Wednesday, January 29, 2014

U.K. Market Illustrates Rule that Household Spending on Communications is Highly Stable

Consumer spending on communications and video entertainment tends to be stable. In other words, households tend to spend about the same percentage of household income on communications and video entertainment services every year.

The variables are changes in household income, and changes in prices for the purchased items.

That implies any increase in household spending in one category likely is balanced by reduced spending in some other category, unless the prices of purchased goodds decreases.

In the U.K. market, households spend between three percent and four percent of household income on communications and video entertainment services. The sole exception is the highest 10th of U.K. households, ranked by household income, where spending is between two percent and three percent.

That is what one would expect. Households with higher incomes can buy a fixed set of services for a smaller percentage of total household income.

Over the years 2001 to 2013, U.K. households began spending more money on mobile services, and less on fixed voice, while also increasing consumption of broadband Internet access. In other words, demand shifted to mobile and broadband, even when unit prices fell.

Mobile accounts in the United Kingdom surpassed fixed network voice accounts in early 2009, according to Ofcom, the U.K. communications regulator. Between 2001 and 2013, U.K. household penetration of fixed line voice dropped from 93 percent to 84 percent, while use of mobile increased from 67 percent to 92 percent.

Fixed line broadband, meanwhile, grew from three percent in 2001 up to 72 percent of U.K. households

That appears to be what happened in the U.K. fixed Internet access business. The average price of a broadband package decreased by 48 percent between 2004 and 2012. 

In fact, since 2008, when Virgin Media began offering its 50 Mbps service, declining prices have been matched almost exactly as economics would indicate.

As price declined, demand increased in linear fashion, exactly what one would expect, if basic economic principles relating to supply and demand have validity.

In the U.K. market, average household spending on broadband has been roughly flat since about 2006, even as households have been increasing their consumption of higher speed services. The reason is lower retail prices.

And even though U.K. consumers are buying “more mobile service,” they also are spending a stable amount of money, as prices have fallen. The volume of voice calls made using a mobile device has more than doubled in the past ten years, while the volume of text messages has increased from 24 billion to over 170 billion, Ofcom notes.

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