Is Communications Spending Growing, or Not?

As a practical matter, it often is difficult to ascertain whether consumer or business spending on particular communications services or products, though up or down in nominal terms, actually represent growth or decline. The reason is that nominal increases in spending over time sometimes reflect broader price changes in the whole economy, rather than changes in demand or spending as a percentage of total spending.

Also, even nominal spending can be deceptive. If a flat dollar amount of spending over time also is accompanied by large decreases or increases of overall income, for example, the nominal spending can disguise “real” changes.

Ignore for the moment changes in product value or features over time that also complicate comparisons. If “X” amount of spending on any product also is accompanied by significant changes in a household or national budget, for example, then the implications can be quite significant.

As a percentage of spending, a flat amount automatically will represent a larger percentage of spending.

In other words, the product of a fraction always changes as either the nominator or denominator changes. That noted, it is possible that spending patterns are changing, for the first time in decades. There is evidence that between 2007 and 2010, for example, U.S. households were spending much more on “telephone equipment,” which has to represent purchases of mobile phones. That should, in principle, lead to higher spending on mobile communication services.

There also was a predictable increase in spending on “communication services,” which probably reflects increases in video subscription rates, plus some incremental spending on mobile services for all those mobile devices people seem to be buying.

Keep in mind that those percentage increases might, or might not, represent a significant change in the percentage of household spending on services or devices.

Logic might suggest that most people do not spend much, in any given year, on fixed line phones or fax machines, for example.

So a 16-percent change on a small base might not represent much actual sales volume. A four-percent growth of spending on “information processing” equipment, which presumably includes personal computers, tablets and possibly other personal mobile devices, might represent a bigger change in dollar volume. 

On the other hand, logic also would suggest that people are spending more on tablets and smart phones, which could mean they are maintaining spending on legacy products, and adding new devices (increasing spending overall), substituting new products for older products (substituting new products for older products), or cutting back someplace else in budgets to add the new products. 

Looking back at the 1990 to 2008 period, for example, one can note “huge” increases in nominal consumer spending on communications and information technology.  

Since 1990, though, those changes also  have been more than matched by broader increases in household income, holding the percentage of household spending on communications flat over the entire period.

One might also note that such figures also are not typically “inflation adjusted” to show changes in constant dollar terms.

Since 1990, consumer spending on information and communications technology has grown from $197 billion to $545 billion, 5.1 percent of national disposable income in 1990, peaking at 5.9 percent in 2000, and falling to 5.4 percent in 2008. Those figures include both recurring spending on services and product purchases.

Spending on communications services has tripled over the same period, from $77 billion to $243 billion, and at 2.3 percent of national disposable income, up from 1.8 percent in 1990 but below its peak of 2.5 percent in 2001.

Basically, the story is one of large increases in consumer value. Consumers are spending more on communications and information technology, but a steady percentage of disposable income. Yet consumer value has grown exponentially in the intervening years, one might argue.

The problem is that changes in product quality are not reflected in retail price metrics. That is a common “problem” where we look at software and computing devices, where a constant dollar amount buys more processing power and features every 18 months to 24 months.

U.S. communications expenditures as a share of national disposable income has been flat since 1997, but users have added over 100 million broadband and video connections and over 100 million wireless connections, according to the Bureau of Economic Analysis.

Such potential changes bear watching. It would be a very-big deal indeed if typical consumer spending on communications services and mobile devices were to deviate from their historical patterns in a markedly upward direction.

One might argue we already have seen a slight upward trend, measured as a percentage of total household spending. The other angle is that communications spending always will represent a very-small fraction of overall household spending, dwarfed by housing, food, medical care and other categories, for example.

Skinny Video Bundles a Logical Response to Growiing Consumer Resistance to Price Increases

Stability of consumer spending patterns is one reason why more linear video suppliers are embracing “skinny” content bundles whose primary attribute is that they cost less.

Since linear TV now is a core “telecom” product in consumer markets, that also means consumers will evaluate their buying choices through a very sticky lens. Households and consumers tend to spend only about two to three percent of income on all communications-related products.

When one category grows--such as mobility--some other category is dropped (such as fixed network voice). If spending on high speed access or any other component grows, then something else has to give.

Ever-higher linear TV bills are no exception. Facing such trends, consumers are going to cut back, to shift spending to mobile data and fixed high speed access.

Eventually, one might argue, they also might consider spending more on mobility and less on fixed services overall, if 5G starts to offer value-price bundles that support video consumption and high speed access requirements.

That--for decades--has been a hope of many mobile executives. The fundamental reality is that consumer budgets for all communication services (and that now includes many forms of entertainment video) is rather fixed. Prices cannot rise in any category without hard choices in other areas.

Device costs also are an issue. It is not clear whether $600 or $800 smartphones come out of a “consumer electronics” or “communication services” bucket. It likely is a combination of both categories. But that also means more attention will be paid to other services to deemphasize, so the pricey smartphones can be purchased.

Though U.S. households have gradually begun spending more on communications services over the past couple of decades, between 1990 and 2008, for example, the rise was fairly slight.

Consumers boosted spending from 1.8 percent of income to about 2.3 percent of personal income. Since 2008, some studies show a further increase.

At least one study of U.K. expenditures suggests communications spending could in some cases represent 12 percent of spending, while U.S. consumer spending on communications could have increased five percent, a possible historic increase level, between 2007 and 2010.

That five percent increase represents higher spending on linear TV, mobile and fixed services. Keep in mind, that does not mean the “percent of income spent on communications,” just the increase. Note that “telephone equipment” largely represents spending on mobile phones.

In fact, if spending on mobile phones and services has grown significantly, something else has given way. Since 2007, consumer spending on mobile services (per household, average of 2.5 persons per household) has been greater than spending on fixed services, according to the U.S. Bureau of Labor Statistics.  

By 2014, in fact, about 73 percent of all “telecom” spending per household was for mobile services.

in 2014, spending per household--including telecom and audiovisual equipment and services, amounted to about 4.4 percent of household spending. It is not immediately clear where spending for high speed access appears. If not captured by government data, then it is certainly possible that household spending on communications has reached five percent, or more, in some cases. It is hard to say for certain.

But the point is that consumer ability to buy communication services is rather finite. At whatever level you believe is current (2.5 percent to five percent per household), there will be resistance to increasing the percentage of spend much more.

That means prices cannot continue to climb, for every component service, without cutbacks, someplace.

So skinny video bundles appear an ever more likely response to consumer resistance to price hikes. Given a choice between spending less on Internet access, entertainment video, mobility or fixed voice, which priorities would you have?

Service Providers Might Gain $77 Billion in New Revenue, Lose Just a Bit Less Than That, to 2023

According to Technavio Research, video entertainment, music, voice and messaging revenues for service providers will grow about $77 billion--roughly 13 percent on a compound annual basis--between 2019 and 2023. It is not actually very clear what all that means, if a correct forecast.

Other credible forecasts suggest total industry revenue will grow by perhaps one percent a year to 2022. All of which suggests net growth will be low, losses balanced almost exactly by losses.

source: Technavio

The way we can understand the different forecasts is to understand that one forecast looks at revenue growth from new products, without considering losses in legacy product lines, while the other is a look at net changes in revenue, including both gains and losses.

Beyond that observation, projected shifts in consumer spending on communications and entertainment products have to be evaluated against actual past behavior. 

Consumer spending does not change too much from year to year. Nor does the percentage of income spent on various categories change too much. 

source: IDC

In Myanmar, a new mobile market, spending per household might be as high as eight percent of total spending. In Australia, communications spending (devices and services) might be just 1.5 percent of household spending.  

In South Africa, households spend 3.4 percent of income is spent on communications (devices, software and connectivity). In Vietnam, communications spending is about 1.5 percent of total consumer spending.

In the United States, all communications spending (fixed and mobile, devices, software and connectivity, for all household residents) is perhaps 2.7 percent of total household spending. U.S. household spending on communications might be as low as one percent of household spending, for example. 

Even spending on video streaming, which is climbing, might not have affected aggregate video subscription revenues too much. What has changed is the allocation of spending between linear and over the top services. 

Also, prices for connectivity services are dropping. From 2000 to 2018, mobile and fixed line charges in Europe and other developed markets have dropped by as much as 59 percent, while fixed network services dipping by as much as 48 percent. 

source: Frontier Economics

So even if usage climbs, and new products are added, unit prices are under pressure. The point is that we have to distinguish between product line growth or decline, total market growth and decline and differences between firms and markets.  

Yes, consumer demand has shifted, and is shifting. But consumer spending for communications, audio and video arguably has changed very little, in terms of aggregate spending. 

How Much Can Consumer Communications Spending Grow?

How much can consumer spending on communications, including mobility services, broadband and other services continue to grow, as a percentage of total household spending? The answer to that question could well determine the health of the global telecom business.

And there are clear indications that household spending on a range of communications services and appliances has been growing over the past couple of decades. In fact, a spending rate below three percent was the norm until the recent Internet and mobile era.

In part, you might argue, that is logical. People now are buying multiple services (broadband access, video entertainment, mobile telephone service, fixed telephone service) where in the past they were only buying a single service, namely fixed network telephone service.

There also are some indications that overall spending on devices and services is reaching unprecedented levels.

U.K. household spending on communications, broadly defined, are as high as 12 percent of total household spending, the U.K. government says.  That figure seems unprecedented and out of line with historic percentages in most markets. If such levels can be reached, then there is room for overall spending on devices and services to more than double.

In the U.S. market,  household communications and information technology spending has recently been in the five percent of spending range. That includes both “communications” subscriptions and devices such as computers and other “office” technology.

And there are clear indications that consumers are spending a greater percentage of their disposable income on mobile services, in particular. Even there, though, there are nuances. People surveyed on behalf of the Cisco nternet Business Solutions Group seem to find mobile broadband a discretionary item. 

Cisco Internet Business Solutions Group found that despite consumers’ fondness for smart phones, they do not prioritize their mobile data spending accordingly. 

Most consumers in all countries surveyed would cut mobile data services first or second if they needed to reduce their household communication and entertainment expenditures.

Why haven’t consumers adapted their spending priorities to favor mobile data? Possibly because when consumers do use their smart phones for data access, the research shows that about 80 percent of mobile Internet activity is not truly mobile, but nomadic. 

That has potential implications. In future recessions, might consumers try to save money by cutting back on mobile data, in addition to subscription video and fixed network voice service? The data suggests there is a possibility of such behavior, as fixed network broadband and mobile voice are the most-important services. That suggests the last services to be cut would be fixed broadband access and mobile voice.

U.S. consumer spending on phone services rose more than four percent in 2011, the fastest rate since 2005, according to Department of Labor statistics.

And mobility now drives much of that spending. In fact, families with more than one smart phone sometimes pay more for mobile service than they pay for cable TV and home Internet access.

The longer term issue is how much more spending can grow, as a percentage of total household spending. The question assumed more importance recently during the Great Recession of 2008, but is an on-going question in light of robust consumer adoption of smart phones and tablets, for example. In principle, widespread use of those devices could change spending on communications.

Though surveys taken in 2009 and 2010 seem to indicate that consumers were cutting back on communications and multi-channel video entertainment spending, other data from the Bureau of Economic Analysis suggests that did not happen; in fact, such spending increased between the start of 2008 and the middle of 2010, for example.

Since the recession started in the fourth quarter of 2007, U.S. consumers have apparently been cutting back on their spending. But Bureau of Economic Analysis data suggests that consumers have been cutting more in some areas than others, and actually have increased spending on many communications services.

BEA show aggregate personal consumption expenditures were up 2.9 percent, or $285 billion, between the fourth quarter of 2007 and the end of the second quarter of 2010, for example.

Mobile device spending was up almost 17 percent since the fourth quarter of 2007. And spending on communications and multi-channel video services was up by five percent.

Consumer Spending on Connectivity Might Surprise You, Even in Recession

It is easy enough to predict that consumer, smaller business and enterprise spending will fall if the world falls into recession in 2020. That would be in line with findings that consumption and consumer spending fell virtually across the board in the Great Recession.  

But that does not directly translate into consumer, small business and enterprise spending on communication services and products. 

Telecom service provider revenues did not change much in the wake of the Great Recession of 2008. In fact, according to some studies, U.S. consumer spending on communications actually grew, overall, in the wake of the Great Recession, for example. 

Some surveys found that device purchases slowed during the Great Recession. But some surveys also found consumers willing to make other tradeoffs to keep their broadband, mobile and video subscription services. There was, in other words,  less willingness to cut high speed access than other services, for example.

In fact, some surveys found consumers would rather abandon their mobile service than give up fixed high speed access. Consumers have indicated they would give up other products as well to keep their broadband access.

If they had to give up one service  (video entertainment, mobile, broadband), U.K. consumers would ditch video (49 percent) or mobile (30 percent) before their fixed network broadband connection (two percent), a survey of  more than 10,000 U.K. consumers found, for example.

The point is that high speed access arguably is highly resilient in a recession, and arguably the most-valued service, perhaps even be more valued than mobility. But mobility likely would rank as among the next most important service.

By some studies, consumer spending on mobile devices increased during the Great Recession of 2008 and spending also increased for communication services. That pattern hasn’t changed.

It does not seem that there was much recession impact on subscription video entertainment spending, though some consumers might have dropped a premium channel in favor of expanded basic service.

So despite fears, it is likely that overall revenue will not change that much in the wake of the expected Covid-19 recessions, either. 

One reason is that consumer spending on communications is relatively fixed. As data gathered by the Organization for Economic Cooperation and Development suggest, developed nation spending by consumers was remarkably consistent in the few years after the 2008 recession. 

source: OECD

Still, operators will be prudent, given growing expectations that the global economy now appears headed for negative growth in 2020 because of the Covid-19 pandemic, according to the Economist Intelligence Unit. 

Three years after the 2008 Great Recession, many still were noting reduced revenue growth in some regions. The caveat is that those areas arguably also had secular revenue issues that might have been masked by the effects of the Great Recession. It is likely that revenue trends were shaped by both consumer and enterprise spending, arguably benign in the former case, but more pronounced in the enterprise customer segment. 

Growth Forecasts, G20 countries in 2020
Real GDP growth (% in 2020)	Real GDP growth (% in 2020)	Previous forecast (before outbreak)
Argentina	-6.7	-2
Australia	-0.4	2
Brazil	-5.5	2.4
Canada	-1.3	1.8
China	1	5.9
France	-5	1
Germany	-6.8	0.9
India (2020/21 fiscal year)	2.1	6
Indonesia	1	5.1
Italy	-7	0.4
Japan	-1.5	0.4
South Korea	-1.8	2.2
Mexico	-5.4	1.1
Russia	-2	1.6
Saudi Arabia	-5	1
South Africa	-3	1.4
Turkey	-3	3.8
UK	-5	1.1
US	-2.8	1.7
Global (market exchange rates)	-2.2	2.3

source: Economist Intelligence Unit

The last two big recessions of note happened in 2001 and 2008. The issue now is whether the recession caused by economic shutdown for health reasons because of Covid-19 is going to be better, the same or worse than the great recession of 2008 or the collapse of the internet bubble in 2001, for example. 

The “same as” or “worse than” scenarios would be multi-year, perhaps half-decade long events. 

In a 2014 analysis, EuroMonitor noted that “the speed of the recovery from the 2008 global financial crisis has been unusually slow,” compared to recoveries from previous recessions. In the U.S. market, for example, gross domestic product per person did not recover to 2007 levels until 2012, four years after the 2008 great recession. 

GDP Per Working Age Person in Advanced Economies since 2007

source: Euromonitor