The perfect storm of expensive subscriptions, bad ads, and the need for growth is pushing Google and Apple to break the internet into bundles, changing it forever.

Back in the early days of the internet, people paid for newspapers to get delivered to their home, they bought music CDs, and Blockbuster was thing. There were set rules for how content creation, payment and distribution worked. Internet disrupted that. Yahoo, Google and then Facebook emerged and created an internet economy, supported by ads. Consumers started expecting most written content, if not music/videos, to be freely accessible. Newspaper publishers saw their fortunes dip.

Meanwhile, companies such as Netflix and Spotify emerged, creating large subscription businesses, and laying down a template for how to monetize video and music content. Believing that their journalism was worth paying for, newspaper publishers such as NYTimes committed to building a subscription business and saw reasonable success. Now other publishers such as Bloomberg, Business Insider, etc. have followed suit, putting a lot of their content behind paywalls. They are hoping to create a future where they will no longer be slaves of the ad dollars of Google and Facebook.

The net result is that we are in subscription hell 😈 and are only getting deeper into it. A lot of good content is now behind separate paywalls. The experience of navigating the internet in search of knowledge is no longer seamless, and the “good internet” has started to become very expensive 💰.

The “bundle” opportunity

The state of the internet as a subscription hell is not sustainable; consumers deserve better. It needs to be easier and more affordable to access good content.

Imagine most of the content available behind separate paywalls becoming accessible as part of subscription bundles sold by Google and Apple, bundles that serve all your content needs —written content (news, analyses), audio (music, podcasts) and video (TV series, movies, etc.).

Evolution of content monetization

When this happens, the market for separate paywalls will shrink (at least in number of paywalls, if not the $ value), and only the richest consumers with very specific needs till buy into subscriptions outside of these bundles. The product experience of accessing content through these bundles will be much superior to the fragmented experience of browsing through good content on the internet today, and Google and Apple will be able to price these bundles low because of their large user base. It will be irrational to pay for separate paywalls unless one really has to.

What about ads?

The question, especially in the case of Google, is why would it create subscription bundles when its entire strategy is predicated on making the content freely accessible and monetizing through ads. There are two main reasons why Google would do that.

Ads have peaked

Selling ads seemed like a good strategy for Yahoo and Google to monetize the large user base that they had built by organizing the information on the internet. However, ads are mostly a nuisance and, as a result, ad blockers have increased in popularity. Google recently launched its own ad blocker on Chrome in its attempt to discipline sites showing disruptive ads and to prevent consumers from installing more aggressive ad blockers that block all ads across all sites.

Google (and also Facebook) are also trying to make ads more relevant to consumers, so that they don’t seem disruptive and can also help these companies make more money per user because of improved targeting. It’s a precarious strategy because the better the targeting, the creepier the ads can seem. Consumers now have a greater awareness of the privacy (data) they might be giving up to access the so called free services (Google search and Facebook newsfeed). According to a recent survey, 30% of respondents distrust Facebook with their personal information, not a good sign for a company that is built on having access to that information. This is a big red flag.

Ads aren’t the best way to monetize the best customers

Eric Feng put across a great argument in this article that monetizing via ads is sub-optimal because you can’t make more money off your best customers (i.e. users who use your products the most). He attributed that to two fundamental aspects of ads monetization: frequency capping and ad load.

Then he went on to argue that what makes Amazon so powerful is its ability to monetize its best customers significantly more than its average customers, calling its strategy shared-value transaction. Its best customers enable Amazon to invest in building a compelling value proposition (cost of access and user experience) for the average customer, getting more and more of them onto the platform. Google and Facebook understand that ads might not be the best business model after all, and Google specifically has been actively trying to diversify its business.

Winners and losers

The large tech companies best positioned to capitalize on this bundling opportunity are Google and Apple, and the large tech company that is set to lose the most is Facebook. The other big tech company most likely to be effected negatively is Spotify.

Google and Apple have all the raw ingredients to offer great content bundles

  • Customer touchpoint: They have dedicated user bases for written content (Google News, Apple News), audio (Google Play Music, Apple Music, Apple Podcasts), and video (YouTube, Apple TV).
  • Supply of content: They have good relationships with content publishers and are increasingly getting aggressive about creating original content.
  • User experience: They have invested in defining great product experiences for the future, Google with its focus on web based experiences (AMP and PWA), and Apple with its focus on good native experience (e.g. Apple News allows customers to add their existing subscriptions to it).

Launching bundles is probably easier for Apple than Google because Apple doesn’t have a big ad supported business that it would need to cannibalize. There is news that Apple is already gearing up to do that.

The biggest losers in the “bundled” internet economy will be

  • Subscription businesses that only offer a subset of content today that is not differentiated e.g. Spotify. These companies will lose some of their pricing power to the bundle creators, Google and Apple.
  • Facebook (it deserves to called out separately)! It will lose because while it serves a lot of ad-supported free text and video content, it is not an app that customers of bundles will see as the entry point for paid good content. It will also lose because it has failed to build good relationships with publishers; Instant Articles was a dud.

What could further extend the lead of Google’s and Apple’s bundles will be the non-content offerings (specifically storage) they are capable of adding to their content bundles. That will hurt companies such as Dropbox. Google One is a potential start in that direction.

Google and Apple need bundles as much as consumers need them. These companies have become very large and there is a need for them to find additional sources of growth. Making more money from their best customers while solving an important customer need is a win-win.

iOS and Android are the nerve centers of the biggest ecosystems in tech. If Google and Apple are able to create attractive bundles, these ecosystems will become even more entrenched. Content will play the role that apps played in building the App Store (and consequently Apple), and the internet will never be the same again.

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