Canadians love their smartphones but are becoming more cautious with their spending on telecommunications services – a new trend toward thriftiness that is poised to slow revenue growth and hurt profit margins across the industry this year.
That digital diet comes at a time when consumers are increasingly weighed down by their finances, grappling with record levels of debt while their incomes barely budge. At the same time, they are being spooked by global economic uncertainty as the euro zone crisis persists.
As a result, consumers have little room to increase their spending on telecom services in 2012, making them more aggressive bargain hunters with their telecom providers, a new report from the Conference Board of Canada says.
Many will cut their spending by postponing handset upgrades, buying cheaper wireless data packages, opting for smaller cable TV packages and getting rid of their home phones. All of this will intensify competition, making it tougher for companies to increase prices.
Consequently, the Conference Board predicts that growth of industry revenues will slow this year. According to its forecast, revenues are expected to rise by 2.8 per cent to $58.87-billion for 2012. That compares to a 7.7 per cent increase to $57.25-billion in 2011. The industry’s 2012 profit margin, meanwhile, will dip to 12.8 per cent from 12.9 per cent last year.
There are already signs that consumers are tightening their purse strings. Rogers Communications Inc., for instance, has recorded a slowdown in its wireless data revenue growth rate in its past two quarterly reports as more consumers chose cheaper data plans. Cogeco Cable Inc., meanwhile, has tightened credit conditions to discourage “promotion hoppers” from switching providers as they seek out better short-term deals.
Consumers are taking a hard look at their finances at a time when recent data from Statistics Canada show the average ratio of debt-to-disposable income climbed to a record 152 per cent during the first quarter of 2012, up from 150.6 per cent during the last three months of 2011. Moreover, the Conference Board notes that “growth in real disposable income has been disappointing for more than a year.”
Those factors are prompting Canadians to be guided by a new sense of frugality after they gorged on costly wireless devices and deluxe data plans last year. In fact, the Conference Board predicts that wireless carriers will have a difficult time replicating the sharp increases in wireless data revenues that were recorded in 2011, even though the majority of postpaid customers – those who pay their bills at the end of the month rather than prepaying for service – now own data-hungry smartphones.
“New entrants have been using aggressive price strategies to gain market share, such as offering smartphones at a large discount along with unlimited texts and flat rates for data,” the report said.
“Also, an increasing number of restaurants, cafés and shops are offering free WiFi access on their premises, which in many cases provides customers with much faster Internet access than their mobile network’s.”
Michael Burt, director of industrial economic trends at the Conference Board, said that while Canadians may scale back their spending, they are unlikely to completely cut essential services – especially Internet access.
“People need or really want their Internet access, so it is more of a utility than a luxury-type of good at this stage,” he said.