Bundling is a business process where a series of blocks in a value chain are grouped to lock in consumers as the bundler takes advantage of its distribution network to limit competition and gain market shares in adjacent markets. This is a distribution-driven strategy where incumbents take advantage of their leading position.
- Bundling vs. Unbundling
- Microsoft Office Case Study
- Microsoft’s Teams Case Study
- Slack merging with Salesforce
- Was Netflix disrupting Disney?
- Disney bundling up its streaming empire
- Connected Business Frameworks
Bundling vs. Unbundling
Usually, when a company has gained monopoly power, it will use bundling to make consumers get its whole set of products and lock them by leveraging its existing distribution networks (Microsoft Windows is an example).
Unbundling, instead, is a business process where a series of products or blocks inside a value chain is broken down to provide better value by removing the parts of the value chain that are less valuable to consumers and keeping those that, in a period in time, consumers value the most.
Bundling is very common in the business world in industries that tend to mature and become more and more competitive.
That happens because as startups enter new spaces, and those new spaces become viable and quite large, incumbents leverage their distribution power to quickly build an alternative to the new entrance while bundling it up with its other services.
The bundling strategy has a few key objectives:
It helps gain quick distribution
Take the example of Microsoft, which tried to enter the Browser market quickly by launching its Internet Explorer browser within Windows.
This highly reduced the friction for the browser adoption, and it enabled Microsoft’s Internet Explorer to quickly gain traction against the most popular browser at the time, Netscape.
Of course, in this case, when bundling is aggressively executed by the incumbent might quickly turn into an abuse of dominating position.
It helps increase the perceived value of the company’s brands for their existing customers
For instance, going back to the case of Microsoft incorporating Internet Explorer, for free, into its Windows package, it enabled its existing users to have an additional service for free and with much-reduced friction.
At the time, using an Internet Browser was still quite complex.
It helps expand the customer base
As Microsoft introduced Internet Explorer, it automatically opened up the way to develop new products for a new and expanding customer base.
Microsoft Office Case Study
As Microsoft became a tech giant throughout the PC era, it built a strong distribution network to lock in consumers in the PC market for decades.
Indeed, Microsoft bundled its Windows in computers before they got purchased.
Thus, encouraging manufacturers to push Microsoft’s products.
If abused by a monopolist, a business model primarily built on bundling can turn into anti-competitive behaviors.
Microsoft’s Teams Case Study
As Microsoft saw the rise of Slack disrupting the productivity space, it quickly acted to create its own version, as a knockoff of Slack called Teams.
This worried Slack so much that the company bought an entire page in The NY Times to write an open letter to Microsoft’s bundling Teams, as am abuse of its position.
It was November 2016, and Slack was correct, Microsoft would soon make its Teams very successful, thanks to its distribution power.
This is a perfect example of how powerful bundling can be when combined with a dominant position and massive distribution.
This sort of move is risky as it might awaken the regulator.
However, if you’re Microsoft, you might accept the cost that comes later (a significant fine) as the cost of doing business, yet stay relevant in a quickly evolving market.
And with productivity representing the core of Microsoft’s business model for decades, the company understood that either it was going to defend its core or it was going to lose an important chunk of its business.
Slack merging with Salesforce
Since regulators did not intervene in Microsoft’s bunding of Teams, Slack was either going to fight a very fierce battle, or it needed to understand how to compete against Microsoft’s massive distribution power.
By 2021, Slack was acquired by Salesforce for over $27 billion.
Salesforce left Slack to operate independently while it smoothly integrated it into its offering to expand the value of its CRM.
Thus, by joining Salesforce, Slack could compete against Microsoft’s massive distribution power.
This is a perfect example of how powerful bundling can be and how it can shape a whole industry to consolidate as the stronger players roll out their bundling strategy.
Was Netflix disrupting Disney?
Another interesting case is the opposite of Microsoft vs. Slack, where Slack has been pushed into the corner and had to sell to Salesforce.
Disney bundling up its streaming empire
By 2022, Disney’s bundle of streaming services (comprising Disney+, ESPN, and Hulu) passed Netflix’s subscriber count!
Disney+ only started to build its streaming services in 2019, yet by 2022, it became a powerhouse.
Of course, Disney threw a considerable amount of resources into it by launching its Disney+ service, and by purchasing Hulu.
Yet, this helped Disney reverse the disruption from Netflix, which by 2022 faced a substantial threat from Disney, as the company used its distribution power to bundle up its streaming services to create a compelling offering on the market.
In this scenario, Disney stopped Netflix’s dominance successfully by using a powerful bundling strategy.
Usually, when a company has gained monopoly power, it will use bundling to make consumers get its whole set of products and lock them by levering on its existing distribution networks (see Microsoft Windows).
Unbundling is the opposite process when a newcomer enters a traditional and established industry by removing the parts of the value chain less valuable to consumers and only capturing the most valuable part (think of how Amazon unbundled retail stores by designing in a whole new experience, that leveraged on digital real estates).
The digital era has brought several business waves that led to the creation of new industries and companies, once newcomers, then become giants themselves.
Let’s look at some of those trends that shaped and shaped the business world in the web era.
Where Unbundling looks at the product offering to break down what’s most valuable and offer it more conveniently.
The classic example is how platform business models have been disintermediating several industries.
As they did so, former intermediaries were wiped out, and the whole market grew.
Yet, this process often leads to the consolidation of a new ecosystem created by the super-platform.
As this ecosystem adapts to the new rules and policies created by the super-platform (implicit or explicit).
The ecosystem adapts to it, and the new intermediaries that enhance that ecosystem spring up.
For instance, as Amazon is disintermediating the delivery industry with last-mile delivery, that might create a situation where key players that have existed for decades (FedEx, DHL) might be kicked out of the marketplace or perhaps just remain niche players with marginal market shares.
That might happen as Amazon might create a much larger industry, driven by its last-mile delivery ecosystem that might favor the birth of new intermediaries aligned with Amazon’s last-mile delivery policies.
This process of reintermediation will help industries and markets to be born on top of new ecosystems made of incentives and disincentives.
That is how it gains traction.
In a coupling process, instead, the coupler expands in new areas and activities that might seem disconnected from the overall business model, and yet, the way those activities are offered to final customers also enhances the whole business model.
Connected Business Frameworks
Other key business concepts:
- What Is Unbundling
- What is Disintermediation
- What is Decoupling
- What is Coupling
- Platform Business Models In A Nutshell
- Network Effects In A Nutshell
- What Are Diseconomies Of Scale And Why They Matter
Other key resources:
- What Is Business Model Innovation
- What Is a Business Model
- What Is A Heuristic
- What Is Bounded Rationality
- What Is Business Development
- What Is Business Strategy
- What is Blitzscaling
- What Is a Value Proposition
- What Is a Lean Startup Canvas
- What Is Market Segmentation
- What Is a Marketing Strategy
- What is Growth Hacking