There is a widespread belief in technology circles that bundling of cable TV, newspaper, magazine and other information goods will go away now that those products can be distributed à la carte on the internet…But this reasoning misses the economic logic behind bundling: under assumptions that apply to most information-based businesses, bundling benefits buyers and sellers.
Consider the following simple model for the willingness-to-pay of two cable buyers, the “sports lover” and the “history lover”:
What price should the cable companies charge to maximize revenues? Note that optimal prices are always somewhere below the buyers’ willingness-to-pay… If ESPN and the History Channel were sold individually, the revenue maximizing price would be $9 ($10 with a 10% discount). Sports lovers would buy ESPN and history lovers would buy the History Channel. The cable company would get $18 in revenue.
By bundling channels, the cable company can charge each customer $11.70 ($13 discounted 10%) for the bundle, yielding combined revenue of $23.40. The consumer surplus would be $2 in the non-bundle and $2.60 in the bundle. Thus both buyers and sellers benefit from bundling.
I would argue that the internet made bundling even more sensible. The biggest advantage of the Netflix model is its non-linear content strategy – shows can be watched at any time and in any order. The only benefit remaining with cable television is live content. They no longer are the go-to option for news, education, story-telling (programs) or escapism; the latter of which has been completely disrupted by social media.
It’s interesting to note how the internet has changed the economics of bundling as well, since it also facilitates a minimum distribution model. Content reaches consumers directly, very different from physical news or music, whose distribution is still controlled by record labels. This changed the power economy from content creators to lock-in platforms like Google and Facebook, where advertisers can now appeal directly to end consumers.