Poverty could derail telecom, cable gravy train

Poverty could derail telecom, cable gravy train

Summary: Telecom and cable companies are built to extract more revenue from their respective customer bases. What happens when there's no more money to extract from a big chunk of the U.S. population?

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The playbook for cable giants and wireless carriers has been relatively simple for years. These companies offer services and then upsell to the latest greatest thing. How about that HBO bundle? If you have 3G you must have 4G---of course you need a data plan.

The business is a game of ARPU (average revenue per user) and as long as it goes up telecom related companies and their shareholders are happy.

Just this week we received the following comments from a Barclays Capital investment conference.

AT&T John Stankey, CEO of AT&T Business Solutions, said:

We want to start the process of migrating folks aggressively out of 2G and into more advanced handsets to contribute to ARPU growth and give them a better experience and more capabilities.

Comcast CFO Mike Angelakis said:

Our ARPU has gone up quite nicely over the last couple of years, and now we have about 23% of our customer base taking a higher speed service than sort of our core flagship service.

The elephant in the customer base, however, may be poverty. What happens when there's no more revenue to squeeze from existing users?

Bernstein Research is asking that question and the answers are a bit troubling. Most folks don't think poverty and telecom go together. The reality is that incomes are shrinking and telecom and pay TV bills keep going up.

Craig Moffett, an analyst at Bernstein, wrote in a research note:

A central theme of our research about pay TV and telecommunications for the past two years has been the growing problem of poverty, and the inherent mismatch between the expectations of media and telecom investors for rising prices and penetration on the one hand, and the lack of means among lower-income consumers on the other. Projections for smartphone penetration, broadband adoption, and pay TV prices must take account of affordability.

If affordability matters more how will companies like Comcast, Verizon, AT&T and Cablevision grow revenue?

Moffett noted that 44 million Americans are below the poverty line and 50 million are on food stamps. "Considerations of pricing power in telecom and media industries have traditionally been about competition, not affordability. But simple affordability may emerge as a critical factor," said Moffett. "Real income growth in the United States has been negative during the last five years."

Bernstein's early warning is clear. The bottom two quintiles of income in the U.S. have no headroom after paying for food, shelter, transportation and healthcare. Where will the money come from for fancy smartphones and 1,000 cable channels?

Moffett argued that the impact of poverty is already being seen. Broadband adoption has plateaued around 64 percent. Affordability is cited as the biggest hurdle for the remainder of non-broadband households. Moffett added:

The bull case for the telecom sector rests on the notion of a rising tide of smartphone adoption that will lift all boats. For this thesis to work, operators will need to extract additional revenue from lower-income Americans. And yet it isn't clear that there's any revenue left to extract. Today, the fastest growing segment in the U.S. wireless market is not smartphones… it is government-subsidized wireless service for the poor. The bottom end of the market is trading down as quickly as the top end is trading up.

Today all is well because smartphones have enough room to grow as a percentage of mobile devices. However, once the smartphone market becomes saturated this ARPU playbook is going to look tired in a hurry.

What's the fallout?

  • Pay TV will see the biggest problem as alternatives like Netflix become good enough. "We believe that cord cutting will not be a technological phenomenon---it will be an economic one," said Moffett.
  • On the telecom side, prepaid providers could ultimately rule. In fact, they are already providing more than two-thirds of gross wireless additions. Sprint, which has doubled down on prepaid via Boost and Virgin Mobile, could be a winner.

Topics: Mobility, Hardware, Networking, Smartphones, Telcos

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  • RE: Poverty could derail telecom, cable gravy train

    The only cable cutting that is going to occur as incomes decrease is the paid channels. People will eventually find that FREE TV is once again good enough. However, if the government stops going down the social road and stops over taxing the population, maybe the economy will get back on track. People will then have excess resources to spend on these luxury items and services...I just hope they get themselves out of debt first.
    brianw29@...
    • Message has been deleted.

      donaldarbuckle
      • Message has been deleted.

        fatman65535
      • No cable no problem, just stream it

        Clear at 30 dollars a month is the best deal you have.<br><br>Unlimited internet. Their service is now solid.<br><br>ATT I will never do business with them again.
        Uralbas
      • RE: Poverty could derail telecom, cable gravy train

        @donaldarbuckle ....... So gas being $4 a galion is not to bad for you oh wait it could be $2 or even 1.50 if there were less tax's on it. And then you have sales tax and then your income tax so in real speak if you get $1 then you almost spend 25c to 50c in tax's......
        nickitnite
      • RE: Poverty could derail telecom, cable gravy train

        @donaldarbuckle ... and strangely enough, by repeated polls and surveys, the people in Sweden are happier than us: they work less hours, have more fulfilling jobs, and have time to enjoy vacations and families without worrying about their future too much. So, perhaps, their taxes are buying something that we should look at buying ourselves.
        krauskopf
      • RE: Poverty could derail telecom, cable gravy train

        @donaldarbuckle

        Over taxed is when you don't get much value from your taxes. Under taxed is when you get value but go into debt to do so. So even paying $1 in tax where you get nothing for that $1 is over taxed.
        voska1
      • RE: Poverty could derail telecom, cable gravy train

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        giacomo Al
    • RE: Poverty could derail telecom, cable gravy train

      @brianw29@... "stops going down the social road and stops over taxing the population". Whatever the answer to poverty, it isn't cutting social services and giving millionaires tax breaks. As the article pointed out, real income has been declining, but neglects to mention that the income among the wealthiest has been increasing during the same period. Accelerating that trend can't be the answer.
      jgm@...
      • RE: Poverty could derail telecom, cable gravy train

        @jgm@... <br><br>Something @brianw29@ probably does not even know, is that there is an interesting parallel between the concentration of wealth that occurred during the 1920's, and the early part of the first decade of the 21th century. History clearly indicated what happened in October 1929. That lingering depression hung on until the onset of World War 2.<br><br>While today's situation has some similarities, `tea baggers` like @brianw29@ want to gut all of the social progress made during the Depression just so that they can increase their wealth, <b>BTW, at the expense of the middle class and the poor.</b> <br><br>There is one thing that I wish `teabaggers` would do in keeping with their 1929 counterparts. Many then who were financially ruined, jumped out of the windows of skyscrapers. I would not shed a tear is some of those Wall Street crooks that bamboozled and FUBARed the economy did the same.
        fatman65535
      • The answer to eliminating poverty is creating a robust

        economy with strong job demand. Since no poor guy ever offered anyone a job, tax breaks for millionaires is PRECISELY what's needed. That and elimination of government regulation which changes businesses from instruments of profit via pleasing the consumer to instruments of profit via political connection.

        As for social programs? If you want to help your neighbor, pull out your wallet and write a check. In a free society, how I choose to spend my money to help my neighbor is MY business. When the state becomes involved in social services, the goal is NOT to help the poor, but to buy their vote. Because, here's a another truth you need to learn: Your elected representatives resent the hell out of the fact you can vote them from office.
        fr_gough
      • Except...

        @fr_gough:
        I know a billionaire. Guess what? That person does NOT want to hire anybody else. She wants those that work for her to work harder and longer hours, with no raises. Why?
        SHE WANTS TO KEEP THE MONEY FOR HERSELF.
        How exactly is giving her more money going to motivate her to hire in this type of situation?
        Here's a secret for you: Rich people are rich because they don't spend all the money they have, and prefer to hoard as much of it as possible. It's called greed. They wouldn't be that rich if they weren't just a little (or more) greedy. Here's another secret you may not know: most rich people are like this.
        So how is handing them MORE money going to stimulate job growth?
        I liken them to dragons: sitting on their horde, demanding tribute, and torching anyone who threatens to take a single morsel of it from them.
        Zorched
      • RE: Poverty could derail telecom, cable gravy train

        @fr_gough
        plutocracy sucks.
        jessiethe3rd
      • Tea Party

        The fundamental point that all of you liberals are continuing to miss about the Tea Party is that it is not composed of rich people. The rich do not need to reduce their taxes, as most of them pay very little now. The overtaxed portion of our society is the middle class, you know, those of us who actually have jobs and are stuck supporting the unproductive members of our society. Have you considered that is why our income has declined over the years, not because we are paid less but because our taxes have increased year after year to pay for the pie in the sky social programs that do little other than bankrupt our nation?

        When I was a kid, my father supported a family of six kids and a stay at home mother from a single income. Of course, his tax burden was tiny compared to today, so a single income was enough to support his family. Now, between all of the taxes levied on us, it typically takes two incomes to do the same.

        Statistically, about half of US citizens either pay no taxes at all, or actually get back more than they pay in. The top earners pay very little as they can hide their income in a variety of ways and afford the best accountants to take advantage of every loophole and deduction. The ones left carrying the load are the middle class, and we are fed up with carrying everyone else on our shoulders. It is past time for tax reform, to make sure EVERYONE pays their fair share. It is also past time to force the Federal Government to live within its means. The Democrats and the Republicans have refused to do that, hence the Tea Party. We will not be ignored any longer!
        itpro_z
      • RE: Poverty could derail telecom, cable gravy train

        @fr_gough

        You're about the most consistently wrong person on these forums. You're as wrong about social policy as you are on matters technical, on earth sciences, and on evolution. We've seen ample evidence that the vast concentration of wealth and unregulated markets has not created growth in the productive economy. It has only created market bubbles and instability. The consequences are not borne by those whose scams for greater wealth did the economic damage. They're borne by Mr and Mrs Joe Blow.

        In case you didn't understand this article, Mr and Mrs Joe Blow are the source of revenue for all of those wealthy telecom investors. The dilemma is that Mr. and Mrs Joe Blow are tapped out because of the upwards redistribution of wealth towards people like those telecom investors. For a while, that situation was relieved by easily available credit, but now Mr and Mrs Joe Blow are too heavily in debt.

        Rich people do the hiring, but it is the less wealthy who create the demand that allows the rich to do the hiring. When the rich keep too much of the pie for themselves, demand falls. Ultimately, every job in the world owes its existence to consumers, and it's the consumers/wage earners who take it on the chin under your preferred economic model.
        Lester Young
      • RE: Poverty could derail telecom, cable gravy train

        @itpro_z

        That has to be the most simplistic analysis of an economic situation I've read in quite some time.

        The standard of living in the US was at its peak in the 1950s but the level of taxation was roughly the same as it is now. Conversely, taxation levels in the 1930s was quite low and there was a depression.

        You can't take one factor and assign all the blame for it. Case in point, Canada has a slightly higher taxation level AND a higher average standard of living than the US does - but we also don't have a wide an income spread either.

        Real personal income has been stagnant or declining in the US for decades while businesses have grown income substantially. Taxes on corporations has declined drastically... shifted to individals, yet businesses still outsource their work to other countries in order to reduce their costs and increase profits - while eliminating jobs in the US.

        This notion that businesses are benign organisations who directly contribute to the welfare of the people is simply laughable. Any benefits you get are unintentional. If they could eliminate all workers and automate everything, they would... except then you'd have no one to buy their goods and services, and we've seen where that leads (Oct 1929).

        As for nicknite's surreal comment. Gas is heavily taxed, but it's not just collected and stuck in a bank.. that money goes to paying for public infrastructure like roads and transit systems, and for cleaning up the ecological consequences of using gas to power cars.

        And in most places, the total tax burden per gallon isn't even 1/2 of the price. More to the point, it's primarily a percentage and so doesn't make gas prices go up or down - it follows the gas prices. What's making gas $4/gal isn't tax - it's the oil companies and their amazing inability to predict complex gas use scenarios - like 'In winter, people use more oil to heat their homes' and 'In summer, people use more gas on vacations or on long weekends...'
        TheWerewolf
    • RE: Poverty could derail telecom, cable gravy train

      @brianw29@... I don't agree but I can be persuaded! Give me three bullets that might suggest you are correct. I promise you I will listen!
      eargasm
    • RE: Poverty could derail telecom, cable gravy train

      @brianw29@...

      Free TV may be good enough, but some of us live in rural areas where there are NO OTA signals. They have people like me by the short and curly's. I don't consider wanting to see the local news a "luxury".
      Just saying...
      mrsfixit
    • RE: Poverty could derail telecom, cable gravy train

      @brianw29@... Another of the growing number of uninformed,uneducated,Fox zombies.
      They believe all government is bad.
      All taxes are bad.
      All forms of Socialism are bad.
      All forms of Capitalism are good.
      They are just very simple minded people who have no use for facts,education,knowledge or science.
      garyc8710
    • RE: Poverty could derail telecom, cable gravy train

      @brianw29@... <br>Actually, in real terms, income tax and overall taxation is lower than it has been since the 1960s. The entire discussion about how lowering taxes will improve the economy is a moot point: we have steadily reduced taxes since the Reagan Administration's failed "Laffer Curve" analysis, and the growth in the economy hasn't been related to those tax reductions, but rather easy credit. In fact, during the periods of the steepest tax reductions, the economy grew the least, or even shrunk (Reagan, Bush II), including net job *losses*. While the TEA party's economic philosophy may make "common sense", it is not actually correct either in theory or fact. The reason it keeps being repeated is NOT because poor grandmas in the TEA party come up with it, but rather that billions are being spent by the mega-wealthy to dupe the common man in the TEA party to believe in voodoo economics that only benefits those same ultra-wealthy. This is why the media that fans the barely flammable TEA party and keeps it burning is paid for by the Koch's and not your neighbor down the street.<br> <br>The point of this article is that investors are beginning to realize that the TEA party's economic 'solutions' are actually negatively impacting their investments because they are destroying the economy. As wealth is distributed from the middle to the upper income brackets, the number of cell phones and the average revenue per user drops, since rich people use just as many cell phones per person as poor ones, but the poor ones start to forgo them. The consequence is that industry itself shrinks, and eventually the wealthy become less wealthy but they haven't figured that out yet. <br><br>Truly, capitalism only works if everyone's on a level playing field, and when corporations and their wealthy owners can afford to get away without paying taxes, buy the political process far out of proportion to the number of people they represent, and function with no regulation that preserves basic constitutional principles, we no longer have capitalism, but rather feudalism. I don't recall any large telecom companies creating jobs during the last feudal period. In fact, there were no large companies beacause the economic system couldn't support them.<br><br>Face it fellow citizens, large corporations and their rich clients aren't going to save your butts, it is you will do it for yourselves by exercising your power through a goverment created by the people, of the people, and for the people.
      krauskopf