Will the Oil Shock Lead to Unbundled Services?

When I was visiting Sweden I found it shocking that they charged me 4 Kroner for a 8oz glass of tap water. As I traveled a bit more in Europe I found this common practice of restaurants charging extra for things that in US we take for granted. Sitting at a table has a surcharge, bread has a surcharge, water too. I compare this to a sign that I saw outside a Hot Dog stand near UC Berkeley, “All toppings always free”, this captures the characteristic of US restaurants.

These are not really free, restaurants here use bundled pricing. The problem with this bundling is some of the added items are valued below cost by the customers and hence the restaurants do not reap the advantages of bundling.

Now in US, as the food and fuel prices keep increasing, restaurants are finding it hard to keep their margins. All these free toppings and additions that are “always free” add to the cost with no relief through higher pricing. Until now they have not passed on much of the supplies cost increases to their customers in the form of higher prices. It is not that it is difficult to keep changing prices (economists call this the menu costs).

Restaurant owners are wary of customer reaction and competitor moves. There may also be lingering doubts on whether we are experiencing a temporary price shock or the higher prices are here to stay. If the businesses and the public are convinced that is is the latter, then the cost increases will flow into prices.

However, an acceptance of increased prices does not mean the demand will stay the same. There are substitutes, eating at home and packing lunch from home. So restaurants may still be reluctant to increase prices. That leads us to unbundled pricing. Should the US restaurants do costing right (do not price items below their cost)? Should they price the food items at its current levels and start charging for service, water, bread, toppings, paper napkins, plastic ware etc?

It is not clear to me.

Customers may not value some of the items included in the bundle but will consider these essential to support the main product they are buying. If customers do not value something by itself, they also will not be willing to pay it. So charging a quarter for toppings may find fewer takers. While the costs will go down, I am not certain if the demand for the main product will remain steady.

It is definitely worth experimenting at a smaller scale before unbundling the whole burrito.

Unbundling the Brand

In the CPG market the brands are unbundled from the corporation. You buy Pantene brand shampoo not P&G. There is some brand extension like using the Pantene brand for all hair care products. But most customers do not know or care about who makes Pantene. This level of unbundling was part of the strategy and not something forced on P&G or Lipton by the environment.

In the case of media companies NBC, ABC and HBO they are the brands and the product categories or the individual products to do not have a brand. The companies actively pursued bundling as the strategy like the Must See TV campaigns. The main brand is meant to evoke the same positive feelings across all the shows, from sitcoms to dramas. A successful show is used to position the main brand and leveraged to bundle with it other weaker and newer offerings. The shows are also very loosely tied to the media company because of the re-run market.

In the TiVo and Hulu world, an unbundling of the shows from the parent media company is unfolding and the companies can do nothing about it. Jason Fry of WSJ sees this as diminishing the role of a network to a bit pipe, like a cable company:

I don’t know what network hosts most of the programs saved on my TiVo. (A rare exception is “John Adams, but that says more about what a strong brand HBO has become.) I don’t have the faintest idea what time “John Adams” or most any other show airs. Why should I? Unless you’re talking about a baseball game, all I need to know about a show is that it’s on my TiVo screen when I want to watch it. As a result, I neither know nor care any more about the supposed qualities of NBC or the WB or any other network than I do about the supposed qualities of whatever company makes the coaxial cable Time Warner uses to bring a TV signal to my house. Content itself is becoming the brand — and networks used to hitting me with commercials while I sat captive on the couch have to work much, much harder to get my attention.

The media companies can either let this happen and stay on the sideline or be a driver in developing the individual brands. This requires them to recognize the changes in business models from traditional Ads, DVD sales and re-runs. In addition to branding the content they need to unbundle them so each brand competes on its own.

This is not totally new to the networks. They already have branded morning shows like Good Morning America and news programs like 20/20. But the problem with entertainment shows is who owns the content and who should spend for brand development. The bigger question in an unbundled media world in which the content becomes the brand is, what value does a media company add?