The New Normal Will Not Last; in 2 to 4 Years, Normal Will Reassert Itself

One hears talk of post-Covid-19 new normal that results in permanent changes in business and consumer behavior. 

But we heard the same analysis in the wake of the 2008 great recession. Permanent slow growth was supposed to be the new normal.  It did not last. 

source: Statista

source: Statista

Some confidently predicted that U.S. firms would never again make as much use of leverage as they had going into 2018.  In fact, trends in use of leverage in financial markets suggest there is nothing permanent about new business attitudes towards financial leverage.  Use of leverage soared, post-great recession, to new levels. 

source: Seeking Alpha

Likewise, many analysts suggested consumer behavior had fundamentally changed as a result of the 2008 recession. Consumers would remain wary of debt, it was suggested. That also proved to be incorrect. To be sure, consumers were more cautious for half a decade, but eventually returned to their old ways. 

source: Marquette Associates

Consumer saving rates grew in the wake of the great recession, but only for perhaps four years. 

source: Federal Reserve Bank

The cruise industry saw price declines in the wake of past recent recessions or event shocks as well, and most expect a slow recovery for cruise line activity in the wake of the pandemic. But other shocks--the internet bubble collapse, the SARS epidemic, the 2008 recession and Costa Concordia disaster of 2012 all led to price weakness. It took about five years for prices to recover. 

source: Market Insider

After the 2008 recession, consumer spending was back up to pre-recession levels. 

source: Bureau of Economic Analysis

To be sure, the recession of 2008 likely accelerated trends that already were happening, but also lead to at least a temporary emphasis on simplicity, thrift and fickle changes in preferences. Green and ethical consumerism would wane, some predicted. None of those trends lasted. 

So despite all the talk of the new normal, we are likely to see a reversion to the mean after a few years. Linear extrapolations from current behavior are likely to be wrong, as they have been wrong in the past. The new normal will not likely last very long. Eventually, we will return mostly to the original normal, with the caveat that all underlying fundamental trends are likely to remain intact. 

Next Normal or New Normal?

The post-Covid business environment--for connectivity providers as much as for any other industry--might be “next normal” or “new normal.” The former might indicate bigger changes for some industries but fewer disruptions for others, essentially accelerating trends already present.

The latter might indicate fairly permanent and significant life alterations that were not already in place. “Just different” is one way of describing “next normal,” while “never be the same” characterizes “new normal.”

McKinsey consultants analyzed the change potential across more than 2,000 tasks used in some 800 occupations in the eight focus countries.

“Considering only remote work that can be done without a loss of productivity, we find that about 20 to 25 percent of the work forces in advanced economies could work from home between three and five days a week,” McKinsey says. 

“This represents four to five times more remote work than before the pandemic and could prompt a large change in the geography of work, as individuals and companies shift out of large cities into suburbs and small cities,” McKinsey notes.

The geography of communications also should shift, with some possible ramifications. Pre-Covid, mobile traffic demand was generally concentrated at 30 percent of cell sites. That should lessen, with a greater percentage of traffic at the other 70 percent of sites.

That also should alleviate some capital investment intended to boost radio capacity at the busiest urban sites. Additionally, mobile data demand could grow less rapidly than before the pandemic, if significant percentages of workers stay at home, more of the time, connected to their Wi-Fi networks. 

Less urban traffic also means less demand for all the associated businesses catering to urban workers. That suggests less demand for small business connectivity, for some time, or perhaps even permanently.

Less demand for urban office space will shrink the market for business connectivity supplied to those locations. There eventually should be higher demand for at-home upstream bandwidth as well, as more people need better support for two-way video sessions. 

Use cases for fixed wireless should improve, as the suburban and rural locations more people will be working from are precisely those locations where sustainable business cases for new fiber to home installations are toughest. 

There will unpleasant social implications, as low-wage, lesser-skilled jobs are among those which will be displaced, post-Covid. As has been the case for decades, the growth will be happening in health care and knowledge work. 

source: McKinsey 

“Compared to our pre-Covid-19 estimates, we expect the largest negative impact of the pandemic to fall on workers in food service and customer sales and service roles, as well as less-skilled office support roles,” McKinsey says. 

“Jobs in warehousing and transportation may increase as a result of the growth in e-commerce and the delivery economy, but those increases are unlikely to offset the disruption of many low-wage jobs,” McKinsey adds. 

“In the United States, for instance, customer service and food service jobs could fall by 4.3 million, while transportation jobs could grow by nearly 800,000,” McKinsey notes. “Demand for workers in the healthcare and STEM occupations may grow more than before the pandemic.”

On the other hand, it also is fair to ask whether travel, hospitality and some forms of business travel will be permanently depressed. A year ago, some quipped that “trade shows are dead,” as a permanent trend. To be sure, all large in-person events were temporarily halted, for health reasons. 

But we need to be careful about extrapolating present circumstances into the future. The pandemic will pass. And we can be sure that any linear extrapolation from pandemic behaviors will prove incorrect. 

Gradually, demand for experiences provided by in-person events will return. For business-to-business sales operations, they will be almost necessary. 

“We found that some work that technically can be done remotely is best done in person,” McKinsey says. “Negotiations, critical business decisions, brainstorming sessions, providing sensitive feedback, and onboarding new employees are examples of activities that may lose some effectiveness when done remotely.”

Are There Big, Permanent Demand Changes Post-Covid?

How much will the new business-to-business environment post-Covid “normal” resemble either the “old” normal or the temporary pandemic normal? And to what degree will the new normal create new trends that affect business models? 

The safest answer--based on history--is that the new normal will accentuate underlying trends in place before Covid, with incremental changes to business models for many businesses and industries. Most of us likely assume that the consumer and business shift to online behaviors--already underway before Covid--will be reinforced at a higher level. 

That includes a shift to remote work and more collaboration at a distance. But that arguably will affect many industries and firms in an incremental way.

The bigger issue is whether some industries--such as airlines, cruise lines and hotels--might see big and permanent drops in demand, which will force big business model changes, including industry exit if markets shrink.

Some believe business travel, for example, will never return to pre-pandemic levels. That will have negative repercussions for hotels, airlines, trade shows, restaurants and associated industries.

If demand shrinks, so must operating costs and investment. Some business models might break altogether. Most trade shows will suffer; some will disappear.

Beyond all that, the question is whether any important new trends with business model implications--unseen before Covid--could be created. “Contact-less” procedures and business processes could be one example of a big new trend affecting many, if not all, place-based businesses.

Big financial and technology disruptions tend to have a big short term impact on business models--revenue and cost; customers and sales; products and services; production and distribution--and operating procedures. 

The long-term impact is harder to gauge. Do disruptions such as recessions (economic cycles or deliberate result of government policies) cause new trends or only accelerate underlying trends. 

Will some industries find demand permanently reduced or enhanced? Which industries might see permanent shrinkage? How will they cope? Beyond big demand changes, what are the more prosaic operational changes?

Will a shift to more “contact-less” retail commerce emerge as a permanent shift? And how much in-person retail shifts permanently to online ordering and fulfillment? How much will remote work and work from home persist? Will business travel be permanently reduced? If so, how do sales and marketing practices change? 

The easy “answer” is that big recessions or pandemics accelerate trends already in place. You would have to search very hard to find a recession that actually reverses a key underlying trend. 

The obvious example is online retail spending, which in the United Kingdom, for example, sharply accelerated during the pandemic. The issue, of course, is how much reversion to the mean will occur once the pandemic is over. 

The conventional wisdom seems to be that a permanent shift could occur. The magnitude of the shift is the issue, as is the timing of the shifts.  

source: A.D. Little

It is easier to show that recessions accelerate technology substitution than to illustrate new trend causation or at least correlation.

The short term effect is obvious: technology investment drops in the wake of a recession, even if firm professionals tend to believe the opposite. 

In line with that expectation, there is some evidence that the Covid pandemic has caused firms hit by massive drops in demand to decrease digital technology investment, while firms able to continue operating have increased investment. 

Retailers, for example, have remained open while cruise lines and theaters have been completely shut down, while other travel-related entities such as hotels and airlines have seen drops in demand above 70 percent. It obviously is easier to maintain investment when revenue has not been devastated. 

source: BDO 

Disparate investment in technology might easily be explained by relative differences in firm and industry revenue during the pandemic. Streaming services gained customers and revenue. Cloud computing sales increased, as did purchasing of broadband internet access services. 

In contrast, it is hard to increase technology spending when a firm’s revenue has been reduced to zero or close to zero. As firms cut operating costs, their investments in technology also tend to be reduced. 

source: A.D. Little

New Normal or Not?

Statements that “everything has changed” to a new normal because of the global Covid-19 pandemic seem to suggest a fundamental change in economic, business model and social mores. We should remain skeptical of such claims. 

The same thing was said in the aftermath of the Great Recession of 2008, and it is not clear any new normal persisted. 

That is not to deny the continuing force of underlying and pre-existing trends. Basically, what was growing before the Great Recession continued to grow afterwards; what was declining also continued with the same long-term trend. Looking only at consumer loan delinquencies, they had been trending upwards for two years prior to the Great Recession, for example. 

source: Marquette Associates

So was the 2008 global Great Recession a structural break, a point in time when fundamental patterns change because business models are broken? That now appears questionable. 

Back in 2009, McKinsey consultants said “in most of the recessions of the past 40 years, demand caught up with capacity and growth returned in 10 to 18 months. This recession feels different.” Looking at mortgage defaults, maybe even the Great Recession did not change the underlying long-term trend. 

There was a spike in first-mortgage defaults, with a peak in the immediate aftermath of the recession. But rates returned to pre-recession levels after a few years. 

source: Standard and Poors

It might be incontestable that “the Great Recession accelerated a number of long-term trends and arrested the development of others,” professors from Wharton School and UCLA argued. But they also noted, about a decade after the event, that “at this point most of the indicators pretty much resemble what they were before.” 

Some have argued that social impact has been long-lasting. The problem is that it also is possible to argue those trends were underway before and after the Great Recession, and are independent of the temporary impact of that event. 

That is similar to the “weather caused revenue shortfalls” excuse one sometimes hears from public companies explaining why revenue fell short of expectations. That might be a plausible short-term explanation of consumer behavior, but also often masks other longer-term trends a firm faces, or management failures. 

Did attitudes toward debt and leverage really change after 2008, and continue to the present? Some would say the evidence points the other way: that there was no long-term change. Sure, there was a four-year impact before the prior trend reasserted itself. But the long-term trend remained in place. 

source: Federal Reserve

The caution is that present calls that we have entered a “new normal” might be wrong. There should be some impact for a few years afterwards. That happened in the wake of the 2008 Great Recession as well. But underlying trends reasserted themselves after about four years.

"New Normal" Might Well Look Pretty Much Like the Old Normal

This ABI Research forecast showing how company analysts have revised projections of future activity because of the Covid-19 pandemic might also suggest why many predictions of a “new normal” might turn out to be mostly ephemeral. That is not the conventional wisdom, but there are precedents for “less change than might have been supposed.”

source: ABI Research

To be sure, the pandemic might accelerate any pre-existing trends. What already was in motion might “go faster” because of pandemic responses. That is why some observers say internet usage experienced a year’s worth of change in a couple of months when people were forced to work from home and stay home from school. 

It is common to hear arguments that many or most workers will continue to work from home, post pandemic, and not return to in-office work. Many argue business travel will never return to past levels. Some might argue that will last until lots of firms start losing market share to competitors who are getting face to face with prospects. 

Beyond that, there are other events few who make the “nothing will be the same” arguments. They assume there is no vaccine, or that most people will refuse to vaccinate. They tacitly seem to assume some new version of virus keeps recurring, so that no country is ever fully “over” the pandemic. 

But people and firms will make different decisions if they no longer must worry about social distancing, masks and other protective measures. A non-scientific poll on Blind, for example, shows 66 percent of respondents reporting work from home is harming their mental health. Though impressionistic, that suggests people will want to return to normal work settings, once safety is no longer an issue. 

Productivity might also be an issue, longer term, if work from home spreads widely. 

Also, most businesses probably cannot sustain themselves with permanent social distancing. Profit margins are too thin to allow restaurants to operate at 25-percent capacity; airlines to block middle seats forever; elevators to restrict riders to only a few at a time. 

Will Conventional Wisdom About Pandemic Winners Prove Wrong?

Conventional wisdom about the financial impact of Covid-19 stay-at-home policies is that they will devastate small businesses and the self-employed, throw most economies into recession and slam firm earnings for a couple quarters to a couple of years. 

The conventional wisdom also suggests connectivity providers might see a bit of revenue deceleration from firms that go out of business and lower levels of business activity, though possibly balanced by some slight uptake of consumer spending for internet access and streaming video services. Most consumer apps arguably are getting much more use as well. 

Almost everyone would expect revenue lift for suppliers of videoconferencing services, though the long-term impact is harder to predict. 

Conventional wisdom might prove to be wrong, though, especially when temporary behavior is extrapolated into the future in a linear way, to suggest a big permanent change in business and consumer behavior. Underlying and pre-existing trends of all types are likely to get a boost, to be sure. 

But the amount of permanent and on-going change is almost certainly going to disappoint. 

The “problem” with many internet services and apps is that usage does not change in linear fashion with usage, as consumption of voice services once did. A dramatic increase in home internet access usage does not necessarily lead to increased usage charges. So perhaps costs are up marginally, but revenue does not change. 

You might assume newly-popular videoconferencing services such as Zoom would be seeing instant lift in revenue (at least at the margin) as usage explodes. But that would be true only if substantial numbers of new accounts and users are of the for fee type, and that seems quite unclear at the moment.

Every ad-supported consumer app faces cutbacks in advertising. Surely streaming services will be winners, one might think. In a narrow sense, yes. But the owners of many streaming services have other huge revenue components with zero revenue (theme parks, theatrical release of new movies, merchandise sales, cruise operations and so forth). Overall firm revenue will fall, even if some lift in streaming revenue might occur.

There arguably was some initial lift in sales of PCs as people faced the reality of more time and demand on their computing devices. But that is balanced by almost-certain reductions in business spending on all manner of information technology, as projected revenue falls. 

Mobile phone sales are likely to fall, as retail stores have been closed. Cloud computing suppliers will win, as increased usage means more demand for computing and storage services, at least temporarily. But there could be issues unrelated to the increase in cloud computing demand. 

Amazon is selling more, to be sure. But it also is shipping more, which means higher costs. That does not directly affect Amazon Web Services revenue, but does mean total firm results are going to be influenced by other parts of the business. 

Microsoft does not face e-commerce shipping cost impact, but will see lower hardware and possibly software revenues, but if those revenues are reported in a category that also includes servers and server software, the total impact is unclear, with both revenue increases and decreases. 

The point is that usage does not equal revenue in any linear way. Nor can be extrapolate from present trends in a linear way. The touted “new normal” might, in five years, simply be the “old normal” with a temporary spike or dip in underlying trends. 

If you look at remote work trends over a 40-year period or so, growth has been slow and steady, despite periods of boom and bust. No “new normal” has emerged. Of course, one always can argue that the inflection point simply has not been reached, and it will in the wake of the pandemic. 

But 40 years is a long time to wait for an inflection point. Looking at many other services with that lifespan, one might more fruitfully argue that if an inflection has not happened yet, it may never happen.

"More" is Nearly as Fundamental a Law as Moore's Law

Skepticism about prospects for any new technology are common, perhaps even natural, which is why the Gartner emerging technology hype cycle exists. The pattern is overblown expectations, followed by a period of disillusionment, with eventual emergence as a useful tool.

Of course, we all should, by now, be accustomed to the idea that better processors, more memory, faster access speeds and more untethered access all are fundamental parts of technology development. We “need more.”

Within some limits, we do not question the business model for faster computing, faster internet access and new uses for mobility. Digital transformation, no matter how one defines it, now is an underlying process for almost every economic activity. 

More compute-intensive capabilities, including artificial intelligence, virtual reality, augmented reality and internet of things, require faster processors, new computing architectures and faster internet access. The shift of global data traffic to video and remote computing likewise requires huge investments in capacity. 

It appears 5G is no exception, as some observers complain that new use cases and apps are not developing. It is worth noting that such concern was expressed as 3G and 4G as well, and nobody would consider either 3G or 4G “failures” in a commercial sense, even if many predicted new use cases took longer to develop than expected, and some use cases have not yet developed.  

source: Gartner

The larger point is that concern about the business model has been a feature of early deployment of 3G, 4G and now 5G. When 6G comes, we can be certain there will the same concerns expressed as well.

 

Of course, there are many ways to look at 5G value. Every next-generation mobile network has led to new use cases and revenue drivers. But each next-generation network has succeeded for other reasons: they have allowed mobile operators to satisfying growing customer demand for capacity, bandwidth and data usage. 

 

source: American Tower 

In other words, ignoring new use cases that will develop over time, 5G is necessary simply to provide lower cost per bit, as 40 percent to 50 percent more data capacity has to be added every year, while retail consumer prices increase only at about the rate of gross domestic product growth, in low single digits. 

The business model is “you get to keep your business,” not mostly “new use cases.” The former is essential, the latter helpful. To be practical, the business value of 5G is that it replaces 4G, with all the revenues 4G represents, while creating a platform for some new use cases and revenue sources, which might take some time to develop fully. 

That “you get to keep your business” value might not seem like such a big deal, but the analogy is the upgrade from copper access media to optical or other broadband platforms. It matters greatly whether an access provider is able to protect its existing business. 

That process has played out in the access business for well over two decades already, as the decision to deploy FTTH or any other higher-performance access platform has been evaluated. Quite often, the business advantage boils down to “staying competitive in the internet access business” more than anything else. 

In that sense, the evolution matches the increase in computing power of our personal devices over the decades. The business model for newer processors is “you get to keep your business.”

Skepticism about 5G is fundamentally misplaced. The slow development of new use cases--some of which might be unforeseen--is normal and typical. 

Innovation Takes Time, Be Patient

Anybody who expected early 5G to yield massive upside in the form of innovative use cases and value has not been paying attention to history. Since 3G, promised futuristic applications and use cases have inevitably disappointed, in the short term. 

In part, that is because some observers mistakenly believe complicated new ecosystems can be developed rapidly to match the features enabled by the new next-generation mobile platform. That is never the case. 

Consider the analogy of information technology advances and the harnessing of such innovations by enterprises. There always has been a lag between technology availability and the retooling of business processes to take advantage of those advances. 

Many innovations expected during the 3G era did not happen until 4G. Some 4G innovations might not appear until 5G is near the end of its adoption cycle. The point is that it takes time to create the ubiquitous networks that allow application developers to incorporate the new capabilities into their products and for users to figure out how to take advantage of the changes. 

Non-manufacturing productivity, in particular, is hard to measure, and has shown relative insensitivity to IT adoption.

source: MIT

Construction of the new networks also takes time, especially in continent-sized countries. It easily can take three years to cover sufficient potential users so that app developers have a critical mass of users and customers. 

And that is just the start. Once a baseline of performance is created, the task of creating new use cases and revenue models can begin. Phone-based ride hailing did develop during the 4G era. 

But that was built on ubiquity of mapping and turn-by-turn directions, payment methods and other innovations such as social media and messaging.

Support for mobile entertainment video also flourished in 4G, built on the advent of ubiquitous streaming platforms. But that required new services to be built, content being assembled and revenue models created. 

The lag between technology introduction and new use cases is likely just as clear for business use cases. 

The productivity paradox remains the clearest example of the lag time. Most of us assume that higher investment and use of technology improves productivity. That might not be true, or true only under some circumstances. 

Investing in more information technology has often and consistently failed to boost productivity.  Others would argue the gains are there; just hard to measure.  There is evidence to support either conclusion.

Most of us likely assume quality broadband “must” boost productivity. Except when it does not. The consensus view on broadband access for business is that it leads to higher productivity. 

But a study by Ireland’s Economic and Social Research Institute finds “small positive associations between broadband and firms’ productivity levels, none of these effects are statistically significant.”

“We also find no significant effect looking across all service sector firms taken together,” ESRI notes. “These results are consistent with those of other recent research that suggests the benefits of broadband for productivity depend heavily upon sectoral and firm characteristics rather than representing a generalised effect.”

“Overall, it seems that the benefits of broadband to particular local areas may vary substantially depending upon the sectoral mix of local firms and the availability of related inputs such as highly educated labour and appropriate management,” says ESRI.

Before investment in IT became widespread, the expected return on investment in terms of productivity was three percent to four percent, in line with what was seen in mechanization and automation of the farm and factory sectors.

When IT was applied over two decades from 1970 to 1990, the normal return on investment was only one percent.

This productivity paradox is not new. Information technology investments did not measurably help improve white collar job productivity for decades. In fact, it can be argued that researchers have failed to measure any improvement in productivity. So some might argue nearly all the investment has been wasted.

Some now argue there is a lag between the massive introduction of new information technology and measurable productivity results, and that this lag might conceivably take a decade or two decades to emerge.

Work from home trends were catalyzed by the pandemic, to be sure. Many underlying rates of change were accelerated. But the underlying remote work trends were there for decades, and always have been expected to grow sharply. 

Whether that is good, bad or indifferent for productivity remains to be seen. The Solow productivity paradox suggests that applied technology can boost--or lower--productivity. Though perhaps shocking, it appears that technology adoption productivity impact can be negative. 

All of that should always temper our expectations. 5G is nowhere near delivering change. It takes time.