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October 13, 2008

Challenging Conventional Wisdom about Consumer Spending

By Gary Kim, Contributing Editor

It’s tough to challenge conventional wisdom.
What’s the safest forecast anybody can give about how well a service or product will fare in the wake of the liquidity crisis or a subsequent growth slowdown? Just predict everything will drop – information technology spending, semiconductor shipments, consumer spending, broadband connections, video entertainment, smart phone sales, bandwidth prices – and people probably will agree.
Just a case in point: Lazard Capital Markets analyst Daniel Amir, who follows semiconductor companies, thinks a slowdown in IPTV (News - Alert) growth in Europe and the United States could affect semiconductor shipments. Lower semiconductor shipments would be the result of firms such as AT&T or Verizon (News - Alert) missing new customer acquisition targets because of economic stringency.
AT&T (News - Alert), for example, is in danger of missing its annual projection of one million subscribers, he argues. Instead of adding 40,000 subscribers a week by the end of the year, the company might reach only 30,000 a week rates.
It’s a reasonable thesis, well in keeping with the conventional wisdom. But there actually is little evidence that consumers drop their video or voice services in times of economic toughness. Though there is more evidence that they might downgrade some services, historically, neither cable growth nor use of wired phone service has been short-circuited during slow-growth periods. Sure, people pull in their spending, but households traditionally have deemed video entertainment to be a “lifeline” service of sorts, and have taken the same view of their phone service.
Still, matters are more complicated this time around, many undoubtedly will say. As a potential negative, video, mobile, voice and broadband markets are relatively saturated. In past instances of sluggish growth, only landline voice actually was saturated. The other services either had not been invented yet or still had room to grow, nor was there as much competition.
In past recessions, whatever the level of demand, phone and video providers were in a position to reap the rewards or pay the price. In a competitive environment, providers must battle not only the threat of declining demand, but also market share losses. So one must discriminate between how the segments fare, and how various providers serving those segments fare.
It is of course conceivable that some customers will reduce their usage, switch to lower-price plans, change carriers to get lower rates or avoid a handset upgrade. But it is hard to imagine most people deciding that mobile phone service, television or broadband access are services they can live without.
So the issue is whether consumers will behave the same way in the current circumstances as they have in the past. Most observers seem inclined to argue “no.” I would not be so sure. Never before have product bundles been the dominant way consumers buy phone, video and broadband services. And the thing about bundles is that it might not be possible to save much, if anything, by dropping one of the services. So that will provide a brake on disconnect behavior.
That makes for a different decision-making context than typically has been the case in slowdowns of the past. The math used to be, “drop a service, save money.” In a bundled services context, dropping a service might mean an increase in prices, or a savings so small as to be insignificant.
So to challenge the conventional wisdom: There are reasons to believe that, despite all the market changes, consumers will not be dropping video, broadband, mobile or even landline voice services as a direct result of the economic stringencies.
Even looking at the background rate of “landline abandonment,” if one totes up cable digital voice gains, and then balances them against telco voice line loss, it is clear there is more market share shifting than actual landline abandonment going on. So, to challenge the conventional wisdom, market share shifts, not demand shortages, will be the result of consumer behavior during the next period of several quarters to a year or two.
Don’t forget to check out TMCnet’s White Paper Library, which provides a selection of in-depth information on relevant topics affecting the IP Communications industry. The library offers white papers, case studies and other documents which are free to registered users. Today’s featured white paper is The Compelling ROI Benefits of Contact Center Quality and Performance Management Technologies, brought to you by Voice Print International.

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary's articles, please visit his columnist page.

Edited by Michael Dinan

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