Don’t Look Now, but the Great Unbundling Has Spun Into Reverse

We are in the age of the great rebundling, when firms use packages of services as a way to increase their scale advantage and thus deepen the moat around their businesses.

In music, the story is even starker than in television. At one time, consumers used to buy a collection of songs — on vinyl, cassette and then compact disc. It was possible to buy a single song or two in these formats, but the internet facilitated more and more people downloading individual tracks.

Yet, today, there is an inexorable consumer shift to all-you-can-eat bundles of music. Already more than 60 million people pay for Spotify, Apple Music and others. These music bundles will increasingly be combined with other services as well to build competitive advantage. This newspaper currently includes Spotify with certain new subscriptions.
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 Bundling has always worked well for products for which consumers have widely varying tastes and willingness to pay. The magic of bundle economics allows consumers to get more for less, while also maximizing revenue for the provider.
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First, the near-zero marginal cost of distribution makes all-you-can-eat packages compelling. Even heavy users of streaming services can potentially be profitable customers if the underlying economics of rights payments are well managed.
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But investors often forget that network effects are just a subset of scale advantages. Superior scale is what protects most businesses from competition. It would be hard to start a business to take on Coca-Cola because of its size advantage — especially in local bottling, distribution and marketing.
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