Sour economy may hurt cell phone sales; voice, data plans won't be as hard-hit

'One of the last things people will get rid of is cell phone service,' says one analyst

Just as the wireless market has been flooded with new smart phones and wireless devices, the economy has turned south.

As a result of the downturn, some forecasters predict wireless customers will spend less on new devices, including an array of sophisticated smart phones such as Apple Inc.'s iPhone 3G, the T-Mobile G1 based on Android software, and the upcoming BlackBerry Storm.

At the same time, wireless customers may start cutting back on their monthly voice and data plan spending, forecasters say, even as AT&T Wireless last week and Verizon Wireless today reported strong third-quarter results in wireless revenues.

Forecasters say wireless carriers, especially AT&T and Verizon, will still see continued revenue growth in voice and data services, albeit at a slower pace. Verizon CEO Ivan Seidenberg even told analysts today that the carrier may see reduced consumer and business spending due to the sluggish economy.

Even in hard times, users want their cell phones

One thing just about everyone in the wireless industry agrees on is that users are unlikely to give up their wireless devices even as the economy falters, and they would be more likely to drop the land lines to their homes instead.

"One of the last things people will get rid of is cell phone service," said Kate Price, an analyst at Technology Business Research Inc. in Hampton, N.H. "People may scrimp in other areas [in a bad economy], including dropping land lines, but people won't get rid of cell phones."

Added Jeffrey Kagan, an independent analyst: "If people are going to cancel one or the other, I see many of them canceling some of their local [wired] phone lines."

In fact, replacing a land-line phone with a wireless phone is a widely recognized market reality, and the carriers acknowledge it as well, these analysts said.

At a demonstration of a high-speed WiMax wireless network in Baltimore recently, Sprint Nextel Corp. CEO Dan Hesse suggested that the economy could force a reduction in the cost of wireless devices, although he didn't announce any specific plans. Hesse also acknowledged that consumers will give up wire-line Internet and TV communications before wireless ones.

Analysts were struck by the strong third-quarter earnings of AT&T Wireless and Verizon Wireless, two companies perpetually battling to be No. 1 in the U.S. However, experts predicted slowdowns in coming quarters.

"Telecom ... seems to be weathering this economic storm," Kagan said, noting the recent performance of the two companies. The big stock-market plunges of October were not a part of both reports, however.

"Will growth be slowed? Sure," Kagan added.

AT&T, which exclusively provides the wireless network for the iPhone in the U.S., took a hit to its profit margins because of subsidies it provides for the Apple device, Price noted. But she also concluded that data revenue will grow over time as iPhones are sold.

And while AT&T said it had activated 2.4 million iPhone 3G devices in the third quarter, Price predicted that the fall launch of the BlackBerry Storm is likely to bring new subscribers to Verizon, which is marketing the device.

But analysts also believe that many of the customers for the most sophisticated smart phones will be seeking cheaper alternatives. "People will want new phones but won't spend as much," Price said. "People don't want to pay upfront for the phone as much and don't want to pay as much for the needed data plan."

Price said there also could be a slowing of growth in the phenomenal pace of data plan revenues or sales. "Verizon and AT&T and T-Mobile will all keep growing this way but will probably be slowed significantly," she added. And Sprint won't see the same growth, given its previous financial troubles and plans for a joint venture with Clearwire Inc. in WiMax, she said.

Carriers could see a drop in revenue from equipment for the most sophisticated phones, but from a profit standpoint, it could be a good thing because the subsidies carriers pay to promote the smart phones will also decline, Price added.

"The overall biggest impact the economic downturn will have is that consumers might not be purchasing smart phones as expected," Price said. "It's unfortunate that the devices hit now, but nobody foresaw the economy crashing. Eventually, people will adopt these new devices."

Carsten Brinkschulte, CEO of Synchronica PLC in the U.K., predicted a slowdown in sales of wireless devices but expects steady sales of wireless services to continue. Brinkschulte is hoping that Synchronica, which provides mobile e-mail for wireless carriers and device manufacturers, won't take a big hit.

"People are still going to place phone calls and browse the Internet," he said. "But people are not going to buy or upgrade their phones as much."

Brinkschulte noted that Nokia and Sony Ericsson have reduced their forecasts for consumer spending. "It's clear that this fear, doubt and uncertainty is going to affect the purchasing of consumer electronics," he said.

While consumers might normally want to upgrade a phone every eight to 12 months, Brinkschulte said they might delay an upgrade by an additional six months or longer.

"You don't really need a new cell phone, and you can really live with the same one for longer than a year and still send messages on it two years from now," he said. "It might not be the same status symbol, but people are going to be more cautious about things they do not need, including upgrading cell phones."

Copyright © 2008 IDG Communications, Inc.

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