Friday, December 21, 2012

When Cutting Price Won’t Help

It is a truism of economics that price and sales are directly and inversely related . In other words, lower the price of a product and consumers tend to buy more; raise the price and consumers buy less. In fact, the whole point of some public policy policies (taxes, rebates, subsidies, penalties, credits, tolls, fees) is to dampen demand for some products or encourage demand for some products.

Communications markets are not exempt. Raise prices and people can be expected to consume less; drop prices and people theoretically buy more. But that only works up to a point.

Demand for the product, and ability to supply it, has to exist. And that is getting to be a problem for some communications or entertainment products.

Demand for streamed versions of items in the Netflix catalog is growing; demand for disc rentals is shrinking. Presumably Netflix could drop prices for “DVD only” versions of the product. But consumer preferences are shifting, and it is not clear whether even significant price drops would reverse the streaming versus DVD by mail volume changes.

You might argue something similar is happening with mobile voice and fixed network voice, or video entertainment subscriptions.

To be sure, there’s a relatively simple reason people globally prefer to use mobile for voice. In many markets, mobile is the only way to make a call. In 2010, about 90 percent of total call volumes in Brazil, Russia and China occurred on a mobile device. That is a market where there is no functional substitute product, so fixed network voice pricing isn’t relevant.

In other markets where both mobile voice and fixed voice are available, mobile is cheaper than using fixed services. In these markets, retail pricing and packaging, not just user preferences, drive usage.

Classical economics would suggest the suppliers could increase buying and use of fixed network voice services by dropping the price. Some would argue that is precisely what Skype and cable digital voice services have done.

In the video entertainment business, the price and volume consumed trends are not so pronounced, yet. But some surveys suggest not only that the problem of actual cord cutting is growing, but that demand is the issue.

The implication is that even a price cut for video subscriptions might not work to stimulate demand, on the part of some growing percentage of consumers.

About 33 percent of people who have “cut the cord” on their video entertainment subscriptions would not buy again, even if prices were cut in half, a study by has  found.

That opinion illustrates the level of growing dissatisfaction with video entertainment services sold by cable, satellite and telco TV providers, at least in some consumer segments.

Despite the fact that 83 percent of surveyed cord cutters abandoned their video entertainment services because of the “high cost,” even a price cut in half would not be enough to entice many cord cutters to buy again.

Significantly, the study also suggests that video entertainment services are not even viewed as providing the best quality and variety of programming by 17 percent of people who disconnected their  cable TV or satellite TV services. For an industry that claims to provide the best quality and variety, that is a problem.

Another possibly-significant finding is that consumers who abandoned their fixed network phone service were two times more likely to eliminate their cable TV or satellite TV subscription than those who have not disconnected their home telephone.

Of respondents who have gotten rid of their landline, 36 percent  also discontinued their cable TV or satellite TV service. Of respondents who still have their landlines, 19 percent have cut the cable cord.

The survey found that 60 percent  of respondents no longer have a landline telephone service, either.

Although the survey also found  that 57 percent of people that still have a landline voice service  do not plan to disconnect their landline in the next year, that statistic might be only mildly reassuring, since it suggests that 43 percent might cut the cord on their fixed network voice service within a year or two.  

The Federal Communications Commission Technology Advisory Council has estimated that  U.S. time division multiplex fixed consumer access lines could dip to perhaps 20 million units by about 2018.

Others, such as Kent Larsen, CHR Solutions SVP, think lines overall could dip to about 50 million over the next five years, then to about 40 million on a long term and somewhat stable basis.

Keep in mind that the U.S. market supported about 150 million voice lines  in service around the turn of the century. One might argue, under such circumstances, that even lower prices would not entice many consumers to buy fixed network voice again.

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