foreign we've had recorded music for around 150 years and over that time the format we listened to music in has changed steadily from the phonograph to records to CDs to mp3s iTunes is widely credited with upending the entire music industry because it allowed consumers to buy individual songs rather than forcing them to buy a whole album and by putting thousands of songs in your pocket with the iPod it seemed like music had reached its final form I remember getting my first iPod in 2003 and these days I have an iPhone but that iPhone no longer has iTunes on it in 2006 Spotify was founded in Sweden and in the years since they've grown into the market leader for music streaming services they were so successful that Apple ditched iTunes in favor of their own music streaming service heck I'm listening to music on Spotify right now as I write out the script for the video Spotify has been so successful because of a pricing strategy called bundling it's just what you think it is bundling is the practice of selling two or more Goods together instead of selling you one song they sell you Millions all bundled together bundles are very popular strategies for products which have high fixed costs but low marginal costs like music movies or software consider the Microsoft products Word and Excel you can buy these programs separately if you would like but almost everyone chooses to buy them in a bundle called Microsoft Office here's an example to see why this pricing strategy works so well let's say we have two people Ewell and Kim and they're interested in buying Word and Excel Yule is willing to pay twenty dollars for word while Kim would pay sixty dollars for it for Excel you will is willing to pay ninety dollars he must really enjoy it but Kim would only pay forty dollars if they sell each program separately Microsoft has just a couple of options they could sell two copies of word for twenty dollars each or they could sell one copy for sixty dollars notice that I'm assuming Microsoft can't prevent Arbitrage if they try to charge Yule 20 and Kim sixty dollars you'll just buy two copies and sell one to Kim for something less than sixty dollars obviously Microsoft's best option is to sell one copy to Kim for sixty dollars that will get them sixty dollars in profit if we assume the marginal cost of selling one more unit of word is zero dollars a similar thing happens with Excel they could sell two copies of Excel for forty dollars each earning them eighty dollars or they could sell a single copy to Yule for ninety dollars their best option would be the ninety dollars and so they'll earn a total profit of one hundred and fifty dollars selling one copy of Word to Kim and one copy of excel to yule but what if instead Microsoft introduced a product called office which includes Word and Excel you'll would be willing to pay 110 dollars for office because he's willing to pay twenty dollars for word and ninety dollars for excel Kim is willing to pay 100 for office Microsoft can sell one copy of office to Yule for a hundred and ten dollars or they can sell office to both of them at a price of one hundred dollars that would net Microsoft a profit of two hundred dollars which is a 33 increase in profit without doing anything except offering this bundle and Kim and you'll are better off too they're getting more value out of the bundle than they got from buying individual programs and we could see that output has increased here cable TV is a form of bundling where you can get hundreds of channels for some monthly price this tends to benefit consumers because it pushes everyone towards the average willingness to pay in Industries with high fixed costs but nearly zero marginal costs like TV and movies bundling makes a lot of sense everyone values cable about the same but that's because each of us gravitate towards different channels that variety is only possible when we bundle I might be willing to pay twenty dollars a month for HBO but only 20 cents a month for the Hallmark Channel you might be the opposite but with such high fixed costs the Hallmark Channel can't exist unless it's getting my 20 cents and the 20 cents of millions of other people bundling offers a way to increase the supply of content to the amount we would want given the extremely low marginal cost these days cable TV is being replaced by streaming services which are bundles of their own I have to admit I haven't had cable TV in over a decade but I'm spending quite a bit on streaming services bundling is why Spotify has been so successful that Apple abandoned its Cash Cow in iTunes in favor of their own rival music service streaming service consumers end up with more when we bundle and we like it I would predict that the streaming services we see today will start to combine either through mergers or buyouts or third parties working out deals to bundle multiple Services together we'll see more bundling but that will also mean we will see even more content