Wednesday, August 10, 2011

The United States Economy and “The Poverty Problem”

Apparently, the overlords of technology are about to discover one of the eternal truths of economics: if you build it they will come—but only if they have money. NetNewsPublisher provided a reference to an analyses performed by Bernstein Research on the telecom sector. The message from the people at Bernstein seems to be that all the fancy new gadgets being produced have overly optimistic projections for future growth. The reason being, that too many people are falling behind in income, and they have begun looking in other directions for service. The article provides this quote from Craig Moffett, an analyst at Bernstein.

“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.”

“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.”

Lo and behold, there was an Associated Press article out today titled: “Pay TV industry loses record number of subscribers.”

Schumpeter picked up a similar thread recently in The Economist in a piece titled: The bottom of the pyramid. The theme there is that marketers are too used to dealing with upscale consumers and they will have to learn how to refocus their efforts on the more frugal (poor).

“But even in one of the world’s richest countries the hard-up represent a huge and growing market. The average American household saw its real income decline between 2005 and 2009. Millions of middle-class Americans have been forced to “downshift”, as credit dries up and the costs of college and health care soar. Some 44m Americans live below the official poverty line ($21,954 a year for a family of four). Consumer spending per household fell by 2.8% in 2009, the first time it had fallen since the Bureau of Labour Statistics started gathering data in 1984.”

There are apparently a number of new modes being developed to help people save money or extract it from existing resources.

“Even that staple of the urban poor, the pawn shop, is being reinvented. Pawngo is putting pawn on the internet for the convenience of what it describes as “college-educated working professionals with temporary cashflow problems”. Customers can send their college-graduation presents (for example) to Pawngo by FedEx and get a loan in the form of a bank transfer.’

“Entrepreneurs are also adjusting their business models to deal with the age of austerity. One popular model is paying for things upfront (which appeals to consumers who have poor credit or who want to curb their splurging). Pre-paid wireless providers such as Leap Wireless and MetroPCS have captured 90% of the growth in the market for mobile telephony. Houston’s Direct Energy has just introduced a pre-paid plan for electricity. A second popular model is “collaborative consumption”, which allows people to share or rent rather than own. enables you to swap DVDs and videos with other sofa spuds. ThredUp does the same for children’s clothes. Jobless students can hitch lifts via Craigslist (a website for classified ads), or doss down in someone else’s flat via CouchSurfing, another website.”

The article points out that developing countries with experience in selling to poor people see the US as a ripe target for their products and methods.

“TracFone Wireless, a subsidiary of Carlos Slim’s América Móvil, has sold more than 3m phones in America since 2008 to pre-paying customers. MedicallHome, a Mexican company that provides medical advice over the phone for $5 a month, as well as access to its network of 6,000 doctors, is expanding north of the border. Emerging giants such as India’s Tata and China’s Haier regard America as a natural market for their frugal products.”

The article closes with this rather depressing observation.

“Firms that offer ultra-low prices will find themselves as much in demand in Detroit as in Delhi.”

So—what works for the teeming masses of India will soon work in the US. While our masses aren’t teeming yet—who knows about next year.

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