The Great Content Rebundling

Earlier this week, Variety published an interesting article citing data from TDG that suggested Amazon Channels accounted for 55% of all third-party direct-to-consumer (“DTC”) video subscriptions. The TDG survey of 2,000 US broadband users revealed that substantially more than half of the subscribers to premium DTC channels such as HBO and Showtime had subscribed through Amazon Channels rather than directly through the TV networks. Setting aside any biases introduced by the small sample size, the magnitude and direction of the data suggests we may be coming full circle from the great unbundling of cable TV packages to the rebundling of subscription services by online platforms.

The unbundling of cable packages (or cord cutting) was largely the outcome of i) consumer dissatisfaction with paying for content they didn’t want, and ii) the internet levelling the distribution playing field. According to S&P Global Market Intelligence, cable bills have increased 53% since 2007 to over $100 a month in 2017. With internet-only services from as little as $40 a month and Netflix at $10 a month, it isn’t surprising to see cable customers grumbling at paying nearly $20 a month for ESPN and Fox Sports if all they want is TV drama. However, as consumers sign up for more and more standalone DTC services (of their choosing), the logical progression would be for popular services to be bundled on a platform.

This rebundling of disparate DTC services by an aggregating platform could lead to the creation of entirely new content bundles beyond what is available to consumers today. Take Amazon for example; the company’s Prime membership already bundles Prime Video, Music and Twitch together with the shopping/shipping benefits, and Amazon Channels adds in third-party video content into one package. Apple is arguably slightly behind Amazon in this respect but is heading in a similar direction with Apple TV, and it would not be inconceivable for the company to bundle TV along with Apple Music, books, news and other third-party content subscriptions into one bundle. Subscribers to these bundles could be attracted not only by potential cost savings, but also because they are already customers of, and trust, the platforms.

And the suppliers – both the platforms and the content providers – can mutually benefit from such bundles. The obvious benefit for the third-party content providers is that they can sell more subscriptions than they otherwise could on a standalone basis. Even if the platform takes a cut, the typically high fixed cost of content production means it is almost always a better outcome to amortise these costs over a larger subscriber base. This is especially true for the TV networks that are facing accelerating subscriber losses in the cable channel.

For the platforms, the benefit is two-fold. Firstly, the close-to-zero marginal cost of distribution over the internet means that incremental commission revenue from distributing third-party subscriptions likely carries a high incremental margin. Apple generally takes a 30% cut of all subscriptions sold through the App Store (falling to 15% in subsequent renewal years) for very little incremental outlay on its part. And unlike traditional cable distributors with low variable costs but high fixed costs (their network infrastructure investments), platforms like Apple and Amazon can distribute these bundles with very little capital investment directly related to said distribution.

Secondly, subscription services help create customer lock-in for the platforms. Perhaps the best example of this is the Amazon Prime flywheel. Jeff Bezos has said numerous times that Prime membership drives higher shopping spend, and Prime Video drives higher Prime renewal rates. By bundling networks such as HBO and Showtime into Prime through Amazon Channels, Amazon can promote further customer lock-in while passing some of the content production costs to the external networks. Likewise for Apple, offering unique third-party bundles within its closed ecosystem would create even higher switching costs for iPhone users.

Apple and Amazon are uniquely placed to lead the great content rebundling amongst the big online tech platforms/aggregators because their core businesses actually sell products directly to their users. Apple generates revenue when it sells an iPhone to a customer, and Amazon generates revenue when it (or a merchant in its marketplace) sells an item to a shopper. This means that, so far as it relates to the bundling of third-party services, Apple and Amazon don’t need to exclusively own the third-party subscriber relationship, making it more palatable for third-party content providers to partner with them. On the other hand, advertising platforms that exchange free services for personal data need exclusive control over the customer relationship and have little incentive to divert their users’ attentions to third-party properties.

Ultimately, the inevitable rebundling of owned and third-party subscription content could prove to be an attractive high-margin, asset-light business for the likes of Apple and Amazon by leaving content costs with the content providers and distribution costs with the internet service providers, while enhancing the stickiness of their respective platforms.

Montaka owns shares in Apple (Nasdaq: AAPL)

DH5_2155Daniel Wu is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.