Parks Associates Blog

Tuesday, December 09, 2008

Consumers and the Recession: Crisis or Opportunity?

The Recession
On December 1, 2008, the National Bureau of Economic Research declared that the U.S. economy was in a recession that began in December 2007. While it took these experts a year to make this official determination, consumers have most certainly had a cloud of economic uncertainty hanging above them. The economic news in 2008 has come in constant waves of news, with increasing severity. From talk early in the year about plummeting home values and mortgage defaults, gas prices that peaked to record highs in July, the collapse or financial bailout of major banking and insurance institutions, to trillions of dollars of lost investments, and the potential for major bankruptcies in the U.S. auto industry, consumers have been buffeted by bad news. No wonder, therefore, that consumer confidence, as measured by the Conference Board Consumer Confidence Index™ hit an all-time low in October 2008, with only a slight rebound in November.

Parks Associates Consumer Research in 2008: Understanding Consumer Buying Changes
Our consumer research in 2008 has understandably had more of a focus in understanding potential changes to consumer spending and entertainment habits because of economic conditions. One nice thing about running many surveys throughout the year is the consumer sentiment tracking that we're able to pull together. For example, we included consumer sentiment and behavioral tracking questions in a number of studies this year, including:

How is the Economy Impacting Consumer Spending?

I'll give you an example of where the tracking has been useful as we've asked some consistent questions in each survey. When we ran the National Technology Scan in January 2008, economic concerns were already quite prevalent. In this study, we asked consumers about whether they had already changed their spending habits as a result of economic uncertainty. At that time, about one-half of those surveyed indicated that they had not yet made any changes. However, about a quarter of respondents – in response to the higher gas prices – were indicating that they were driving less. In categories that would most directly impact the cable industry, smaller percentages of consumers indicated that they had cut back for outside entertainment.

By April, our Consumer Electronics Purchases: Quarterly Monitor indicated a significant shift in consumer mindset regarding the economy and the impact on consumer spending. Nearly two-thirds of consumers surveyed indicated that they had changed spending habits. It is notable that expenditures for outside-the-home entertainment (such as going out to the movies) was taking a bit hit at this time. In terms of spending that was likely threatened, the top three categories were dining out, travel, and out-of-home entertainment.By the time our Digital Media Evolution survey was fielded (late November 2008), the full effects of the economic situation were being felt fully by businesses and consumers alike. Nearly 50% of consumers surveyed indicate that they will be spending less on consumer electronics because of the economic conditions. And, although Black Friday and Cyber Monday both showed growth over 2007, there is no guarantee that spending for the rest of the holiday season will remain as healthy. For household services (such as Internet and pay TV), recessionary concerns appear to have less impact. Consumers are far more likely to cut back on travel, dining out, and outside entertainment expenses before trimming household services such as home telephone, pay TV, and Internet. Only 4% of consumers with home phone service and pay TV service, respectively, plan to cancel their services because of the economy. More recession-proof are services such as Internet and mobile phone.

Where are the Opportunities?

Although all companies should rightfully be concerned about the impact of the economic slowdown on their businesses, can there be opportunities, particularly among service providers? Interestingly enough, there are dynamics within the industry that point to potential gains among broadband, communications, and entertainment providers.

One key data point that comes out of our surveys (and the surveys of industry players) is the continued growth of entertainment-at-home (at the expense of outside-the-home entertainment). One interesting finding from our TV 2.0: The Consumer Perspective study is the self-reported changes in video habits. As was indicated earlier, consumers are far more likely to reduce expenditures for outside entertainment like movies in a recessionary period. Video-on-demand leads the way in increased video consumption, while DVRs and on-demand programming appear to have taken a significant bite out of renting or buying television series on DVDs.

Verizon recently reported some research that confirms this finding, noting a rise in what they call "Home Enterstayment." In a December 1 press release, the company reported that a majority (57 percent) plan to spend more time at home turning to their television instead of events outside the home.

Focus on Cost Savings: Customer Support in the Digital Home

In these uncertain economic times, revenue-growth strategies may take a back-seat to more of a back-to-the-basics approach of cost savings. Chief among OPEX reductions should be strategies that work on streamlining customer support, which could be a huge cost liability for service providers. Our own research, for example, finds that service provider costs for supporting home networks alone could run in the hundreds of millions of dollars annually. By implementing self-diagnostic and troubleshooting solutions and building remote support capabilities, service providers can actually turn customer support from a liability to an opportunity, reducing OPEX costs initially and perhaps growing revenue-generating customer support businesses in the long-term.

I'm actually at the Cisco C-Scape analyst event right now, and the customer support enhancements are a key strategy that is being communicated by the company's executives as they look at their roadmap from 2009 and beyond. It's clear that they will be taking the Pure Networks assets and tying them more closely with both their customer premise equipment and their service provider solutions. OPEX cost reductions, their executives argue, will be a critical factor in service provider strategies.

Concluding Thoughts

Although there is no such thing as a truly recession-proof business, we are encouraged by what the data we've collected this year indicates how companies can take advantage of opportunities to solidify and plan for future growth. For service providers in particular, two key opportunities are bringing a high-quality and convenient entertainment experience to the home and improving customer support. If you look at the key service provider strategies today - customer retention, customer acquisition, and revenue growth per subscriber - these two areas alone will drive significant long-term benefit.

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