“There are only two ways to make money in business: one is to bundle; the other is unbundle.” Jim Barksdale, former CEO and President of Netscape

Apple ultimately won this category with iTunes, and owned the distribution of music on the internet for over a decade. In 2002, prior to iTunes launch, singles made up only 1.9% of music transactions; 10 years later they made up 75%. However, this is not the end of the story: the most recent evolution in this cycle is best illustrated by Spotify, which have created an audio bundle and a business model which could be categorised as music as a service. Spotify is continuing to evolve their bundle in two ways: First, increasing their depth with a push into the wider audio category, as shown by recent acquisitions of podcast companies Gimlet Media and Anchor. Secondly, pushing breadth, through the creation of entertainment bundles in partnership with Showtime and Hulu.

Incumbents building empires.

So why do bundles happen? Bundling services together has a number of benefits, not least as a powerful growth play. By bringing together disparate elements of value, the core offering is strengthened through increasing breadth of appeal. A bundle can tip the scales of value to a point where new segments or customers are willing to open their wallets, or can help increase the rate of adoption and loyalty within existing segments. This effect drives the economics of the bundle, where high costs of production are offset by increasing breadth of appeal in a large, reachable, customer base. Consider what is arguably one of the most successful bundles of all time.

What’s in your office?

Microsoft Office has generated more than $300bn in revenue over a 20 year period and is one of the most successful products ever. In the 80s and 90s, there were a range of productivity applications filling “niches” such as spreadsheets, word processing and the production of slides. With no dominant player, a business wanting to obtain this range of productivity applications had to purchase multiple products from multiple providers. Enter Microsoft Office, a bundle of Word, Excel and PowerPoint, which launched in 1990. By bundling popular applications that would cost upwards of $1,500 if bought separately, and pricing the entire suite at $600, Office represented amazing value for money. No competitor could compete with the value for money Office represented which enabled Microsoft to win the market. Other factors, such as Microsoft’s ownership of the Windows operating system and the availability of significant resources to invest in the suite, contributed to this success, but that should not discount the impact of having a bundle with considerable intrinsic value. In 2009, almost 20 years after the bundle was formed, Office was still generating almost $20bn in annual revenue.

Plucky upstarts taking their slice.

Given the upside of bundles, why would you consider unbundling? The reality is, as an incumbent, it’s often not your choice. The unbundling of many institutions has been driven by disruptive upstarts or in response to a change in market landscape. In fact, a well trodden path to disrupt an industry or large incumbent is by picking apart their bundle.

Switching channels.

Netflix provides an illuminating example of how an underlying technical change can power the unbundling of an established industry. Netflix have been at the forefront of how people watch video content in the internet age. They have carved a slice of audience from the traditional cable bundle by taking advantage of a significant underlying technical change: the way content is distributed. Historically in the US, the gatekeepers between content producers and customers was cable companies, which owned the distribution of content. This led to the creation of content bundles curated by cable companies to drive adoption in different market segments. With the advent of the internet, the value chain of content production is no longer constrained by distribution. This opened the door for content companies to go direct to customers. Enter Netflix, which launched their streaming service in 2007 and by 2017 had more subscribers in the US than cable TV.

To bundle or not to bundle?

Whether an incumbent or insurgent, it is valuable to consider the extent to which a bundle is at risk, ripe for disruption or viable to grow. A good starting point is a deeper understanding on the alignment between bundled value and customer needs. To what extent does a bundle meet customers needs better than other options (as MS Office did) or provide superfluous “value” which users don’t want (as was the case with many forgettable tracks bundled into an album). Are significant technological changes underway, as with Netflix where the internet fundamentally challenged the established value chain of how content was distributed and consumed, or are consumers expectations evolving, as with Spotify where music ownership has diminished in importance, as access has increased. Ultimately, the extent to which your bundle is safe to expand, or ripe for disruption is personal to your product, and can change quickly. It pays to keep your eye on it.