Bundling, unbundling, and re-bundling: understanding the cycle of progress
Netscape ruled the world of web browsers in the early 90s.
In August 1995, on the final leg of their pre-IPO roadshow to take Netscape public, Jim Barksdale, then CEO, took one last question from a room full of British investment bankers at The Savoy, London: “How do you know that Microsoft isn’t just going to bundle a browser into their product?” [Context: Netscape’s flagship product, a web browser, was a standalone product. Microsoft was the market leader in the PC operating system segment.]
In a rush, Barksdale responded, “Gentlemen, there’s only two ways I know of to make money: bundling and unbundling.”
As they walked out the door, Peter Currie, then Netscape CFO, remarked, “Those people are looking at you, Barksdale, like you’re crazy. What did you just say?”
This quote by Jim Barksdale defining the way Internet businesses inexorably advance has come to be seen as incredibly prescient since that fateful day at The Savoy.
What is unbundling and bundling and why is it important to understand them?
If an early millennial heard something cool on the radio, she would rush out to the nearest record store to buy the CD. If she was lucky, the album would match up to the promise of that one track. If not and the rest of the album sucked, she basically paid the price of an album for just one track.
This was until file-sharing programs allowed her to download tracks individually. Napster took distribution overheads out of the equation making the physical reach of record labels irrelevant. MP3 took up very little storage and unbundled a singular entity–the album–into its components–individual tracks. This became the new way she consumed music. A couple of decades hence, today, streaming services like Spotify look at the music she loves listening to across artists and genres and rebundle her preferences into a playlist and sell it to her as a subscription. They make all of this available to her on her phone, tablet, PC, or watch.
The music industry isn’t alone. Since the turn of the century, we have seen newspapers splinter into individual articles that sit separately on the web (now the sports lover can steer clear of political news and vice versa), which are then curated into a Google News feed from across sources; an undergrad college education stripped down to a la carte chunks on Youtube only to be later morphed into cohort-based courses delivered by creators ;on learning platforms; or school curricula replaced by private tuition for individual subjects before being rebundled as a subscription available to school goers on the smartphone.
Bundling aids market expansion leading to customer lock-in and unbundling aids market entry leading to customer acquisition. Product management guru Shreyas Doshi’s categorization of deepening product-market fit offers a useful lens with which to understand how incumbents entrench themselves by spreading themselves across verticals and raising the barrier to entry for new competitors. While this scale of horizontal span by a conglomerate offers high cumulative value, it also prepares the ground for a smaller player to enter the market by disintermediating a value link in the chain that is otherwise unaffordable to the average user. As the newer entrant grows, it digs into heels and begins to bundle up until its portfolio is unpicked by another newcomer.
Yet, this is not the only behavior seen. Nor is the motivation to bundle/unbundle singular. Sometimes, an established player wishes to divest its position in an attritional market so as to unlock capital for investment in a growing category. Netflix may sell its bundle for direct subscription revenue, Disney+ for customer relationship management across all Disney businesses, and Amazon Prime Video may use bundling for churn management.
Progress as a spiral staircase
Information goods makers walk a perpetual tightrope between value creation and fragmentation. In a recent tweet, Balaji Srinivasan attributes the quest for balance to market feedback loops that cannot be precisely timed or adjusted: “It’s not so much that decentralization is a panacea. It’s that when you are over-centralized, you decentralize. And then, if people over-decentralize, they recentralize. But around new hubs this time.”
These new hubs mean that the cycle of bundling-unbundling-re-bundling is not a case of Groundhog Day because we rarely, if at all, find ourselves at the same place after a loop. The hubs elevate the cycle to a new plane by providing an orthogonal axis along which market forces push. Let’s imagine this structure as a spiral staircase. Viewed from the top, it may look deceptively like a circle. Viewed from elsewhere, it is impossible to miss the vertical rise of the structure. What fuels this rise, we may ask?
Deflationary tech is the architect of this rise. What is expensive today will be affordable in a year or two, thanks to cheaper computing power and emergent distribution channels. Think a digicam versus a smartphone camera or a desktop application versus SaaS. It means the cost of producing and consuming music, for example, is a fraction of what it used to be even as the choice of music available is several orders of magnitude wider.
Principles of bundling and unbundling
Rebundling should use newer distribution channels to offer more choice: A baby boomer anywhere in the world would’ve gone to a physical school for education, read print for news, and watched TV for entertainment. A Gen Zer gets all this and more on Twitter or TikTok on her smartphone.
Bundling and unbundling often happen simultaneously: Rapid tech advancement and patchy distribution of that progress has shortened industry lifecycles and created unequally served consumer pockets, so much so that both disaggregation and aggregation now happen at the same time. Take the loop of ecommerce marketplaces (Amazon / Flipkart) unbundled into hundreds of vertical D2C brands bundled by horizontal D2C aggregators (Mensa, GlobalBees). We’re at once exposed to any or all of them.
Digitization should democratize market entry: Even as recently as a few years ago, journalists needed the sanctuary of a corporate media entity to attach their reputations to and to earn a living. This was until Substack and Ghost allowed them to benefit directly via a digital subscription and break away from The Washington Posts and The New York Timeses. In the near future, newer centers of information power may yet emerge, like topic-based aggregation of newsletters.
Side note: Academic publishing is one area where arbitration in the form of centrally managed closed expert review still holds strong, though that practice too is being questioned by proponents of independent open verification (preprints).
Up until Jim Barksdale’s prescient comment on how to make money on the Internet, Microsoft was focused on building software products. It did not initially see the potential of the Internet as a giant communication network. In a 1995 internal memo titled The Internet Tidal Wave, Bill Gates urges his “executive team and their direct reports to use the Internet.” He goes on to marvel: “Amazingly, it is easier to find information on the Web than it is to find on the Microsoft Corporate Network. This inversion where a public network solves a problem better than a private network is quite stunning.”
The root of Gates’ fears was the snowballing adoption of Netscape’s Mosaic browser. By the mid-90s, Netscape had a 90% share of the browser market. How did Microsoft counter it? By bundling its own browser, called Internet Explorer (IE), and offering it free to both home and business users with the Windows operating system. And just like that, IE became the default browser for almost every PC sold. Netscape, as did other browsers at the time, responded by packaging a suite of Internet tools (= a bundle) that had a “browser, an email front end, and a newsgroup reader.” This triggered a browser war between Netscape and Microsoft, which lasted half a decade and could very well have been called The First Bundling War.
It’s not just online retail or entertainment or media. Any Internet business is at some stage of an unbundling and bundling cycle. Understanding the phenomena of bundling and unbundling makes us see the future differently and unlocks opportunities that we would otherwise have been unable to frame correctly. How does your industry appear to you through a bundling-unbundling model? And where are you headed?