NFL, Espn, Spotify discussed on Invest Like the Best
Itunes and spotify offered was a way to pay for all the music. You Might WanNA listen to even if you're going to get access to some things that you might not have gone out and bought individuals and offering turned out to be incredibly Parker to use that terminology. What it allowed was it allowed for. Every consumer to all of a sudden get access to goods that they were casual fan up and turns out to be very powerful because the set of products for which any individual would pay retail and have the activation energy and find it. That's a product sentence to be very narrow but the set of that you might find utility in and you might find pleasure entertainment in or whatever it might be tend to be much wider than that so at one level spotify bundled together ninety nine cent purchases of music into a ten dollar offering another level. If you watch what it is doing now especially with odd casting is producing a bundle. That is really the Audio Bundle and Dana is a really good talk about the value of the eyes and ears and on a really good analogy for it but core idea being you can apply the same principle one step up and say not just about all the music you might listen to. It might be all the audio you might listen to. And then beyond that. What is built a set of bundling relationships across companies as well and one of the most popular ones is the spotify student. There comes with Hulu and showtime as well. There's a number of similar offerings. That have been made across the portfolio. But those sort of three different levels bundling up music only audio and then cross bundling across arts and services. Let's return now to the structure so introduced us to this first myth that you encountered and why almost the exact opposite is true. Yeah so reminder on the terminology math the way the papers written and I expect some of your listeners will wanna read the details. I'll try to cover it here but there's a lot of. There's a lot of fun in the details. This written as a conversation between me and what I call the myth maker and the midst maker. I think each reader could picture someone. Everybody knows someone who says online his bad. These are all the bad things that come out of it for the purpose of when I was reading the paper mostly just pictured myself so these are all things that I said ten years earlier. That's the way victory in the first one written in this paper is the most superficial and the highest align is the blanket statement bundling is bad for consumers as well as providers and the easiest way to understand this wine. Is You just start with the scenario described? Before I have three products I can sell them. Each Alencar can sell them in a bundle. What should I do? And what most people see in that. Sorta ran through the example. If I saw the car every product every provider only has access to super fans and every consumer on the flip side can only get access to products that they are a Superfan hops. If I have these products separate them out that's the value created if I put them in a bundle than I produce value in two ways for providers I give them access to casual fans and for consumers. I give them access to products that they might be a casual fan of us are music example earlier. What it spotify. Due to Itunes it allowed people to listen to music that they might not have gone out at ninety nine cents to buy and that value turns out to be really important and if you go look at the usage grass and so on what people spend their time listening to some of it is things that they might have gone out and bought and bought at nine cents or and record source on but a very large portion of what people spend time. Consuming are things that they value but they would not have met that super fantastic four so the first myth and then each of these has it of thesis that goes around with it is the way that bundling produces value is not by producing more super fans by producing casual fans one example. I like to use for. This is an example. People don't is. You'll see the ultimate fighting championship fan the OC. I'm not your description of its unaware of it but I'm not an active watcher Eh. Right right so interestingly. I sometimes talk in a room of one. Hundred people asked this question generally somewhere between two and five people raise their hand and Sam a fan of the FCC and generally those people raise your hand not a little bit in the air straight in the air. Because I'm sure you know someone like this or the people who are into ultimate fighting chip. It is a deep obsession some of it. There's lots of reasons why it's perhaps audience but I think one of the reasons is the Businessma you pay fifty bucks for a fight on Fridays. You invite your friends over and you watch if you ask the same question of people who are into the NFL Sarria fan of the NFL. A sustained group one hundred people and you'll get hands raised all different levels. Some people will say I guess. I watch super bowls. I'M A fan. So people say whenever my teams winning I watch all the way to the person at the end who says afforded Tv's I watch every game simultaneously every Sunday. My Fantasy League is my obsession and so on and one observation of that is the. Nfl vary widely distributed. And most of those fans can't really describe for you how they pay for the only. Actually no I come through my my Reisen bill myself. It seems to be free. I'm not really sure. Why and that reason is that that as a business focused heavily on casual fans they focused on distribution casual fans so backing all the way away up. The first myth is this sort of high level. One will get more practical in moment. Is I think that people will say bundling is cheating. Both consumers and providers the east are generally missing. Is that one done well. The way bundling produces value is by giving access to and revenue from casualties. I guess we're wind would go would be to say. I pay this however much per month for my cable. Bundle and only watch three channels. This is nonsense. I wish I could just pay those three channels directly. That sort of thing is sort of the reason. Why people don't like this concept but I think what you've made clear is I think the NFL example is perfect that if you take away all experience of the NFL from everyone except for the four screen fan that seems like an obvious negative right right exactly and the positive is because of the bundle. Yeah and by the way the example you just gave cable and why can't I just pay for three channels? You pause that one because that observation is very sharp on the consumer side and that's what made three is all about. We'll get to that in a second awesome awesome so the second myth is really about more than business model of this on the other side. Not The consumer side so much but will call the provider side so I I'd love a distinction between if relevant third party providers and first party providers and why there's this kind of weirdness around who should get what share of the Pie of the revenue that's generated from selling the bundle to consumers. Yeah so let's do deficient part. I so providers consumers bundlers. Most of this theory will divide the world and try to treat them neatly as divided between the provider the consumer and the bundler provider provides a good to consumer consumes it and the Bundler puts them together. It's not always that clean gave an example earlier sometimes the providers or bundlers themselves and to lots of different ways at that works. But let's pretend it's thing for moment. The third party versus First Party thing is interesting and one of the conjectures of this paper is all the examples given tend to be as you describe it. Third Party bundles. The bundler and a provider are different. Corporate ENTITIES. There many cases of what? You might call first party bundles where I have. Multiple product produced by the same company to Amazon Prime. To pretty good example Amazon has Prime Amazon music and so on New York Times of brick example they have not only the New York Times subscription but the offer subscription and food subscription. That goes along with the to they bundled together. There's also just one level deeper through this third party first party. There's also inside of a single product. You might call intro product bundles and from that perspective. I code as a pretty good example. Where the bundle is a bundle of products. It's a document a spreadsheet application all in one so multiple different ways it can be applied. I'll describe the terminology all in terms of third party. Bundles and thirty providers. Because it's easier to understand if two entities are separate but I think we should come back to that. I think a lot of listeners. That may not be the most practical application of this. It might actually be the inside a single company or inside a single product but okay so myth to so this one like you said to focus on providers. Three focuses on consumers in mid four will come back around the Bundler so myth to this one may seem odd to put as the second one as I've thought about the ordering understanding this one is the key to understanding the next set and the way has generally gets. That is a small sentence. What does the mythmakers say? The mythmakers says hey okay maybe I get your whole thing about casual fans creating value and the NFL examples are pretty good one but come on the bundlers clearly cheating everybody. They're paying everybody all these arbitrary rates they should just pay people fairly and bundling would work better and again. I'm putting the consumer side aside for a moment into focus. That's at all the time people look at it and say how does comcast get away with paying? Espn four dollars and fifty cents per month. History twenty cents per month doesn't seem fair now when people use the word fair they mean lots of different things but I find that most times what they mean by fair is by usage especially in Silicon Valley. That's the it's almost a direct proxy for that term the myth here to give the full sentences. The Myth is revenue from. Bundles should be allocated based on usage. How used to say this all the time or at Youtube building up these different products. And saying we're going to build this offering we're going to build a better bundling model and it's going to be more fair and what we meant by that was we're GONNA pay based on usage and as I spent more time thinking about it I realized not only is that incorrect. It's actually can lead to almost the opposite behaviors of what you really want to let me describe a little bit one way to think about it. So there's a little diagram in the paper that just lots out usage for some different properties. I'M GONNA use cables an example because it's very familiar but if you look back on paper written the first time post stats on this history channel on ESPN so uses to autism. An example history channel. Espn get about the same amount of usage if you look at it in terms of timespan rating points so it's very close and yet history channel makes about twenty cents per month per subscriber and espn make somewhere between four five bucks per subscriber per month. So what is the second access? What does that price access correlated to now? Usually you would buy go ask. People knew mistry. The term that generally gets handed back is anchor valley that axis corresponds to anchor anchor. Value is a word and a term that I use when the economic phenomenon is not yet clear as a kind of a made up her. It's not very descriptive. And so instead we started using this term marginal turn contribution. Mcc and it's pretty simple idea that access what anchor value represents marginal turn contribution is if I were to remove this one product from the bundle. What percentage of my audience would turn pretty easy to understand if I move? Espn from bundled. How many people turn and they've been a bunch of studies on this but the reason why. Espn is twenty times more than history channel is if you were to Spn for the Bundle Twenty Times as many people turn as if you were to move history channel. That core idea that bundles should divide up. Payment divide up the revenue based on M. C. C. As opposed to usage leads to a totally different way of thinking about the bundle. The paper actually even walked through some formulas for how to calculate this you can formulate arrived. At what a fair price would be a wholesale prices. How much you pay out to each provider and it is correlated mostly to this sermon. That marginal trunk. I think this concept is really interesting like this. To access. Chart for usage is on the x axis. Mcc is on the Y axis. It lets you plot all sorts of different businesses so what would be an example of say a very low usage but hi. Mcc business you could draw a diagonal through this chart. We owe back your very first question. Like what Superfan businesses casualty businesses? And so on so okay. Let's start where you start in the top left of this chart low usage hi. Mcc ANCHOR VALUE. WanNa use that term the typical example. I'll give it a sporting event you go to sporting event you bay hundreds of thousands of dollars or an hour or two of entertainment..