Monday, April 2, 2012

Bundling for a reason

There's much to dislike about the current monetization of television shows, but bundling isn't necessarily a bad idea for the channels.

On a recent episode of The Ihnatko Almanac podcast, Andy Ihnatko, talking about HBO pricing and release schedule for Game Of Thrones (which he had blogged about before), said that a rule of commerce is "when customers have money to give you for your product, you take it" (paraphrased). I don't like to defend HBO, but that rule is incomplete: it should read " take it as long as it doesn't change your ability to get more money from other customers."

An example (simplistic for clarity, but the reason why HBO bundles content):

In this example HBO has three shows: Game of Thrones, Sopranos, Sex and the City; and there are only three customers in the world, Andy, Ben, and Charles. Each of the customers values each of the shows differently. What they're willing to pay for one season of each show is:

$ \begin{array}{lccc}
 & \mathrm{GoT} & \mathrm{Sopranos}  & \mathrm{SatC} \\
\mathrm{Andy} &100 & 40 &10\\
\mathrm{Ben}  & 40 & 10 & 100 \\
\mathrm{Charles}   & 10 &100 & 40\\

HBO can sell each of them a subscription for $\$150$/yr. Or it can price each show at $\$100$ and get a total of $\$100$ from each customer (any other price is even worse). This is the standard rationale for all bundling: take advantage of uncorrelated preferences.

By keeping the shows exclusively on their channel for a year, they get to realize those $\$150$ from the "high value" customers. After that, HBO sells the individual shows to make money off of people who don't value the HBO channel enough to subscribe (people other than Andy, Ben, or Charles above). This is standard time-based price segmentation.

This is not to say that HBO and other content providers won't have to adapt; but their release schedule is not just because they're old-fashioned.