Seattle Times: Wireless Spending

Seattle Times: Wireless Spending

Following our 4th Wave paper, Brier Dudley and I talked at length about the US consumer and how they spend. Article below

Wireless bills biting into consumer spending?

Posted by Brier Dudley

Here’s my theory on the ominous decline in consumer spending, the widening crack in the economy that suggests leaner times ahead.

When the Commerce Department reported the spending slowdown last week, unemployment and stagnant wages received the blame.

But I think there’s another reason Americans are cutting back: They’re trying to pay their enormous bills for wireless phone service.

Consumers may be spending less overall, but they’re still trading up to smartphones with more expensive service plans. Those who already own smartphones are adding iPads and other gadgets that increase their monthly bills.

These gadget sales aren’t turning the economy around, but they’re doing wonders for the wireless industry.

A few days after the consumer-spending news, Verizon Wireless said half of its customers are now using smartphones. It also surprised analysts by reporting that it’s now making $56.13 per month per customer, up about 4 percent from last year.

AT&T may bring even more surprises Tuesday when it reports earnings.

Broadly, global wireless revenues should reach $1.5 trillion this year, tripling over the past decade, according to Chetan Sharma, an Issaquah-based industry analyst.

"Astronomical" sales of data — largely since the iPhone’s debut in 2007 — have more than offset declines in voice and message services, he noted in a report last week.

AT&T — the largest beneficiary of the iPhone effect — saw data sales grow from $689 million in 2004 to $22 billion in 2011, he noted.

To maintain profit margins and keep a handle on surging data usage, the leading carriers have moved from unlimited data plans to tiered plans.

Now, to encourage the use of multiple devices, AT&T andVerizon are rolling out shared-data plans. This new billing approach may bring the average monthly revenue per smartphone user to $90 or more.

The cost per gigabyte may go down for some, but the carriers will do fine. That’s because overall usage continues to grow as people use faster, higher-resolution devices to access more video and other content via wireless networks.

Sharma expects carriers will see strong growth in data-access sales for several years. He believes this will peak in three or four years, after which the industry will look to services and applications for its next wave of growth.

So will industry sales triple again over the next decade?

"I wouldn’t be surprised," Sharma said. "There’s a tremendous amount of growth left in the developing markets."

Where this money will come from is the big question.

Households typically spend around $1,000 a year on technology, including their phone, cable and Internet bills. In general, tech has taken about 4 percent of disposable income over the last decade, Sharma said.

As people spend more on wireless, they reallocate and cut back on things like wired phone service, he explained. Consumers are now spending about 43 percent of their tech budgets on wireless and he expects that to reach 50 percent early next year.

"The spend on cable and Internet is growing but slowing, and the majority of the growth is coming from the spend on cellphones — that is, on both voice, as well as data," Sharma said.

This has to be consuming a larger share of Americans’ disposable income. Consider the new Verizon and AT&T plans. For smartphones, they charge a minimum of $90 to $95 per month, with 1 gigabyte of data access. That’s close to $1,200 per year.

Yet if wireless costs are affecting overall consumer spending, this isn’t yet apparent in national spending reports, according to economic consultant Joel Naroff in Holland, Pa.

Naroff said spending on services isn’t rising much. In fact services — which includes real estate and health care, and accounts for about 65 percent of spending — is seeing weak increases.

"More than likely it’s putting pressure on people’s budgets and they’ve cut back in other places," he said.

New devices and online services will also encourage people to spend even more on wireless data services in the next few years.

Apple’s "retina display" technology started a race toward devices with higher density displays, which consume more data. Just around the corner is ultrahigh definition video with 4,000 lines of resolution.

The push toward online "cloud" services also will increase wireless data usage.

As people embrace online services that store and stream content, they’ll depend even more on carriers to provide constant, fast service. And it’s going to cost them.

I’ve been thinking about this while testing new Android phones that come preloaded with Dropbox, a service that automatically uploads photos and videos to an online storage locker.

It also struck me when testing Microsoft’s upcoming version of Office. By default, it stores copies of all files online in the SkyDrive storage service, though Microsoft has also built it in a way that minimizes the amount of data that’s transferred.

A bigger concern is the potential cost of streaming video services like Netflix, which uses up to 2.3 gigabytes per hour to stream a movie in high-definition. That means watching one could cost $60 if you’re streaming it over AT&T and you’ve used up the data allocated by your "Mobile Share" wireless plan.

That would definitely lead to reduced consumer spending in my household.