Microsoft establishing market dominance through aggressive bundling strategies

The foundation of Microsoft’s market dominance was born out of their bundling strategy. The company started by developing the early version of Windows as a disk based operating system (DOS) that proved to be very successful, and upon achieving an early monopoly with its operating system, Microsoft was able to offer discounts to its customers in a manner that priced out its competitors. For example, using the profits earned by the success of Windows, they could subsidize the bundling of the individual Microsoft Office products Word, Excel, and PowerPoint into one package, then priced the package at a low price other competitors could not compete with, thus ensuring market dominance of the Microsoft Office bundle.

This same strategy was used in establishing early market dominance over internet search browsers. In the mid 1990’s, Netscape was the dominant browser and considered a “superior product” to internet explorer. However, Microsoft decided to bundle internet explorer “free” with their Windows operating system, and since their operating system was so popular, Internet Explorer quickly gained 90% control of the market and Netscape collapsed. This is an aggressive ploy that is being reused currently with Windows 10. With this updated system, the new browser “Edge” is automatically installed as the default browser even if you originally had Chrome or Firefox etc. already set to default. This move from Microsoft angered the Mozilla CEO to the point where he wrote an open letter, complaining that, while it was possible to revert back to Firefox instead of Edge, the new Microsoft system’s interface does not make it “obvious or easy” to make this adjustment.

The theoretical benefits to bundling can be shown in the above two product example as part of the bundling notes on this site. As the theory states, when a company uses a bundling strategy, they expect to earn greater profits that if a company sold two individual products separately. An example of this process can be found through Nintendo and their attempts to sell platforms and games, with a catch that bundling is only profitable if you do it right. Research by a Harvard Business School professor showed that bundling only encourages consumers to purchase the bundled product if they also have the option to purchase the individual components of the bundle separately. For example, when a bundle was offered alongside individual products, a “mixed bundle,” Nintendo’s total hardware sales were “higher by approximately 100,000 units,” and “sales of video games jumped by over a million units.” In contrast, when the bundle was the only option for a consumer, a “pure-bundle,” revenues were 20% less than in the mixed-bundle scenario and total hardware and software units sold declined by 10s of millions. 

Back to Microsoft, one of their most ingenious moves was to create a bundle of bundles called an “Enterprise Agreement,” in which they combined Office, Windows, and ‘The Core CAL’ (a bundle of license rights). From this, Microsoft have manipulated these bundles in such a way as to be able to introduce new products originally as part of the bundle, before taking them out of the bundles. Because of this, consumers need to purchase the side product at great additional cost, allowing Microsoft to reap “enormous cash gains” to the point where these side products such as the “System Management Server” have become billion dollar businesses in their own right. 

Microsoft’s aggressive bundling strategy has obviously been hugely important in taking the company to its current position, and it will be interesting to see whether they can continue to use this strategy successfully. 

Sources:

http://www.netnetweb.com/blog/how-microsofts-bundling-has-been-adding-enterprise-costs-two-decades

https://www.forbes.com/sites/hbsworkingknowledge/2013/01/18/product-bundling-is-a-smart-strategy-but-theres-a-catch/2/#7f8125265274

https://techtalk.gfi.com/is-microsoft-up-to-old-bundling-tricks/

10 thoughts on “Microsoft establishing market dominance through aggressive bundling strategies

  1. Does a successful bundling effort require one product inside the bundle to be a standalone success? Or is there research that suggests that bundling several products that sell in a mediocre manner increases the number of total products sold? Obviously one very successful product is required to break into the market, but after that, I wonder if bundling several average products would effect sales.

    • I don’t know. Digging into your question could be an interesting but challenging proposition: many products are always offered as bundles, so it’s not clear how you could find a large enough group of “individually mediocre” products that did better as bundles.

      The model for bundle plus stand-alone is more complicated. You could search the literature and might find relevant empirical studies; what I know is purely theoretical.

    • When I read this the most obvious bundle that came to mind were those black friday console sales that would throw in a usually bad game to go along with the new console. I always wondered what the point of that was, but now I wonder if the company that produced these poor games knew game play would be low unless they found someway to have their games included automatically.

  2. I disagree with the point about Microsoft Edge. I do not even consider this a true bundle because all search browsers are free. But even if you are arguing that bundling Edge with Windows 10 will make it more widely used I disagree. In the past decade, the Microsoft search explorers whether it be Internet Explorer or now Edge have fallen behind the main competitors (Firefox, Chrome, Safari) in terms of effectiveness. Just because Edge is automatically set as the default browser in windows 10 does not mean people will use it. When I got Windows 10, Edge opened on my screen as the default browser but I immediately closed it out and instead used Firefox. I suspect most people will stick with the same browser that they are accustomed to.

    • I am also hesitant to agree on Microsoft Edge being considered a “true” bundle. Seeing as most internet browsers these days are available for free online, being railroaded into using Microsoft’s admittedly sub-bar browser for at least as long as until you can figure out how to change back to Chrome is nothing more than an inconvenience. It baffles me that Microsoft has so far failed to recognize what makes Firefox/Chrome popular; that is a sleek low profile interface and less resource intensive when it comes to source code.

  3. Honestly, bundling just seems like a way for companies, such as Microsoft, to get consumers to spend a larger amount of money than the individual initially thought. Realistically, how many programs in Microsoft’s Office Bundle to people use on a day-to-day basis? I would think that a student, such as myself, would use more of the options than the average person, but even still, I really only one or two of the programs in the bundle.

    • I intensely dislike Word and instead use Nisus Writer Pro [there’s also NW Express]. But that is Mac OS specific [iOS is in fact very, very different and they did not try to develop a second version for iPads]. I also avoid Outlook, and instead use Mac Mail [downloading everything, which lets me work offline; I also use the Apple Mail indexing program Infoclick]. On the other hand, I use Excel every day and Powerpoint frequently. On occasion I use Word when a file I want to read has particularly complicated formatting [graphics, tables] and won’t display properly in Nisus. In contrast, the control of text formatting is much easier and more intuitive in Nisus.

      Now business users may be tied much more heavily to multiple pieces – Word, Excel, Outlook and Access at a minimum. And that’s where the money lies.

  4. I never thought of product deployment in this way, and similar to Pearce, kind of just accepted this as a way of businesses selling their products. I like Will’s comments on Microsoft’s revenue from bundle vs. individual optional bundles, where I can totally see how that is a scenario. I am naturally incentivized to buy a 360 bundle with 2 games included, even if it realistically is not saving money at the margin. I like having the option though, of buying two independent products separately.

  5. After reading your blog post and the following article, I am skeptical whether Microsoft’s bundling strategy will work with Edge. It seems as though people will switch to a browser they are most comfortable with even if its not the default browser. Microsoft has even has enlisted a rewards program for people who spend a certain amount of time on the Edge browser. Even with the rewards program, Microsoft Edge has not gained a large share of the market.
    source : https://www.theguardian.com/technology/2016/aug/19/microsoft-windows-10-browser-edge-pay-users-bing

  6. Sam poses an interesting question regarding whether an effective bundle needs a product that has been successful before. Additionally, how does a customer’s knowledge of unbundled packages effect their likelihood to purchase a bundle? Do the add-on items make it more attractable to an ordinary customer and how much do the relative proximities of prices effect the success of the bundle?

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