Espn, Comcast, Mcdonald discussed on Invest Like the Best
That's at one. Extreme of usage is very low. But your sense of utility is very high. So that's in one corner and the other corner tend to be. There's a lot of products where there's a lot of usage but not a lot of empty not a lot of anchor. Much of Youtube fit in this category people use it for hours and hours a day. But you push people on you had to pay for it. What would you a if we took it away? How would you feel and you get a wide spectrum? Of course it's a widely spread business but a lot of it would fall in this category of very high usage and low. Mcc if you draw diagonal through this chart but you'll find sort of above that diagonal our businesses that naturally lead towards casual fan or superfan business models and below the diagonal are ones that lead to what I call non end as models advertising being the most obvious of those. Where would something like insurance figure into this way of viewing the business world? Insurance is such an interesting example. So insurance is a bundle on many levels and in specified roles whom health insurance from health insurance added sort of basic offering. What is health insurance the bundle between sick people and healthy people and at the next level? What is insurance will tend to get bundled together with other forms of germs is bottled with dental and disability and so on at another level health insurance gets bundled with depending on your country in the US gets bundled with employment and many countries it gets bundled with citizenship. And you get it as part of that country at a core level if you think about usage versus anchor Value Health. Insurance is the perfect example. It's a thing that you pay one us. Yeah you never use it you pay for it and you hope you never get sick and when you do get sick you're up in the top. Left question gets asked a lie about. Why don't people just pay for what they need and health insurance like the perfect example? Because you can't the thing that I think people miss about it. I'm going to try to offer very little political and I don't think this Israeli have opinions on it but I'm gonNA ignore all lacks the reason health. Insurance works is the cost or the superfan is ridiculously exorbitantly. High and so the only way for that product to exist for the whole healthcare industry work to bundle healthy people with sick people. People need to contribute even though they're not using it or the whole system doesn't work when you have a catastrophic issue and you spend a few days in the hospital a few weeks in the hospital it's millions of dollars and no practical person can put away enough money to deal with xfinity. This is not about bad planning. This is about bundling. That's why that industry works and you can now ask the question of. Should it be bundled with employment or should it be bundled with citizenship totally reasonable but should you bundle healthy and sick people together go find any country where insurance is not prevalent and just look at all the rates of illness mortality of so on and it's order mind to health insurance works? That is a very good example of a product that sits in the top left of this quarter. It's interesting one because again. Since we first talked you start to see all of the world some sort of bundle and the notion of a business that you never wanna use but definitely want to pay for is strange at first and then insurance fixes that Strangeness Very Quickly Exactly Right Talk a little bit now from the consumer side. So that's sort of maybe the more proper way to compensate providers whether that's first party or third party is via deterred metric talk now about the consumer side of things in mid three. Okay Mithra so you already gave them the typical way this gets framed is. I've got this bundle. I only want to pay for these products and cable is uses an common example for this the myth maker in this case. Maybe they're following along so far you produce values casual fans maybe. I can buy this. Mcc thing that seems like inside baseball. I kinda cared but whatever. I overcome divides that money is up to them by come on good bundling is clearly bad because what it represents at its core is a lack of choice. That's the man. What is a Bundler doing the ripping off consumers by presenting a lack of choice in order to get product a half the byproduct be so just as a as sort of simple example to us is us McDonald's as an example and imagine you walk into McDonald's look up at the board? What goes everybody's head when you look at that board so I look at it and you say okay. I kind of want big Mac. I definitely want some fries and if I get those two things together than the drink is free and the person right behind them or do they say. I definitely want a big Mac. I really WANNA drink. I guess the fries are free and the person right behind them has a crying kid. Looks up at the board and says who has happy meal thing to come with the toy and then the whole damn meal is free. The interesting thing about that. Everybody's seen that happen looking up this board and everybody's looking at the same package and looking at different and to all of them. It looks like a deal. There's one fundamental reason why people think bundles are rip offs. When they're not and that reason is for consumer as the thesis in this in the section is for consumer to properly value bundle there must be transparent in reasonable albacore price for every product in the bundle. I get asked a lot of big media industry and so on. What's my opinion on? What's happening with capable industry tables going through unbundling and so on? I've you is. That's not actually what's happening through a variety of mostly non-intentional choices over the course of the last forty years the evolution of cable. What we've landed on is an incredibly non-transparent. Ala Carte pricing mechanism. Nobody has any idea what the cost of the individual offerings inside. The cable bundle would be and so they mis attributed and so they presume that if I were to rip out parts of the Bundle I get at the cheaper price so the reason I put these two in order to talk to three. You think were very disconnected in order for me to Papa understand the value of a bundle. I need to get all our pricing. Why does McDonalds work and comcast has trouble with this? Because Microsoft puts a price next the big Mac and next to the fries and next to the drink and you can their transparent the reasonable some people buy them but you now have an understanding of what that bundle feels like and when you say what you just said is if you survey people about what they like and dislike about cable it is easily the number one answer is I just WanNa pay for the channels. I want and then you'll ask them. You'll say okay. Let's take an example. I just want. Espn GREAT. What would you pay for? Espn you pay fifty bucks a month for Cable. What would you pay for? Espn and generally what they'll say is well. I read some article. That says that he has PM gets five bucks a month from comcast so about. I pay a little bit more than that. I'll pay like seven or eight bucks and I'll get just ESPN. Why can't I do that? That seems really clear. Okay so why? Do these two myths connect. And what's the problem with? What's happening here and by the punchline of this is. I think what we're seeing happening with cable is we're GonNa see unbundling and what we're going to see is transparency on all car racing and then we're going to see a massive re bundling as soon as people understand what the components of this bundle cost. We're GONNA see them all back together in the way and has lots of reason why I think the the bundled today is broken. I do think because we lost track of this. We'll get to this myth four to because we lost track of this. The cable industry has not been able to realign their bundled the right way. But I think what we're seeing transfer pricing okay. So you go through the scenario interviewing the consumer and you say hey what you want from cables that I would just want to pay for. Espn okay great. What would you pay for? Espn has had paid mark up over. What the five bucks that. I think they're getting I go back to miss too. So how is this working in Mathu? As well. The way I divide up money in a bundle is by martyring contribution and I take my fifty dollars bundle and I divide up the money by what percentage of people would turn if this Removed from the bundle and as an equation in there that I won't go into detail here but the net impact of it is that there's a relationship between the wholesale price of a product and the retail price of a product and it's proportional to the what we call the superfan percentage so the wholesale price of ESPN inside of the bundle five bucks a month. Let's say superfan percentage for it is ten percent. Let's say that it makes that Very Chris. Imagine that if you were to remove ESPN from a bundle and percent of people would turn what that implies the correct retail price free. Spn is fifty dollars per month. That's what the math implies. So now you go back to that consumer and say great. You're paying fifty bucks a month for comcast. What would you like to pay for? Well I guess I'd like to be free. You can pay fifty bucks for ESPN NOW. All of a sudden took an amazing deal. You Pay Fifty Bucks Pin and get two hundred ninety nine other channels for free. It's better the McDonald's and this is a really good deals but because we don't have transparency on each of these components were is that people think they're getting ripped off and so this myth is quite important. And when you think about it so that's cable if you think about it for people trying to apply this I get asked a lot about him going to produce this bundle should offer the product separately to in. My answer is definitely yes. Even if you don't think that's going to be a primary thing people by and you're GonNa make the bundle such a good deal because you think that that's really what you want people to buy people's ability to understand a bundle starts from their ability to understand two components the bumble. That's what Mitt three is all about. He's seen a little bit about how marginal cost or cost of goods figures into this whole framework so in examples of say Netflix. Or spotify or cable. Bundle doesn't cost them anything. Extra to distribute some of the product from the providers to the marginal user so enormously high gross margins. Obviously some things are physical bundles like McDonald's food. There's other bundles where there's more marginal costs as a percentage. How does that figure in to the thinking? Here for sure. There's a section of the paper in the end about that and basically you just adjust the equation to put a minimum on it. Your product is basically unviable if you're wholesale price gets below the marginal cost of delivery of that product and so if I have a five dollar value meal. Mcdonald's and immortal contribution of the Burger is less than what it costs to make the Burger. That should just not include it not gonNa work and it's at the floor effectively on what is tolerable. Mcc for the product in practical terms. I'll say sequoia use a lot of media examples at all. Have what you described as zero delivery costs or not zero near-zero delivery marginal delivery costs. When you look at other bundles. The interesting thing is I think. Many people don't perceive the amount of markup that goes into marketing a product superfan go back to the definition super fans are defined by number one willingness to a retail number two the activation energy to find it and the activation energy to find a product is.