Economic Bloggers More Pessimistic

Optimism is out; pessimism is in among the country's top economics bloggers as they look to 2012 and beyond, particularly regarding jobs. 


A new Ewing Marion Kauffman Foundation survey released today shows that only 50 percent of respondents anticipate employment growth, a decrease of 20 percent from second quarter.


Fully 95 percent of respondents view current economic conditions as "mixed" or "facing recession," an increase of 10 percent from second quarter, and a third predict a double-dip recession during 2012. 


"Uncertain" is once again the top adjective economics bloggers use to describe the economy, and respondents shared expectations of higher annual deficits and the top marginal tax rate. Kauffman Economic Outlook

What Would Double-Dip Recession Do To Telecom?

It isn’t yet clear whether Europe, or other regions, will enter a double dip recession in 2012 or not. Analysts at Gartner already are predicting that the next recession in enterprise information technology spending has virtually begun, and that spending will slow through 2015.

The impact of the Great Recession beginning in 2008 is easy enough to describe. According to TeleGeography Research, revenue growth  slipped from about seven percent annually to one percent in 2009, returning to about three percent globally in 2011.

The Economic Cycle Research Institute says the U.S. economy is either just beginning to dip, or is about to do so, says Lakshman Achuthan, the managing director of ECRI. "The critical news is there's no turning back,” he says. “We are going to have a new recession." U.S. Double Dip?

If that turns out to be correct, service providers probably will encounter revenue pressure much as was seen in the last recession. The issue will not be so much that “lines” or “accounts” are abandoned, as that users will consume less. So “line loss” will not be the issue so much as “average revenue per user.”

Some believe that, even in the absence of a new recession, there will be no quick post-recession recovery for Western European telecom revenue, according to new forecasts published by Analysys Mason. End-user spend was down by 4.4 percent in 2009, and will decline at a compound annual growth rate (CAGR) of –1.8 percent until 2012, the firm predicted.  No quick return to growth

What was expected in the last recession was a greater degree of product substitution. "The more flexible cost structure of mobile networks means that mobile operators are winning more of the lower usage end of the fixed services customer base," the International Telecommunications Union says. "This has happened in voice, and 2008 has demonstrated that mobile broadband can substitute for light-usage DSL." Recession impact on telecom

Also, more consumers are likely to opt for prepaid and flat-rate packages for telecom services to try and control their spending.

Point Topic does not believe any recession would affect “line growth.” The total number of broadband lines in these countries will grow from 393 million by the end of 2008 to 635 million by 2013.

Adding in estimates for the remaining smaller countries suggests that the world will add a further 48 million broadband lines to reach 683 million in total over the period. Point Topic forecast

This represents a 10.8 percent per year compound growth rate, well down from 27.7 percent per year in the 2004 to 2008 period, but still substantial, Point Topic argues.

One major reason for the slowdown in growth is that most of the richer countries are approaching saturation with broadband; new customers are becoming harder to find and sign up. At the same time poorer countries such as China and India have gone through the initial phase of rapid growth and are now growing steadily rather than exponentially.

Whatever else one might say, the number of accounts or lines in service seemed relatively unfazed by the recent “Great Recession.”  Fixed voice subscriptions will continue a downward trend, as users increasingly switch to mobile and VoIP substitutions. The recession impact is likely to be on average revenue per user, not abandonment of service, as such. Line growth

For its part, Gartner believes enterprise IT spending in Europe, the Middle East and Africa (EMEA), which will be €604 billion in 2011, a 1.4 percent decline from 2010, will face headwinds through 2015.

Euro-based enterprise IT spending in the region will grow by 2.3 percent in 2012. Western Europe will continue to slow EMEA growth through 2015, according to Peter Sondergaard, senior vice president and global head of Research at Gartner. IT to Hit Double Dip

“The second recession is about to hit and CIOs must decide which way to turn,” said Mr. Sondergaard. “The continued global economic uncertainty and the eurozone crisis will impact your IT budget in 2012, and your business will face difficult budgetary questions,” says Sondergaard.

Sharply lower economic growth in the mature economies of Western Europe is the reason for the tight IT budgets.  Austerity measures brought in to deal with the sovereign debt crisis will curtail government spending on IT in particular and hinder economic growth, which will result in lower demand for IT products and services from businesses.

Western Europe, which accounts for 80 percent of EMEA enterprise IT spending, will see enterprise IT spending in euros decline by 1.8 percent in 2011 and grow by only 1.5 percent in 2012, Gartner predicts.

Government (including education) IT spending will account for the largest share of Western Europe enterprise IT spending in 2011, at 20 percent of the total. Gartner predicts that this sector will decline by 4.8 percent in 2011 and 1.7 percent in 2012, and that it will not recover to the level seen in 2010 until 2015.

Stagnation, Double Dip, New Recession? Things Just Aren't Getting Better

In strict terms, the recession ended in mid 2009. In practical terms, you might argue it has ended with stagnation, the recovery remaining anemic.

It might not matter much whether there is a "double dip" recession, or just another recession, or simply continued stagnation.

Service Providers Now Will Have to Contend with Decades of Belt-Tightening

As if forecasting telecom, cable and Internet spending were not hard enough, it is about to become much-more uncertain, for reasons most of us probably could never have expected: a decades-long suppression of end user consumption to re-balance structural deficits.

Developed countries with big budget deficits--including the United States--must start now to prepare public opinion for the belt-tightening that will be needed starting next year, John Lipsky, says International Monetary Fund first deputy managing director.

Gross general government debt in the advanced economies will rise from an average of 75 percent of gross domestic product at end-2007 to 110 percent of GDP at end-2014, even assuming that temporary, crisis-related stimulus steps are withdrawn in coming years.

Reducing the ratio to the pre-crisis average of 60 percent by 2030 would require raising the structural primary balance -- before interest payments -- from a deficit of about four percent of GDP in 2010 to a surplus of about four percent of GDP in 2020 and keeping it at that level for the following decade.

That clearly implies an eight percent swing in balances, before interest payments.

Lipsky also says the scale of the adjustment is so vast that less-generous health and pension benefits, government spending cuts and increased tax revenues are needed.

The drops in government services to individual citizens and businesses could be unprecedented, some therefore suggest.

The obvious danger is that the U.S. Congress seems hell-bent on making the problem worse by continuing to spend as though it had the means to pay for its spending. The IMF has for decades both scolded and disciplined developing nations unable to balance their budgets.

Now it appears the United States, for the first time, is headed that way as well. The ramifications are not entirely certain, but slower economic growth is likely and social strife virtually inevitable.

It is not immediately certain what all of this fundamental change will mean for providers of communication and other services to businesses and consumers, but it probably will a mixed impact.

If one assumes consumers will have less disposal income, one would expect pressure on overall revenues and profit margins. But consumers will also have to make choices about discretionary spending, and past behavior suggests that communications and entertainment services are high priorities.

All indications are that broadband access will become, with mobility, anchor and foundational services, the key issues for service providers being the cost of delivering those and other services, as well as creating a sustainable new role in the revenue chain for application usage.

It is not so clear what will happen to demand for today's packaged multi-channel video services. So far, mobile and online video usage seems incremental to other existing forms of video consumption, but much depends on what content owners decide is in their best long-term interests. Major change in distribution methods is possible, but not likely in the short term.

But businesses also will be forced to operate more frugally, which could have a variety of effects. In the recent recession business revenue dropped, except for providers taking market share.

The upshot is that most consumers will have less to spend, though. That could send the United States and other developed nations into a downward spiral where muted consumer activity undermines GDP growth.

The point is that our historical experiences with post-recession recoveries will be stressed in new ways this time around, specifically because the macro-economic stresses are so novel. The United States never before has had to be told by the IMF to adopt austerity measures, and people have not had to live through such a period.

But we are about to. And means everybody who tries to forecast revenue for telecom, cable and Internet companies, as well as others in the ecosystem, must face increased uncertainty. That doesn't necessarily mean the underlying assumptions will change. They might not. But it is not clear at the moment what could change, and we might not know for several years what the nature of those changes are.

Reuters article

Get Ready for a Test of Social Cohesion, Says Moody's

It isn't immediately clear how soon debt service will become a major business issue in the United States, but it is clear it will be. Moody's analysts, looking at sovereign debt loads in the United States, say there is no way to "grow" our way out of the problem.

“Growth alone will not resolve an increasingly complicated debt equation,” Moody’s says. “Preserving debt affordability” (the ratio of interest payments to government revenue) “at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.”

Note the phrase "at levels that will test social cohesion." What Moody's means is that, to keep its credit rating, given the fact that economic growth, even robust growth, would not grow tax revenues enough to take care of the problem, the federal government likely will have to cut spending, though it also will try to raise taxes.

And that is going to lead to protests, anger and unrest.

But there will not be a choice. If the United States does not act to preserve its credit rating, it will be more costly to borrow money, driving the debt burden even higher and threating yet another round of downgrades.

Such a downgrade also would force an immediate reduction in debt-financed spending. And that is precisely what the United States currently is doing: spending more than it raises in taxes and borrowing to support the shortfall.

Moody’s says the United States and other major Western nations, particularly Britain, have moved “substantially” closer to losing their current ratings. The ratings are “stable,” but “their ‘distance-to-downgrade’ has in all cases substantially diminished,” Moody's says.

source

Recession Not the Issue, Structural Is What Challenges Telcos

The global telecom industry performed pretty much as it always does during the recent recession. Basically, revenue growth continued at low single digits, overall. As always is the case, some industry segments fared better than others, but consumer demand for communications and entertainment video services was steady.

Some might wonder whether some clear signs of consumer frugality will affect growth rates for some time to come, but even that is not the big issue.

The big issue is that wired communications is an industry with a cost structure too high for expected revenues over time, so cost cutting must continue and network operations must become even more efficient than they have, up to this point.

Ovum researchers point out that "the economic downturn hasn’t resulted in the downward pressure on telco top lines that many expected."

But Ovum researchers also point out that "revenue growth is in decline for many mature market operators, and slowing for those in emerging markets."

“Market saturation, increased competition and regulatory intervention on roaming and termination rates won’t disappear just because the economy picks up”, says Ovum Principal Analyst Clare McCarthy.

Telcos are cutting operating expenses and capital investment. They are also accelerating employee early retirement programs and stockpiling cash. Many telcos in fact are emerging from the downturn with healthier balance sheets than when they entered, as well as significant cash balances, Ovum says.

Seasonally Adjusted, 5% Job Growth in 2nd Quarter, Manpower Finds

Seventy-three percent of companies polled in a new Manpower survey said their will not hire employees in the second quarter. Though 16 percent report they will increase hiring, eight percent will cut, for a net gain of eight percent.

On a seasonally adjusted basis, hiring will increase at about five percent of businesses surveyed. That is up from a decline of two percent a year ago, Manpower says.

That 73 percent of firms plan no hiring is a record-tying high in the history of the poll, Manpower says.

The leisure & hospitality industry has a strong outlook and is hiring. So is the professional and business services sector.

The news tends to reinforce the views of economists and the Congressional Budget Office that U.S. unemployment will stay close to 10 percent though the middle of 2010.

That will almost certainly constrain consumer spending and activity in the housing market, suggesting a sluggish recovery.

There had been some hope, particularly early in the current quarter, that business activity had begun to pick up sharply. It turns out that companies were replacing depleted inventory and that core GDP was not improving in any measurable way, says Doug McIntyre, 24/7 Wall Street columnist.

McIntyre is skeptical the latest attempt at stimulus will work, either. The latest "jobs" bill will focus on direct credits for businesses that hire, more state aid, and more infrastructure investment, says McIntyre.

The theory is that these plans will mainline capital to the place where the employment problem is most acute–small and medium-sized business which tend to have limited access to credit, he notes.

But tax credits for hiring do not improve employment if companies see no increase in the demand for their products and services, he says.

The good news is that we are working our way out of the great recession. The bad news is that it appears to be a tough, dogged slog upwards.

Which Growth Pattern Emerges as Recession Ends?

Many economists and market watchers think consumers eventually will return to spending patterns as they existed prior to the recent recession, and on the growth pattern of the 20 years before the recession.

Others warn that growth patterns are more likely to revert to patterns of the 1945 to 1970s, when annual growth in consumer spending was much more restrained.

So the question for many might be, which view is right? For application and service providers, the question might not be as germane. The reason is that consumer spending on network-delivered services and applications was stable over the entire period, and in fact has shown a slow, steady growth.

In other words, people are shifting more of their available entertainment budget to network-based products. Communications spending likewise has slowly grown its percentage of overall discretionary spending, not fluctuating wildly from one year to the next.

Of course, lots of other background factors have changed. There are more products, more applications, more services and providers to choose from.

The value of many products has taken on an increasing "network services" character as well. Consider the value of a PC without Internet access, for example.

The point is that whichever forecast proves correct--either a return to the growth trend of the past two decades, or a reversion to the lower spending growth of the years 1945 to 1979, network-based products are likely to continue a slow, steady, upward growth trend. That may not be true for other industries.

We are in Uncharted Territory, But Get Ready for Change

This graph shows U.S. job losses from the start of the recent recession, in percentage terms. As you can see at a glance, the recession has been an outlyer. Click chart for a larger view.

As they say, "we are in uncharted territory." I use the past tense deliberately, meaning only that by most measures, we passed through the bottom as early as March 2009 and are now, in halting fits and starts, in a growth mode.

So it might be time to stop talking about "recession-induced" behavior, even though we are, by the most recent estimate, down about 8.1 million jobs since the recession began. All other things being equal, it makes most sense to look for signs of changing behavior as the recovery takes hold, as slow as that might be.

As Canadian hockey great Wayne Gretzky once quipped, you don't skate to where the puck is now; you skate to where the puck is going to be. The adage, as it applies to most providers of goods and services, is to anticipate rebuilding, rather than extrapolating from recession behavior permanently into the future.

The main thing now, despite the severity of the downturn, is how behavior will start changing. It is as important to anticipate what people will do, instead of gearing one's business to "how they have been recently behaving."

The reason is simple: by definition, the economic background is changing, meaning people will start to have opportunities to change recent behaviors. As the economy recovers, new discretionary spending is going to build. It will be spent somewhere. So the issue is anticipating how, and skating to the puck.

Bad and Worse News on Job Front

Unemployment rose in most cities and counties in December, signaling that companies remain reluctant to hire even as the economy recovers, according to a new report from the U.S. Labor Department.

The unemployment rate rose in 306 of 372 metro areas, the Labor Department says. As bad as that is, matters may be worse.

Job losses during the recession may have been underestimated by close to a million jobs. The prevailing figure is that the recent recession cost more than seven million jobs. It appears the Labor Department might have to revise those numbers, making the actual total eight million.

The shockingly bad news is that over the last 10 years, according to ADP data, the United States actually has added no net new jobs.

In December 2000 there were 111.65 million U.S. employees working. In January 2010 there were 108.14 million Americans working.

In May 2008 there were 115.2 million U.S. workers. That means the country must add back 7.1 million jobs--or more likely 8.1 million--to get back to where it was before the recent recession began.

That raises a question many of us have not been asking. Up to this point, the issue has been "when will the recession end?" with the implicit assumption that a relatively normal job recovery pattern would follow.

The recovery appears to have started, though we will have to wait for some time to date the actual turning. point.

The new question is what happens to growth rates and job recovery as the recovery continues.

Some have argued that consumer behavior has permanently altered because of the severity of the recession, which would imply a slower rate of growth, even if other negatives were not in place.

But there is no way to test the thesis of new consumer behavior patterns in the near term, because it will take years before consumers really are free to choose new patterns of behavior. There is a difference between "permanent" changes in behavior and "temporary" changes. We seem at the moment stuck in a "temporary" mode: people simply are not free to change their behavior at the moment. So long-term conclusions cannot be drawn.

That has obvious implications for the marketing of most consumer products and services. The recession is over, but recessionary buying habits will persist for some time. We cannot know whether these changes are permanent or cyclical.

"The Perils of Prosperity: The Story Behind the Economic Crisis"

This essay is by noted U.S. economist Robert Samuelson. Those of you who studied economics in college read his books. It's a great piece. Having lived through bubbles, this is starting to make much more sense to me. Perhaps it will make sense to you, as well.

WASHINGTON -- We need to get the story straight. Already, a crude consensus has formed over what caused the financial crisis. We were victimized by dishonest mortgage brokers, greedy bankers and inept regulators. Easy credit from the Federal Reserve probably made matters worse. True, debate continues over details. Fed Chairman Ben Bernanke recently gave a speech denying that it had loosened credit too much, though he admitted to lax bank regulation. A congressionally created commission opened hearings on the causes of the crisis. Still, the basic consensus seems well-established and highly reassuring. It suggests that if we toughen regulation, suppress outrageous avarice and improve the Fed's policies, we can prevent anything like this from ever occurring again.

There's only one problem: The consensus is wrong -- or at least vastly simplified.

Viewed historically, what we experienced was a classic boom and bust. Prolonged prosperity dulled people's sense of risk. With hindsight, we know that investors, mortgage brokers and bankers engaged in reckless behavior that created economic havoc. We know that regulators turned a blind eye to practices that, in retrospect, were ruinous, unethical and sometimes criminal. We know that the Fed kept interest rates low for a long period (the overnight Fed funds rate fell to 1 percent in June 2003). But the crucial question is: Why? Greed and shortsightedness didn't suddenly burst forth seven or eight years ago; they are constants of human nature.

One answer is this: Speculation and complacency flourished, because the prevailing view was that the economy and financial system had become safer. For a quarter-century, from 1983 to 2007, the United States enjoyed what was arguably the greatest prosperity in its history. The boom was triggered by the conquest of high inflation, which had destabilized the economy since the late 1960s. From 1970 to 1984, inflation dropped from almost 13 percent to 4 percent. By 2001, it was 1.6 percent. As inflation fell, interest rates followed -- though the relationship was loose -- and as interest rates fell, the stock market and housing prices soared. From 1980 to 2000, the value of household stocks and mutual funds increased from about $1 trillion to nearly $11 trillion. The median price for existing homes rose from $62,200 in 1980 to $143,600 in 2000; by 2006, it was $221,900.

Feeling enriched by higher home values and stock portfolios, many Americans skimped on savings or borrowed more. The personal saving rate dropped from 10 percent of disposable income in 1980 to about 2 percent 20 years later. The parallel surge in consumer spending, housing construction and renovation propelled the economy and created jobs, 36 million of them from 1983 to 2001. There were only two recessions in these years, both historically mild: those of 1990-91 and 2001. Monthly unemployment peaked at 7.8 percent in mid-1992.

The hard-won triumph over double-digit inflation in the early 1980s, engineered by then-Fed Chairman Paul Volcker and backed by newly elected President Ronald Reagan, qualifies as one of the great achievements of economic policy since World War II. The temptation is to portray it as a pleasing morality tale. The economic theories that led to higher inflation were bad; the theories that subdued higher inflation were good. Superior ideas displaced inferior ones, and the reward was the increased prosperity and economic stability of the 1980s and later. But that, unfortunately, is only half the story.

Success also planted the seeds of disaster by creating self-defeating expectations and behaviors. The huge profits made in these decades by both professional and amateur investors conditioned many to believe in the underlying benevolence of financial markets. Although they might periodically go to excess, they would ultimately self-correct without too much collateral damage. The greater stability of the real economy -- by contrast, there had been four recessions of growing severity from the late 1960s to the early 1980s -- provided an anchor. The Fed was also a backstop: Under Alan Greenspan, it was lionized for averting deep downturns after the stock market crash of 1987 and the burst "tech bubble" in 2000. Money managers, regulators, economists and the general public all succumbed to these seductive beliefs.

The explosion of the subprime-mortgage market early in the new century may now appear insane, but it had a logic. Housing prices would continue rising, because they had consistently risen for two decades. Consumers could borrow and spend more because their wealth was constantly expanding and they were less threatened by recession. That justified relaxed lending standards. Similarly, investment banks could take on more "leverage." Homeowners with weak credit histories could refinance loans on more favorable terms in two or three years, because the value of their houses would have risen. If borrowers defaulted, lenders could recover their money because the underlying homes would be worth more.

The paradox is that, thinking the world less risky, people took actions that made it more risky. The pleasures of prosperity backfired. They bred carelessness and complacency. If regulation was lax, the main reason was that regulators -- like the lenders, investors and borrowers they regulated -- shared the conventional wisdom. Markets seemed to be working. Why interfere? That was the lesson of experience, not an abstract devotion to the theory of "efficient markets," as is now increasingly argued. Euphoria, or something close to it, was considered realism.

Unless we get the story of the crisis right, we may be disappointed by the sequel. The boom-bust explanation does not exonerate greed, shortsightedness or misguided government policies. But it does help explain them. It doesn't mean that we can't -- or shouldn't -- take steps to curb dangerous risk-taking. Some of the Obama administration's proposals for "financial reform" make sense. Greater capital requirements would protect banks from losses; the ability to control the shutdown of large, failing financial institutions might avoid the chaos of the Lehman Brothers collapse; moving the trading of many "derivatives" (such as "credit-default swaps") to exchanges would create more transparency in financial markets. Because the government ultimately stands behind financial markets, regulation is justified to limit taxpayer expense and to prevent catastrophic economic instability.

But it's neither possible -- nor desirable -- to regulate away all risk. Every "bubble" is not a potential Depression. Popped bubbles and losses must occur to deter speculation and compel investors and borrowers to evaluate risk. The overregulation of finance may discourage useful innovation and clog the channels for capital on which an expanding economy depends. Finally, a single-minded focus on the blunders of Wall Street may also distract us from other possible sources of future crises, including excessive government debt and borrowing.

The larger lesson of the recent crisis is sobering. Modern, advanced democracies strive to deliver as much prosperity as possible to as many people as possible for as long as possible. They are in the business of creating perpetual booms. The cruel contradiction is that this promise itself may become a source of instability, because the more it is attained, the more people begin acting in ways that ultimately invite its destruction. Booms often have unintended and nasty side effects. Even anticipated side effects that are ultimately unsustainable -- stock market "bubbles," excessively tight labor markets -- can be hard to police, because they're initially popular and pleasurable.

The quest for ever-more and ever-better prosperity subverts itself. It might be better to tolerate more frequent, milder recessions and financial setbacks than to strive for a sustained prosperity that, though superficially more appealing, is unattainable and ends in a devastating bust. That's a central implication of the crisis, but it poses hard political and economic questions that haven't yet been asked, let alone answered.

This essay is adapted from the paperback edition of "The Great Inflation and Its Aftermath: the Past and Future of American Affluence" by Robert J. Samuelson, published by Random House at the end of January.

Do We Need to Rethink What We Think We Know About Consumer Behavior?

Though 2010 widely is expected to provide a recovery from the depths of the recent recession, questions logically remain about how consumers will behave in a recovery most expect will be extended.

A new study by consumer research firm Decitica suggests lasting effects that could shape consumer spending on any number of communications services, applications and devices.

"The effects of the Great Recession on consumer behavior are so profound that many of the assumptions underpinning consumer segmentation are no longer valid," says Dr. Val Srinivas, Principal at Decitica.

Among the key findings: "Price has become the dominant consideration in the purchase of all kinds of products." For this reason, Decitica predicts "a long uphill struggle by marketers to shift the focus away from price."

The recession has caused a profound, deep-rooted change in consumers' spending habits in favor a more restrained approach, Decitica says. Many have accepted this radical change as the "new normal," and not just a cyclical phenomenon.

American consumers have proven researchers wrong in the past. The issue is whether this time might be different. See full post at http://blogs.metaswitch.com/gk/.

How Strong a Recovery; What Impact on Communications and Technology?

Since 70 percent of U.S. economic activity is generated by consumers, consumer behavior will be key to the arrival of a sustained period of growth. Conversely, anything that imperils consumer spending will weaken, choke off or abort any recovery.

In the past, this hasn't been an especially tough question to answer. Historically, recessions and recoveries roughly conformed to the principle of the bigger the bust, the bigger the boom, and vice versa. That, in turn, was underpinned by the underlying robust health of the U.S. economy.

Real growth in the four quarters following postwar recessions averaged 6.6 percent and 4.3 percent over the following five years.

Those figures are substantially above what economists seem to be calling for at the moment. The current recession has lasted a record seven quarters and has been marked by a near-record average gross domestic product decline of 1.8 percent per quarter.

All of that would, by historical standards, lead to a prediction of a powerful and sustained recovery. Yet forecasts of a two-percent recovery in growth are only one-fourth as strong as postwar experience suggests.

That suggests economists believe something has changed. We can argue about what the changes might be, and what is causing them. But this is not a political issue. As a simple matter of hope for America to get back to work, the anemic growth forecast is worrisome.

As someone who historically has tracked new technology and communications, as well as a citizen who wants the best for his country, it must be said: this does not bode well for our nation, our children or faster deployment of all sorts of interesting and useful tools people can use to enrich their lives and their work.

We might disagree from time to time about what should be done. That isn't the point. Clearly, something rather important is happening; something that defies historical precedent.

Perhaps the economists are wrong. They have been wrong in the past. I hope they are wrong about this. I continue to believe in the power of technology to make a huge difference in peoples' lives, and to fuel robust economic growth, which is, first and foremost, the way we are able to increase wealth and spread it around. I hope, for our nation's sake, that this continues to be true.

For that reason, I really hope the economists are dead wrong about the recovery rate. If not, we have some serious soul searching to do. Perhaps we have been dead wrong about some of our core beliefs.

Are Recession Driven Product Substitutions Permanent?

Whatever else one might say about it, a recession is a prime opportunity for product substitution whose immediate benefit might only be seen to be “saving money,” but which then might create a satisfying habit that leads to a permanent shift in demand, not just a temporary change of provider or service level.

In the U.S. market, the issue is whether the millions of customers who have opted for prepaid mobility will keep those plans even after the recession has past. Virtually nobody thinks consumers who have cut the landline voice cord in favor of mobility are likely to reverse course.

The poster child for substitution of mobile broadband for fixed broadband, for example,  is Austria, where  almost all broadband net adds have over the last year or two been mobile connections, rather than fixed connections.

And though the market in Austria and in the United States appear to have different structural characteristics, the danger of product substitution is amply highlighted in the Austrian market, where aggressive mobile providers, high fixed broadband prices and relatively low value of entertainment video create a sort of perfect storm for mobile broadband substitution.

And though it is not certain, past recessions were linked with, though perhaps not directly contributors to, the rise of disruptive new players in media or communications ecosystems.

Google was born in 1998, in the midst of the Asian financial crisis, while Skype was born in 2003, after the dot-com implosion, for example.

Changes in industry structure and the emergence of disruptive new industry leaders will not be ascertainable for some time. But churn is going to be easier to track, as we normally get reasonable trend data from any number of public companies every three months. We largely will have to guess at how product substitution might be occurring.

Some forms of substitution are now so commonplace as to be expected: cable companies and mobile providers gaining voice customers while telcos shed them; telcos gaining video customers while cable companies shed them while online viewing grows.

Other likely product substitutions are less visible. It is not clear there is any appreciable substitution of mobile wireless broadband for fixed broadband. But logic suggests that will become a greater opportunity and danger in several years, when fourth-generation services are more widely available.

Parks Associates research, for example, finds 80 percent of broadband users in key European markets prefer traditional video viewing to online viewing. Depending on how you want to spin it, that is a glass half empty or half full.

“Broadband has transformed video viewing habits in Western Europe, where over 20 percent of broadband households have watched a film or TV program online in the past six months,” say researchers at Parks Associates.

Mobile broadband and mobile broadband modems and dongles (including embedded devices) are growing dramatically. In several major European markets, including Austria, Ireland and Sweden, as many as 15 percent to 30 percent of broadband subscriptions are now over cellular networks, up from nearly zero a year ago, the International Telecommunications Union says.

Think about that for just a moment. From zero, mobile broadband jumps to 15 to 30 percent of total broadband accounts, in a single year.

That represents some mix of additional access accounts supplemental to fixed broadband, and some substitution. But it is significant that the ITU report believes the growth shows “mobile broadband can substitute for light-usage DSL.”

So the logical question is whether mobile broadband is to fixed broadband as mobile voice was to fixed voice.

Analysys Mason notes that one of the key success factors for the rapid take-up of HSPA (3G) has been the introduction of flat-rate pricing with either unlimited usage or very large inclusive data bundles.

So at least in some markets, the recession could be leading some significant number of consumers to trade off their fixed broadband connections in favor of mobile broadband.

The longer-term issue is more important. Once they have learned to live that way, will they continue when the recession ends?

That is the big danger on a number of fronts. And it is a bigger change than simple churn, as important as that is.

If a business customer picks another provider for one or more services, the danger for the original provider is that this particular customer never returns.

If a customer switches from cable to telco or satellite for video, does the cable company ever get that customer back? And if a customer abandons all landline service, does a telco have much of a shot at getting that customer back later?

Those issues are real enough. More challenging though is a fundamental new behavior pattern that changes the size and value of an entire market segment, application or service, not simply the market share various contenders can claim.

Sure, there will be important but temporary effects during the recession. What bears closer scrutiny are permanent changes in end user demand. The recession will provide incentive to try new things. Once that happens, we might see the behavior persist even after the recession-induced driver has passed.

We won’t know precisely how important all that is for some time. What does seem clear is that lots of people are going to try new things, maybe just to save money at first. There is no way all that behavior is going to stop once the recession is a memory.

Consumer Behavior in Recession was as Expected

Time Warner Cable's third quarter results provide a bit of concrete evidence that consumers did what they said they were going to as far as watching their spending on communications and entertainment services because of the recession.

Consumers said earlier in 2009 they were least likely to cut or reduce spending on Internet access and most likely to cut back on buying pay-per-view movies downloaded over the Internet, according to a new survey by Alcatel-Lucent. But mobile service, basic entertainment video service and telephone lines were among the items consumers said they were most likely to keep, though cutting back on things such as going to night clubs and concerts or going out to movies and restaurants.

All of those patterns would be in keeping with past consumer behavior in recessions.

(see http://ipcarrier.blogspot.com/2009/06/network-services-generally-safe-but.html, http://www.blogger.com/post-edit.g?blogID=7312392900566055630&postID=5497830666217750659)

Generally speaking, people said they would be keeping their broadband Internet, wireless and video entertainment services, though showing much more willingness to curtail adding new enhanced or premium services.

Some surveys suggested consumers would accelerate their abandonment of wired voice, while others suggested demand for fixed telephone services would hold up.

Time Warner Cable's results show that broadband Internet additions held up as expected, though sales of digital video, a premium upgrade, fell, as consumers suggested would be the case.

Time Warner's new voice customers also appear weak, though that bit of data does not necessarily confirm analyst expectations. Existing customers of other voice services might simply have stuck with their existing providers instead of switching to Time Warner Cable.

Overall net new additions tend to show the impact of consumer caution. The company added 117,000 revenue generating units in the third quarter, compared to 522,000 a year ago.

More to the point, Time Warner added 8,000 net new digital video customers, compared to 56,000 net new subscribers analysts were expecting. It added 62,000 net new voice customers where analysts had expected 107,000. The firm also added 117,000 broadband Internet access customers, where analysts had expected 115,000.

So broadband held up, while digital video activity fell, as did voice services.

Still, there are lots of variables to consider. Local market competitive conditions can sharply affect results, as do promotional activities.

Comcast, for example, saw its digital video customer base grow a net 7.4 percent, while adding 6.4 percent net new broadband customers and 20.3 percent voice customers.

Still, the point is that consumers had suggested, and history suggested, that wireless, broadband Internet and entertainment video growth rates would slow, but that the services themselves would hold up. It appears they did, at least for these two large cable operators. At&T and Verizon also added large numbers of wireless customers, as well as a decent number of video and broadband access customers.

Consumer Spending on Internet Access, TV and Mobility is Stable, Poll Suggests

Cutbacks in home communications and entertainment services have yet to emerge as a measurable trend, despite the ongoing recession, say researchers at Pike & Fischer, who recently polled 600 consumers nationwide about their spending on phone, Internet and multichannel video.

Scott Sleek, Pike & Fischer director of broadband advisory services, says the firm conducted the survey because it has been hearing so much "doom and gloom" from service provider executives.

But the study indicates respondents say they would rather keep Internet, video and voice services in their budgets than any other type of expense, including gym memberships, personal care products and apparel.

But the results also point to customers becoming more aware of ways to spend less on those services. That suggests average revenue per user is, or will soon become, an issue for service providers.

"We found very consistent consumer behavior," says Sleek. "We found no evidence of downgrading, for example."

"What I found interesting was that when we asked what people planned to do with their phone and TV services, most said they were planning absolutely no changes," says Sleek.

"Of course, neither are they upgrading, buying more premium channels or adding faster Internet tiers, either," he notes. That is "better than a lot of people thought would happen," he adds.

But one reason service provider executives remain nervous is that there are so many free and cheaper services available now that didn't exist five years ago. Nobody was sure what would happen, this time around.

So far, though, behavior is what one would have predicted, based on behavior in past recessions: stability of subscriptions, but some pressure on average revenue per user.

"The cable guys are worried about over the top video, but so far, it seems to be augmenting video consumption," says Sleek.

People report spending more time at home, so TV and Internet arguably are more valuable.

Will Consumers Follow Through on Wireless Plans?

Some quarters are more important than others. The first quarter of 2009, for example, will provide an important test of whether consumers are "putting their money where their mouths are." The reason? Some surveys have consumers telling researchers they will cut back or drop important communication services.

A recent survey by Pew Research Center, for example, has some 20 percent of respondents reporting they’ve gone with a less expensive cell phone plan, or canceled service altogether. About 22 percent adults say they are saving money on their cell phone bills.

Young adults, the group that is the most likely to use mobiles, are the most likely to have taken this step: 30 percent of respondents under the age of 30 and 20 percent of other adults say they have changed cell plans or dropped service because of the recession.

Three-in-ten adults with family incomes below $30,000 say they have changed or cut their mobile service, and 13 percent of those making $100,000 or more say they have done so as well.

If those respondents really are acting as they say they will, we might expect a bit of an explosion as mobile providers report first-quarter results. To be sure, over the last couple of quarters there has been a clear upsurge in use of pre-paid mobile services, generally interpreted as a cost-saving measure.

Still, AT&T, the first mobile provider to report first-quarter results, had a wildly successful first quarter for post-paid plans. There are of course some other logical developments we might be watching for. Among the obvious economy measures are switching from post-paid to pre-paid plans, and that clearly is happening.

On the other hand, we will be watching for any signs of actual, industry-wide shrinkage of wireless accounts. A simple switch to pre-paid generally reduces average revenue per user, while maintaining subscriber numbers. That likely means some shift of market share among wireless providers, even if it does not automatically suggest overall subscriptions will dip.

Based solely on the AT&T results, respondents are not necessarily behaving as they say they will.

http://pewresearch.org/pubs/1199/more-items-seen-as-luxury-not-necessity

AT&T Results: No Negative Recession Impact

AT&T's first quarter 2009 results suggest it is not suffering from economy-induced customer budgetary caution. Its earnings per share were in line with its full-year outlook, the company gained 1.2 million net wireless subscribers to reach 78.2 million, ading 875,000 retail postpaid net adds, up 24.1 percent compared to the first quarter of 2008.

The company also posted its fifth consecutive quarter with a year-over-year increase in wireless postpaid subscriber average revenue per user, up 2.1 percent versus the year-earlier quarter to $59.21.

AT&T firther saw strong growth in its U-verse IPTV segment, adding 284,000 net customers, nearly double the company’s gain in the first quarter of 2008, to reach 1.3 million in service.

The company also posted a 471,000 net increase in total broadband connections, including wireline and wireless LaptopConnect cards, to reach 16.7 million in service.

Deutsche Telekom Issues Profit Warning

Deutsche Telekom AG has issued a profit warning which it blames on the economic slump, says Dow Jones newswire. Citing weak mobile operations in the United States., the United Kingdom and Poland, Deutsche Telekom says it now expects 2009 earnings before interest, tax, depreciation and amortization to be two percent to four percent below 2008's level of EUR19.5 billion, while free cash flow is set to reach around EUR6.4 billion, down from EUR7 billion a year ago.

But Deutsche Telekom first-quarter revenue rose by around six percent to about EUR15.9 billion. Free cash flow was between EUR200 million and EUR300 million in the first quarter of 2009, compared with EUR1.6 billion in the same period last year, it said.

Deutsche Telekom said it had "felt the impact of the economic slowdown and the more intense competitive environment," particularly in the United States and United Kingdom., while roaming revenue fell as consumers cut back on travel.

The weak zloty in Poland and weak sterling in the U.K. also hurt revenue and adjusted EBITDA, the company says.

Some observers think "blaming the economy" is less relevant than operational shortcomings, currency effects, market share shifts and other issues, though.

In Poland, revenues are expected to take hit following a 26 percent decline in the value of the Polish zloty to the euro, says Emeka Obiodu, Ovum senior analyst. The U.K. pound also is down 21 percent compared to the euro.

Competition rather than the recession remains the major problem, says Obiodu. "Generally, the market dynamics have not changed much and competition remains fierce."

"In fact, we have yet to see any disastrous performance from a mobile operator that can be blamed solely on the economic crisis," Obiodu says." Indeed, for each of the recessionary factors cited by Deutsche Telekom for its profit warning (apart from currency risk), it is possible to show a corresponding non-recessionary force at play."

Roaming revenue is down. But the EU has mandated cuts in mobile roaming. In the UK, off the four main mobile operators in the market, T-Mobile’s organic revenue growth for each of the four quarters of 2008 was the lowest, says Obiodu.

In the United States, intense competition and the increased push for unlimited bundles is having a major impact on T-Mobile USA. There are other explanations for the quarterly results, in other words.

$5 Billion Less Consumer Spending on Mobile, Broadband, TV?

Though first quarter financial results are not yet available to confirm the possible existence of the trend, about 15 percent of respondents say they will cut back spending on subscription-TV, broadband, and mobile services in response to economic pressures, an In-Stat survey finds. Precisely what that means is the question.

If any significant trend of that sort emerges, U.S. consumers could cut spending on mobile, broadband and pay TV services by nearly $5 billion due to economic turmoil, In-Stat says.

Will consumers drop mobile, broadband or multi-channel video subscriptions completely, or simply shift consumption to more-affordable subscriptions? The former would cause a greater hit to revenue and a risk that customers do not return later, the latter might "simply" pressure on average revenue per user.

In the fourth quarter of 2008, a slowing rate of growth could be seen for at least some services, but it was hard to separate purely-economic effects from product maturation. So far, mobile service providers have seen a shift to prepaid services from postpaid.

It wouldn't be unusual to see consumers dropping some premium services or postponing upgrades in the face of a tough recession. What would make news is negative growth for subscription services other than wired voice, which has been declining, at least for some providers, for years.

We'll find out soon enough what is going on.