(Updated) Re: my last post on Microsoft and bundling…
I wanted to respond to an email I received stating that the bulk of consumers want everything in one unified package, and that operationally it’s difficult to support both bundles and discrete items. To answer, I’ll make a correlation to my experience with the telecom industry:
1. If a company is the only one to provide a selection of related products or services, customers will prefer to buy them as a bundle. They’re going to buy the pieces anyway; it might as well be convenient. This was the case when telecom was regulated; if you were in GTE territory, you bought all their services because there wasn’t a choice. Similarly, Microsoft has had a monopoly over the PC software industry; with no competitive options, customers and retailers would naturally prefer bundles.
2. As the industry starts to mature and competitors arise to attack the market leader, some customers will seek out alternatives to various elements of the bundle. The number of customers defecting is based on satisfaction with the market leader’s product compared to the newcomers’ products. In GTE’s case, post-deregulation saw a mass exodus of customers because of strong dissatisfaction. In Microsoft’s case, people are generally pleased with the software and, at this point, the competition still isn’t advanced enough to provide most people with a real alternative. If customers are satisfied, then the company benefits from inertia.
3. As the industry matures and competitive products become more like the market leaders’ at a lower cost, commoditization starts to occur. At this point, consumers have real, viable choices; early adopters from stage 2 actively promote the new choices if they meet customer expectations. In the telecom industry, a lot of customers were burned by poor service from the alternative carriers and they went back to the market leader. In Microsoft’s case, if Linux, Mozilla, and any other new upstarts meet customer expectations at a cost of $0, then they’ll accelerate the commoditization of the software industry and spur more widespread defection from Microsoft. Also at this point, some percentage of the customer base still prefers bundles for convenience, but certainly not all. Telecom companies sell bundled services: local and LD is the most common and basic bundle, but they also try to add more products like DSL, web hosting, etc to the bundle. Yet customers either want stand-alone services, or highly tailored bundles in which they don't pay for what they don't use. And they can get exactly what they want because there are so many competitive options.
4. At this point, I think it’s interesting to look at the model provided by Clayton Christensen in The Innovator’s Solution. He observes that the market leader will continue to make incremental innovations to please the most demanding and highest revenue customers, while the market disruptors begin scooping up the customers who are overserved by the market leaders’ offerings. Microsoft’s offerings are incredibly advanced, huge, expensive programs that enable just about anything you might want to do… great for a large corporation, but overkill for most consumers. We’re not at stage 3 yet, and it might take a while due to inertia and the fact that Microsoft is the defacto standard… but for Microsoft to maintain its enormous market share, I believe it will need to offer unbundled (or re-bundled), less complicated and less expensive products that will effectively compete with the market disruptors. In other words, they need to disrupt their own business and begin competing on the basis of meeting customer needs instead of relying on bundling and distribution. In a similar vein, the telecom industry is faced with the disruptive technology of VoIP. I have a telecom client in Florida who recently launched a VoIP service for business that enables unlimited long-distance calls for a very low flat fee. This was an incredibly difficult decision because they lost a lot of revenue when their current long-distance customers switched over to their VoIP service. But it was a smart decision, because market disruptors like Vonage were already starting to steal customers with their free long-distance service. My client was forced to disrupt its own business model in order to retain customers and revenue as their business became commoditized.
On the operational issue… yes, I’m sure it’s a huge challenge. I don’t work there so I don’t know how to address that issue. All I can do is point out market dynamics, look at parallels with other industries, and come to some conclusions on where I think the market is headed. It’s a huge dilemma for Microsoft, and for any other company that has built its business on a bundle of integrated services. The second law of thermodynamics says that everything moves from unity to chaos, and I believe that companies ignore that law at their peril. Check out the Origin of Brands for more on this topic.