneously exploring ways of bundling that content together in ways that at least some customers will appreciate. After all, what's a subscription but a bundle of somewhat related items sold at a significant discount in exchange for guaranteed revenue flow for the publisher?

So yes, bundles will survive, but those that do will survive for the right reasons, and those reasons have to do with meeting customers' needs and desires more than facilitating economies of scale and higher price points. That in turns means that companies relying on bundled products need to figure out business models that serve both the bundled and the unbundled product. Otherwise they'll eventually slide into unbundled oblivion.


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Comments about The Fall and Rise of Bundle-Based Businesses
(Comments are closed.)

Stuart Hertzog  2010-02-25 10:18
A former magazine editor, I've always assumed that not every article is going to appeal to every reader. The value of a magazine is that it offers a wide selection, like the items in a shop (the word 'magazine' comes from the French word 'magazin'). It's the overall 'look and feel' of a magazine that attracts readers, and the quality of the writing.

Bundling works for New Media too. Recently I put together a book, in print and PDF formats, from almost three years of posts to my blog Called "It's All About Democracy," the title came from reviewing this body of work, when I realised that that's what I've been on about for a very long time. I've also put it together as an ebook, which I'll make available soon.

So bundling and unbundling works both ways. Maybe an subscription model via ebook readers like the iPad will revive both newspapers and magazines, and bring about a return to literary serialisation that resulted in Charles Dickens' writing achieving literary fame.
AHoffman   An apple icon for a TidBITS Supporter 2010-02-25 10:24
I'm intriged by thit concept, but I think you are missing HUGE parts of this story.

Distribution networks USED to have HUGE fixed costs, and much lower marginal costs. So, for the seller(s)/distributor(s), it hardly costs any more to add more stories or track or chapters. But buyers don't care about distribution costs. 5 great songs and 5 ok songs are worth more to me than just 5 great songs. So, I am more likely to pay more for that bundle. And certainly I will pay a lot more for 5 songs than for 1.

So, these two different views served to push that market towards bundles, meeting seller's costs structure to buyer's sense of value.

But now, distribution over the internet has nearly zero fixed costs -- relative to where it used to be -- and even lower marginal costs. So, the economic pressures are different.

You've GOT to account for this. If you leave distribution COSTS out of your explanation, you're missing the story.
Adam Engst  An apple icon for a TidBITS Staffer 2010-02-25 10:31
I think the article does account for this, though perhaps not at the level of detail you've used here. That's why I talk about "the essential awkwardness of atoms" causing bundles to be not significantly more expensive than distributing a single item.
AHoffman   An apple icon for a TidBITS Supporter 2010-02-25 10:45
But the real point here is not 10 vs. 100 articles, or 10 vs. 12 songs. It's 1 vs. 2 songs.

And that's a HUGE difference in how this stuff works. There was NEVER much difference between 10 vs. 12 songs. And the distributions costs of of the thinnest newspaper of the week and a big Sunday edition was always negligible.

Yes, technology has made production cheaper, and by significant margins. But 1) it's the distribution that I am talking about. 2) You are talking about the marginal cost (i.e. how much for a few -- or even a lot -- more). I am talking about fixed costs.

In the past the FIRST whatever HUGELY more expensive to distribute than the second. And so you had to get up to 10 articles (i.e. newsletters), at least! From there, you might then go up to even larger collections. But now? Sending out the first article (e.g. email or blog) costs no more than sending out the second article.

THAT's what I think you're missing.
Adam Engst  An apple icon for a TidBITS Staffer 2010-02-25 10:52
Ah, I see what you're saying. What I meant, and I'll tweak the wording to make this more clear, is that there's very little difference between 1 article versus 10 to 100 (ie, a magazine or newspaper) or 1 song versus 10 to 12 (ie, a single versus an album). The ranges I gave just confuse the issue because they were all on the destination end.
My biggest concern about the digital distribution is that people want their news, for example, to be free. While they see some value in getting a paper delivered to their door on a daily basis, they believe that an email with the same info should be free. When I look at a newspaper, there is a cost to write the articles, a cost to print the articles and a cost to distribute the bundle. The internet allows the the distribution costs to approach zero and dramatically reduces the production cost. However, the cost to write the article (paying the reporter's salary, expenses, etc.) doesn't change.

When people insist on getting the article for free, they negate the value of writing the article. Quite often, someone will summarize the primary source and/or link to it. I read the summary for free and never go to the original source. The person summarizing the original source has negligible costs and sells it for much less. Hard to compete with that.
James Bridges  2010-02-27 10:43
Your comment about distinguishing an article from a chapter brings up a pet peeve of mine. Have you noticed how books are getting thicker and thicker without adding anymore ideas/book? Many non-fiction authors make his/her point in the first chapter and then spent the next five or six reflogging it. I'm guessing the publisher figures no one will buy a skinny book. Perhaps the electronic publishing future will allow for works which are more complex than an article but need not kill an encyclopedia's worth of trees to get noticed.
Adam Engst  An apple icon for a TidBITS Staffer 2010-03-01 08:02
Books do need to be a certain thickness to be bound normally and be visible on shelves, but I do agree that too many books could really use some more editing. And that applies to fiction too...
Michael Scriven   An apple icon for a TidBITS Supporter 2010-03-16 09:00
Adam, I think you've added a classic example to the honor roll of self-refuting claims with your "people place relatively little value on content, whether it's writing, music, or video..." Why do you think they're reading TidBITS, and in particular this view from you?

Michael Scriven
Adam Engst  An apple icon for a TidBITS Staffer 2010-03-16 09:34
Perhaps I should qualify it more to "financial value." :-) It all adds up - at least some people are willing to support TidBITS (the bundle) directly with a contribution - but I certainly haven't seen any direct financial recompense (or even indirect recompense, through links or retweets or whatnot) for this particular article.