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.

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Weaker Market for Fixed Line Services Due in Part to Housing Market Changes

As if fixed-line providers of entertainment video, voice and broadband did not have enough problems, it appears there are fewer households to sell services to, these days.

Lower housing starts and a severe job market are obvious reasons why uptake of new services has been challenged.

But it appears there are other demographic changes at work as well. More young people, for example, are living longer with their parents than once was the case.

Also, more people in their 20s have moved back in with their parents. That is important as younger people represent one of the biggest groups of "single person" households. If there are fewer of those sorts of households, there are fewer potential occupied homes to sell services to.


A 2009 Pew Research survey found that among 22- to 29-years-olds, one-in-eight say that, because of the recession, they have boomeranged back to live with their parents after being on their own. That suggests as many as 12.5 percent of those 22 to 29 have removed themselves from the ranks of households with a possible need for fixed line communications or entertainment services.

Those trends, in turn, seem to have been driven by the recession's impact on younger workers.

According to a Pew Research Center analysis of Bureau of Labor Statistics data, as of 2009 some 37 percent of 18- to-29-year-olds were either unemployed or out of the workforce, the highest share among this age group in nearly four decades.

In 2000 there were about 42 million people living in multi-generational households. In 2008 there were 49 million, and one suspects that number grew in 2009.

National Broadband Plan is Mostly a "Grab Bag" of Proposals

There were few, if any surprises, when the Federal Communications Commission finally released its proposed "National Broadband Plan," whose centerpiece is an effort to free up about 500 megahertz of spectrum for wireless access. A modest amount of incremental spending for rural broadband is proposed. '

Perhaps the real story here is a recognition that not much really can be done, or perhaps ought to be done, about the existing fixed-line broadband access market, except to encourage existing providers to upgrade speeds.

National Broadband Plan Suggests Wireless Future

There are some fairly-significant implications one might draw from the Federal Communications Commission's proposal for National Broadband Policy. First of all, the plan explicitly relies on private capital and private firms to get the job done.

There are some important tweaks to funding of services rural high-cost areas, and a bit of new spending in other areas. But those are a gloss. The heavy lifting clearly is going to have to be done--or left undone--by private capital and existing service providers.

People can continue to advocate for, and support, alternative ways for getting things done, but there is at this moment no sense that radical changes in industry structure are possible. Some might argue that the country would be better off with a robust wholesale infrastructure, retail provider model, but that is not on the table.

The other really-significant implication is that the future will belong to wireless. In fact, the really-big proposal is to reallocate 500 megahertz of wireless spectrum away from TV broadcasting and to wireless communications.

In fact, though any of us might grumble that prices are too high and speeds too low, the FCC's own data suggests that "access" actually is not a problem, even restricting the definition to fixed networks.

The FCC says 78 percent of U.S. homes already have access to two broadband service providers. About four percent have a choice of three providers. Another 13 percent have at least one provider. Only five percent of homes do not have at least one fixed services provider. And, again, those estimates do not include two satellite broadband providers and between one to four mobile broadband providers as well.

Separately, the FCC notes that 77 percent of U.S. households already can buy service from three wireless broadband providers. Another 12 percent of homes have a choice of two mobile broadband providers, while none percent of homes have at least one mobile broadband service provider. Only two percent of U.S. homes cannot buy mobile broadband service.

For a variety of reasons, the FCC plan implicitly acknowledges that the current fixed broadband duopoly is about as good as it will get, and that, going forward, mobile broadband is the new battleground.

The FCC probably is completely right in that assessment. Mobility is the one industry segment that would have relatively little trouble attracting lots of new capital investment, and mobility is the one segment of the whole communications business that is exploding globally, not just in the United States.

Mobility is the segment where innovation already is the fastest, where new applications and devices are proliferating most rapidly, and where consumer interest and new adoption is highest.

Like it or not, the FCC always works within a political context. It has to work within the constraints of what is possible, and the emphasis on wireless is a clear reflection of those constraints. The FCC is smart enough to understand that, so long as private capital and private firms must drive the bulk of national investment and service provision, the agency must work within the constraints of the capital markets, which clearly signal that the perceived upside, and therefore investment interest, lie in wireless and over-the-top applications, not more wired infrastructure.

Make Sure You Keep Watching for about a Minute and a Half, You'll be Rewarded

Now this is truly clever, really.

Google Nexus One: Lessons to be Learned?

New sales data on the Google Nexus One smartphone has most observers concluding that Google has failed with its launch. Flurry notes that the Nexus One has shipped about 135,000 units in 74 days, where Apple shipped a million iPhone units in its first 74 days while the Verizon Droid sold a bit more than a million units in its first 74 days.

"Google Nexus One may go down as a grand, failed experiment or one that ultimately helped Google learn something that will prove important in years to come," Flurry notes.

But the sales curve might suggest something about the distribution channel more than anything else. Droid's sales suggest it is not the Android operating system which accounts for the low sales.

More likely the low sales are the result of a combination of changes in the typical distribution system. Most users buy their devices from carriers, most often preferring a discounted handset with an accompanying contract.

Google has been selling only unlocked devices, and only from a Web site, at full retail price. One could have predicted that would not be popular.

Also, Google initially started out with email support only. Given the history of consumer unhappiness with mobile service provider customer service, that also could have been predicted. When people have a problem, they want to talk to a live person, and they want to talk "now."

Also, though some policy advocates have been loudly calling for sales of unlocked devices as a consumer choice value, most consumers care less about unlocked devices and more about customer support. In an unlocked device scenario, it isn't clear whether it is Google, the handset vendor or the carrier that has the issue causing the problem.

Consumers may have issues with contracts, but they also prefer lower phone prices and the assurance that if there is a problem, the retailer will take responsibility.

What Google's experiment mostly shows is the value and power of an integrated distribution model, with clear responsibility and good customer service support. Unlocked devices do not generally resonate, and neither do full price handsets, especially when customer experience after sale is so poor.

Flurry post

Except for Wireless, National Broadband Plan Much Ado About Almost Nothing

Oddly enough, the proposed National Broadband Plan is light on new spending and puts primary emphasis on wireless, while mixing in a bit of a grab bag of existing and vexing voice-related issues. The goal of getting 100 Mbps service to 100 million U.S. homes by 2020 appears to be just that, a "goal," not a requirement.

Some people would call that a mistake, but the Federal Communications Commission is not unmindful of some basic facts, including the requirement that the investment heavy lifting must be done by private industry, and that means raising lots of investment capital from private sources.

Those sources already have made clear their fears that too much tinkering with broadband regulations, especially regulating broadband access as a common carrier service, will choke off investment.

The single-biggest substantive proposal is the plan to make 500 megahertz of new spectrum available for wireless communications by reallocating spectrum presently used by TV broadcasters.

It might be close to heresy, but if you look out 10 years, the business case for investing lots of money in fiber to home facilities is starting to look worse, not better. Many policy advocates call for much-higher speeds and lower costs at the same time. That's not a convincing scenario for investors who would have to take a chance on loaning money in that sort of market.

Also, to the extent that entertainment video has been a big part of the business case, not many observers would believe the future is as bright as the past has been. With voice also under pressure, it may not make as much sense as it once did to invest too aggressively in fixed broadband. Broadband still is the foundation service for fixed networks in the future.

But that is a different issue from the separate issue of how much investment ought to be made, because it is unclear how much users are willing to pay for really-fast service, or how much incremental revenue might actually be created by new applications that require really-fast broadband.