Is broadband Net access recession-proof?

As the economy slows, so too might the growth of increasingly popular high-speed Internet connections.

5 min read

Gartner analyst Jay Pultz says the economic slowdown will moderate the growth of the broadband Internet access market--but only from torrid to merely hot.

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As the economy slows, so too might the growth of increasingly popular high-speed Internet connections.

Broadband Net access has enjoyed an explosive upsurge in recent years as businesses and consumers turn to high-speed cable modems and DSL (digital subscriber line) service and away from lower-cost, slower dial-up access. Nearly 8 million people use a high-speed Net connection in North America, according to various estimates.

However, some industry analysts and executives fear that when consumers' pocketbooks slim, people may shy away from broadband access, which typically costs $40 to $50 per month. Others suggest that in-home entertainment, such as Net access and cable TV, becomes more important to consumers who tend to shun movie theaters and dining out as forms of recreation during a recession. Broadband backers also point to cable television's resilience during prior economic downturns as reason for optimism.

Making predictions is an uncertain game, however, because the Internet has not had to weather a broad U.S. economic downturn since it began flourishing during the hard-charging 1990s.

"I think whether we see cancellations may be premature, but we might see slower growth rates for sure," said Tom Lieser, a senior economist at the business forecasting and economic modeling unit of the Anderson School of Management at the University of California at Los Angeles. "People feel like their (financial) prospects are shaky, but they haven't had to cut back yet."

Whether the U.S. economy is headed for a recession or not is debatable, but the economic climate has certainly cooled after years of expansion in the '90s. Last week's stock market plunge was just the latest dip for stocks, which already have been battered in the past year.

Money for broadband bills?
Consumers tend to be more cautious about their discretionary spending in financially tough times. Thus, if the economy continues to slow, broadband Net access could lose some of its luster when it comes time to pay the mortgage, buy groceries and shell out for life's other necessities.

SBC Communications and EarthLink, two major DSL providers, have raised their broadband rates, and industry observers suspect others will follow suit. Similarly, Excite@Home executives will not rule out future rate hikes by their cable partners.

Chart: Shrugging off a slowdown "I personally would not spend $50 per month on DSL. It would be nice to have the additional bandwidth, but not for $50," Rick Ayres, an information systems manager in Santa Clarita, Calif., said in an e-mail interview.

"The economy is a factor. While I believe that my job is pretty secure, I do think twice when it comes to purchasing nonessential items," Ayres said. "For me DSL is nonessential. I have dial-up Internet access that costs me half as much; I am fine with that. I'm sure that we could afford $50 per month, but what is the benefit? I would seriously look at DSL if it was in the $20 to $30 price range, but until then it will be dial-up for me."

Will people unhook their speedy Net connections?

"I think the answer is no, but that is the $64,000 question," said Seth Cohen, director of market strategy at Excite@Home. "Demand is still picking up for this product. But even if demand slacks, we're still going to see a large increase in the number of customers."

Some industry executives say most customers consider high-speed Net services a necessity.

"I'm not sure (broadband is) recession-proof, but I'm not sure we're in a recession yet, either," said Hank Nothhaft, vice chairman at XO Communications, a carrier that provides DSL to business customers. "Would you turn off your phone? It will probably be a last resort. I just don't see people turning (broadband) off...Though we may see slower growth."

Similarly, Kip McClanahan, chief executive at BroadJump, a company that makes broadband activation software for carriers, believes demand for high-speed Net access remains strong, and broadband services will continue to grow in metropolitan technology centers regardless of whether the nation's economy continues to slow.

Other executives say that some consumers probably will part ways with a pricey broadband connection, but they make a distinction that most "power users" and business customers will not.

"For anyone that uses the Internet more than five hours a week, it's going to be a recession-proof purchase," said Abhi Ingel, vice president of product development and marketing at Covad Communications, a large DSL wholesaler. "There is a segment of the population that won't see the value, but for the vast majority of people who use the Internet frequently...we think they're going to see broadband as something that's recession-proof."

History as a guide?
Some executives and analysts believe that broadband Net access could be the beneficiary of consumers' tendency to spend increased time at home during economic downturns.

"Historically, cable (TV) has been relatively recession-proof," said Michael Harris, president of broadband market research firm Kinetic Strategies. "People will often turn to television rather than going to the movies (during a recession). How else can you entertain five kids for $30 per month?"

Indeed, historical cable subscriber figures show that the number of basic-cable TV subscribers grew each year through the recession-ridden early and mid-1990s, according to Nielsen Media Research.

However, premium cable services, which include higher-cost channels such as HBO and Showtime, dipped to 41.6 million U.S. households in 1994--about the peak of the recession--from 43 million a year earlier, according to Paul Kagan Associates, a cable industry research firm.

But some skeptics say that communications services today cost more money than ever before, making them more likely to raise the eyebrows of penny-pinching subscribers.

"It can easily cost you $1,000 per year for digital cable TV with a few frills. I think people are starting to look more closely at these services," UCLA's Lieser said.

Indeed, BroadJump's McClanahan says he is worried that a slowing economy could cause some potential new consumer-broadband customers--particularly in the less technology-driven regions--to postpone a purchase. Still, he believes that existing customers will be loath to turn off their connections, even if the economy tanks.

"You're not going to see a decrease," McClanahan said. "No one's going to go back (to dial-up). But you might see a more cautious uptake...The guy in Peoria, Illinois, is going to want to make sure it's not going to break the bank."