To Bundle or Not to Unbundle

Richard Kramer: Welcome to Bubble Trouble, conversations between the economist and author, Will Page and me, independent analyst Richard Kramer, that lay out some inconvenient truths about how financial markets really work. Today, to bundle or not to bundle, if we're all content creators now, how are we all supposed to get paid? More in a moment. Hello, everyone, and welcome back to another episode of Bubble Trouble. And I'm joined here by the inestimable Will Page. Hi, Will.

Will Page: Great to be here.

Richard Kramer: We've seen so many examples of new bundles formed up in this streaming, on demand economy. And I really want you to help us understand how the creator economy dovetails with all these bundles, because what we've learned from these UK parliamentary hearings and numerous complaints from artists is that the bundles don't seem to divide up in a way that leaves enough on the table for all of them.

So first, can you talk to me about the basics of why we bundle? What does it mean for a consumer to have a large bundle of goods that, frankly, a lot of them, they'll never use. Why do we all want the option to be able to over consume those digital goods, even though we're really just going on to these big bundle platforms to get a few things we know we want?

Will Page: To get you to the answer, I'm going to take you to one of your favorite diners there that, that exists. I know that you love your restaurants, and I'll take you to McDonald's, that's a burger joint just in case you're not familiar with it. And just-

Richard Kramer: Not, not familiar, Will. Don't, don't, not my, not my cup of tea.

Will Page: And we think, why do people go to McDonald's? And when they go to McDonald's, why do they pick the Big Mac meal? And what I'm going to give you right now is an example of thinking about super fans, casual fans or non fans. Super fans will happily, willingly search out and buy their individual product. Casual fans, who may be a passing interest in the product, may be willing to buy it and non fans, those who have got no interest.

So let's imagine you go up to the till at McDonald's and you get the proposition a Big Mac meal. First customer could say, you know, I want a Big Mac, I'm a super fan of Big Macs, kind of interested in fries, and I'm a non fan of drinks, but it's free. I'll take that Big Mac meal. Directly behind him a second customer who says, I really want that drink, I'm a super fan of Coca Cola or high sugary drinks. Kinda want a Big Mac, casual fan of Big Macs. And then the fries are free, didn't want to get fries, but I'm getting them for free.

And finally, you could have a third customer with a kid and they're thinking, you know, I really want a toy for my kid and if I get this deal, because there's a toy thrown into the Big Mac meal, not only do I get a toy, but the whole meal is free. That is the essence. As we go through this conversation today, Richard, I want us to think about the Big Mac meal. It's a simpler example I can give our listeners of why bundling works. It takes super fans, casual fans and non fans, and grabs their money completely. It offers something to everyone.

Richard Kramer: So you're saying you want to appeal to the widest possible range of consumers, even though I'm sure there are people who walk into McDonald's and say, you know what? I, I just, I'm just here for a drink or some fries.

Will Page: Right, but they are just here for a drink and fries. But if I told you that drink is X, and you get the fries and the burger for free, you wouldn't say no to the burger and the fries as well. So it expands the portfolio that you're actually selling to your fans.

Richard Kramer: I get that, but it really raises the question for me of money in and money out. How does that spend on the bundle of Big Mac fries and a drink, get divided up by McDonald's? What's the incentive to them to sell you all of those things when each of them have their own individual cost? And indeed, when we think about the creative economy, and you're buying a bundle of 60 million songs, or however many millions of potential hours of content you got on a platform like Netflix, how does all that money get divided up between whose brought the food to the table so to speak?

Will Page: Well, I'm kind of keen to get out of the McDonald's restaurant and back into my home territory of music because it's giving me indigestion, but we think about McDonald's for a second. A classic way that you could approach this, this complicated term here, marginal churn contribution MCC, which is if you took the fries out of that Big Mac meal, how much trade would you potentially lose? So it gives you a counterfactual.

So they take my fries, I have your meal proposition, I'm the wholesale provider, it's Will's fries, and I remove them from your restaurant, how fewer customers do you get? And I've got my marginal churn contribution from deducting one of those three components out of the Big Mac meal. You could flip it and ask, what was the marginal acquisition contribution to getting customers to buy the meal in the first place? The marginal churn is the kind of the two us geeky economists kind of get fascinated about there.

Richard Kramer: Just to make it really simple for listeners, you're saying a deal that had a Big Mac and a drink is going to have a certain audience. And if we add the fries, we'll know exactly how much larger that audience would be.

Will Page: Either a, we add the fries to see how much bigger that audience would be. Or we take away the fries to see how much smaller that audience would be.

Richard Kramer: Got it.

Will Page: That's the flip of churn and acquisition, additive or taking away.

Richard Kramer: So which way is the pendulum swinging, it feels like more and more gets loaded into these bundles, and the outcome is that all the individuals hoping to get paid from however many songs are listened to or video content gets watched in these various, uh, digital bundles, are getting less and less and less, because the cake is getting divided up between more people.

Will Page: Right. And it's interesting when you stick with music for a second, because in music, we have the downstream payment, that is every time you press play, that artist is going to get paid. Remember, that's not how it works on Netflix, which is a buyout model. They will pony up a large amount of capital to acquire, let's say, The Fresh Prince of Bel-Air for a limited time period. And when they get it, they don't have to pay any more money depending on usage.

So the natural instinct is to base it on usage. That is if you've got 1% of all the streams on Spotify for a particular period, you deserve 1% of all the cash generated in that market for a particular period. Another wonky term to throw at you here, sorry for this, but pro rata is what we use to describe that. You're gonna get your pro rata share of streams.

Richard Kramer: So Will, are you saying that I am paying my subscription to just the artists I listen to, or I am paying a portion of my subscription to all the artists, and the ones who are successful are just the ones who are able to aggregate the billions of listens on a platform that bundles all of these different artists together?

Will Page: Absolutely. Under the current model, if you're a light user of Spotify, let's say one hour or two hours a week, and the person next to you as a heavy user of Spotify, perhaps eight, 10 hours a day, then they're heavy consumption is going to be subsidized by your light usage, because you're both contributing the same 10 bucks a month to that pot of cash that needs to be allocated amongst all the consumption that take place.

Richard Kramer: Right. My question there is, is that fair to the artists who contribute the content? Are they getting a fair shake?

Will Page: It's a very delicate one to work through here, but I will start by saying there was a court's headline, the online publication court, which does some great work, saying Spotify and Apple Music are paying artists that you've never listened to. And that is to the essence at the heart of your question, is a contentious headline that creates a knee jerk reaction, it feels wrong.

But you have to remember that it's a contractual pokier, which is, when you pay a platform, you're paying the platform, who then pays the wholesale provider, who would then pay the independent creators who actually produced the works. So there's many steps in the chain between your wallet, and that artists bank statement. And I think you have to remember you're paying for the option to explore music, as well as the music you actually explored.

Richard Kramer: And just to wind up here, I think, to my mind, that option is the key question. Now, options are something that are very hard for your average consumer to value, but we all want to preserve them. So we don't know the music we don't know is out there, but we might want to listen to, but we'd like the opportunity to pre- to preserve it.

And I guess what I want to get into in part two is bundling in action, and how we are getting conditioned to pay for that option value, even though we don't know what's behind magic door, one, two or three. We don't know what's going to be on th- the streaming service next month to watch, we're just hoping that the option is something that's going to preserve its value for us and we'll keep paying for it.

Will Page: That observation right there, Richard, is spot on. And we started this discussion in a McDonald's restaurant, I think it's only suitable if I try, and end it by taking us back to the gym. Now Richard, when you're using the gym, you may only use let's say the treadmill apparatus. Now, the gym is a bundle just like Spotify and Netflix are bundles, just like the Apple One $30 a month subscription is a bundle. But should it be the case that you should give all of your money to the creator of that treadmill? The argument is yes, it's all that you use.

But the argument is no, because you would never have joined a gym that only had a treadmill, you are attracted to the gym for the fact there's a rowing machine there, there's weights that you can get onto when the time is right. You have the option to use all this apparatus, not just one. So even though you're using one, you definitely valued the options to get into that gym in the first place. And if you did start this journey in McDonald's, you definitely need to use those options to get fit again.

Richard Kramer: Great. So now I get it, that what we're buying is the option for what we don't know we might want but we want to make sure it's available to us in the future. And I guess that's how we all look at these giant repositories of digital content, the streaming platforms we buy, where it's virtually impossible for anyone to even use a tiny fraction of what's available. But I guess we've all become options traders now, something we'll come back to-

Will Page: [laughs].

Richard Kramer: ... again and again and again, in future episodes of Bubble Trouble. With that, let's close out part one, and move on to part two, what happens in the creator economy to bundle or not to bundle? I'm Richard Kramer with Will Page, and this is Bubble Trouble.

Welcome back to Bubble Trouble. I'm Richard Kramer, and I'm here with Will Page talking about the creator economy and bundling. Will, it feels like in the world that you've described of hyper competition in music where there are 75 million tracks uploaded every 20 seconds or a million books published every year, that we're all going to be walking around throwing pennies or dollars or something bigger to support all of our favorite creators, and it just feels like that's not really gonna happen.

So talk me through this creator economy and how leaving aside this friction point and obviously it's got to be easier to pay these people, how it's really going to work that you're going to get people to pries open their wallets and support dozens of starving artists.

Will Page: Well, you quoted, uh, Bjorn from ABBA in part one, and I think it's worth going back to that which is, can somebody snap the chain, can somebody create the direct link between the creator and the consumer? So either on one side of the fence we have a platform based business where the platform manages the money end, and the platform manages the money end. On the other side, we look at different business models where creators go over the top to get to the consumer directly. And I think that's the important distinction there as well, which is, it's going to be tough, I do buy into your argument, just make it easy.

There's going to be no panacea for all these traders in this gazillion creator economy that we're seeing. We're seeing two podcasts every minute get created, two every minute, so how is this one gonna stand out from the crowd becomes a question. But what you are seeing is a choice. Either I compensate the platform, the money goes in, and they work out how to allocate it. And hopefully it gets out to where I want it to, or I go over the top and get to that consumer directly. I think the majority of people just keep it easy, look after my bank details and we'll do business. But there is a minority of people who say like, I want to know where my money goes, I want to make sure it gets to the end source.

Richard Kramer: But I would ask our producer, Eric, who's listening in right now, just how many people are actually contributing to public radio. They have their telephones in the US and ask people to open up their wallet and what percentage of their audience actually does kick in a, a tenner or fiver or something to support public radio? And I'd imagine that's a fairly small percentage, even though it's a phenomenal product and has been established as a brand for years and years and years.

Will Page: Well, in the defense of this model, let me look at Patreon for a second. They have a press release which came out around the start of the year where they said they've sent $2 billion to individual creators since their launch, just some back of the envelope [mascio 00:14:01]. In seven years, they got $2 billion out the factory gate and to creators. I would suggest, I'm gonna work it out in my head here, the global music industry took about 14 years to do that with streaming. So global industry and one format versus one company and one crowdsourcing technology. So if Patreon can do that, let's just imagine what could happen if the giants of the Facebook's and YouTube really put their weight into a creator economy as well, with the scale they have.

Richard Kramer: So I want to move on to talk about podcast subscriptions in a second and your smoke signals. But time and time again, an error I see with people looking at tech companies or themes is that they extrapolate upper middle class educated market behavior to the mass market. And I would argue that if you looked at the demographics of those people contributing on Patreon, or the 10% of people that Eric just told me contribute to NPR, that is not replicable in the other 90% of the population, people just won't go for it.

So my question to you is, with big tech controlling these platforms, and obviously wanting to clip their own portion of the coupon there, how do they convince mass market consumers to make those contributions and leave enough on the table after they've taken their cut for all those millions of starving artists to make a living off of?

Will Page: Well, this one's gonna be interesting, because you're seeing that with people using Patreon, on top of YouTube. So you have a YouTube channel, you can monetize that, you have Patreon within YouTube, and you can monetize that as well. So we're seeing platforms that go direct on top of platforms that aggregate, that's interesting. So it may not be these large tech companies that will do it, it's the fact they're opening up their floodgates to other companies to sit on top of theirs. And just one other very quick example, Twitch, who I got to work with intensely at start of this year, they're very open to creators using Streamlabs, Kickstarter, Patreon, Bandcamp, and all these crowdsourcing platforms on top of their platform, that's the interesting thing, on top of their platform.

So it might feel like we have two ships passing each other in the night, one ship says, you bundle, you make things easy, you prioritize convenience, you reduce friction, you're the Apple One bundle, and the other bundle says, we're gonna have all these micro payments. But there is some evidence out there to suggest they could coexist. And if they can coexist, the addressable market could be a lot bigger. I'm just putting that out there because it is happening in the market right now.

Richard Kramer: And I guess my challenge to you would be, and neither of us know for the moment, is to prove that, that depth of the market is there. I mean, if you look in the Chinese market, where tipping or social entertainment as a company like Tencent Music, we'll call it, is a major part of the revenue. It's part of the culture, that you're leaving a tip for a karaoke per- performer.

Will Page: Culture matters.

Richard Kramer: And do we have that kind of culture yet in the West that for all of the cold sounds, the, the great beats or, or the beautiful vocals you might hear, you think, well, I'll reward that with a small micro payment, where A, it's going to be frictionless and people have that altruistic behavior. So let's move on and talk a little bit about podcast subscriptions. You said they're two new podcasts a minutes, something crazy like that.

Will Page: Yeah.

Richard Kramer: And that's not even, that's titles, not shows.

Will Page: Titles, not episodes, not episodes.

Richard Kramer: So how does that work? For the average podcast connoisseur, how many shows do we think they're really going to subscribe to? How many creators will they support? And what's a realistic attach rate, if you will, on top of the all for one bundles that people are going to be getting from listening to ad supported podcasts on their favorite streaming platforms?

Will Page: So I think there's a few points we got to unpack here, Richard. I think the first one is, and it's potentially a smoke signal for us in our industry right now, is I think people are doing some back of the envelope mathematics and they are figuring out that the ad dollars ain't going to pay the bills. I'm not sure that's something you'd agree with, but there's kind of panacea of watching radio advertising migrate to podcasting. I never bought it from the beginning, and I think increasingly, other people are raising question marks too.

So if we take that first point as to whether the ad dollars are going to provide enough cash to cover this podcasting explosion, then we move to our second point, which is, if you look at what Apple's done, not just with their App Store, but with podcast subscriptions, they're treating podcast creators the same way as app developers. I think that's a valid point. And I think that gives us a parable to think about how the app development economy exploded under the iPhone, and whether the same thing could happen to podcasts as well, and whether they could turn podcast creators into app developers.

Richard Kramer: Indeed, and that's one of the reasons why we hear time and again, the value of podcasts, maybe more to video content providers that want to use those true crime podcasts as script material to create their next hit shows.

Will Page: If you ask consumers what their number one platform for podcast is, the majority of surveys I've seen, and I've seen enough surveys, the number one answer is YouTube. And then when you ask the industry, is YouTube a podcasting platform? They say no, you can't call YouTube a podcasting platform. We don't consider it podcasts. And anytime we usually disagree with a consumer, you tend to be found out to be wrong. So it's just an interesting thing that you raise video there in terms of what YouTube's plans are in this space.

Richard Kramer: So let me move you on to a couple of smoke signals. On the one hand, we're hearing more about these giant bundles that we keep getting, on the other hand, we're hearing about the creator economy where we're going to unbundle everything to hundreds and thousands of individual creators we're all going to support. Give us a couple smoke signals for people trying to make heads or tails of these two opposing trends.

Will Page: Smoke signal number one, Richard, I think is lookout for bundle propositions to the customer that are simply too good to be true. And if they are too good to be true, you have to ask yourself, how long can they keep it that way? So you mentioned the Apple One bundle, you know, $30 a month for six people to get music, games, TV, news, fitness and storage all in. That's too good to be true, it's an incredible ... is a kitchen sink offer of a media bundle. But then Richard, remind me again, what's the Apple's cash reserves at the moment.

Richard Kramer: Uh, about $80 billion.

Will Page: Which is pretty much bigger than the Scottish economy. So if you've got that much cash, it can stay too good to be true for a long time. That's the main one. Second one is to think about cross usage, which is if you're using one bundle, what other bundles are you using and are those bundles complimentary? Those who pay for HBO will also pay for Netflix, or the substitutional like music. You pay for Spotify, you don't need to pay for Apple. There's a lot of smaller bundles, pure play bundles that could be, get left out in the cold. And that could be an element of bubble trouble right there.

Richard Kramer: Fascinating. And Will, it reminds me of a great saying by a very famous economist, and I'll ask you to guess who this is, "Every economy is an economy of time." Who said that?

Will Page: Now, I've heard of this, but time has got the better of me, you'll have to tell me.

Richard Kramer: Karl Marx. And of course that means that we can't be watching our video streaming services no matter how many we subscribe to 24/7, 365.

Will Page: And let me, and let me please just quote the other Marx, Groucho Marx who said, "Television is a great idea because whenever I switch it on, it reminds me to read a good book."

Richard Kramer: Absolutely. Especially Tarzan Economics by Will Page.

Will Page: Thanks for the book plug.

Richard Kramer: With that, uh-

Will Page: My omission is your commission.

Richard Kramer: With that, thanks very much for these smoke signals. I'm Richard Kramer with Will Page, and this is Bubble Trouble. If you're new to Bubble Trouble, we'd encourage you to follow the podcast wherever you listen. Bubble Trouble is produced by Eric Newsom and Jesse Baker at Magnificent Noise. You can learn more at bubbletroublepodcast.com. See you next time.