So far, the wireless industry has been relatively unscathed by the economic downturn. Operators reported solid first quarter numbers, spectrum auctions in the U.S. and Canada exceeded expectations, and there has been no pullback yet in capex plans. However, it appears that we are in store for sustained economic challenges, with real casualties across the financial, auto, and retail sectors--and the first bear market in some time. The new reality of commodity pricing is having a measurable impact on consumers' pocketbooks. So as we move into the second half of the year, it's worth a closer look at whether, and how, the wireless industry might be impacted.

It should first be recognized that the economic troubles are more acute in certain countries, so the fact that wireless is a global industry is an important insulator. Equipment and handset manufacturers are benefiting from the engines of a select number of important geographies that are still racing to build out or upgrade networks and are seeing steady organic subscriber growth.

Stateside, I believe the industry has taken some important, and uncharacteristically proactive steps as a hedge. For example, the "unlimited" plans are getting more customers into predicable, post-paid pricing plans and have greater potential for voice ARPU stabilization/accretion than dilution. Additionally, having more customers in these sorts of plans potentially reduces costs, as there are fewer calls into customer care. Concerns about the economy plus financial market realities have also accelerated the pace of industry consolidation, most notably Verizon-Alltel and Virgin-Helio--and might have kept some "new" industry players from going too far in the 700 MHz auction. The pricing of the 3G iPhone is also a nod, in part, to economic jitters, recognizing the sub-$200 price point that seems so critical for mass market adoption of a wireless device.  

So far the wireless industry has held up pretty well. But what happens if the economic situation worsens or is prolonged? Well, we won't see wireless subscribers giving up their subscriptions. Cellular has become a "must have" for just about everyone. In fact, wireless subscriptions could see an initial uptick, as households consolidate their number of "lines." For example, much of the fixed access line loss to date has come from households switching their second line over to mobile and/or broadband.  If the economy continues to be poor, we could see more households take out their remaining fixed voice line in favor of mobile.

What would be most affected are the "nice to have" categories.  Today's "must haves" in the communications universe are a mobile phone and a broadband connection. For 30 percent to 50 percent of the wireless market, I would argue that SMS is a "must have," because of its pervasiveness in certain segments, and its role as a substitute for more expensive services such as mobile email or additional voice minutes. The "nice to haves" in wireless compete more directly with the myriad devices, services and entertainment options in today's digital universe. Consumers might have to start prioritizing. My view of the areas most likely to be affected includes:

• Handset replacement rates. U.S. handset replacement rates average 1.7 years--among the most aggressive in the world.  A slowdown in the handset replacement rate would be a natural result of consumer caution, and could affect the 2008 holiday season, for starters.
  
  
• 3G Broadband subscriptions. Mobile broadband subscriptions have grown at a 50 percent or greater annual clip for several years running. This market could start running out of steam if times are difficult. It is a "need to have" among the mobile professional set, and there is still room for growth there.  But consumers represent an important growth segment for mobile broadband, and they might choose to consolidate around a more capable smartphone and look harder for (the growing number of) free hotspots. Operators will have to offer more flexible pricing for broadband access, for example better options for "occasional" use. 
  
  
• Mobile applications. We have already seen a leveling off in the growth of personalization applications such as ringtones and wallpaper. Mobile gaming has been stagnant. The most vulnerable categories, in my view, are those that require an ongoing subscription. Consumers might start looking hard at the value they are deriving from the "add-ons" that cost $5.99 for this and $10.99 for that. If, in their digital universe, they have to choose between DVR service and Mobile TV, what do you think they're going to do? We are likely to see a migration to more of a "cable industry" model for pricing, where $20-25 buys you a pretty broad swath of services--messaging, email, location, browsing--with premium content available on a "pay per view" basis.   
  
  
• Appetite for risk. When times get tough, you focus on the fundamentals. Operators will be less willing to take risks on new applications, and will be more cautious with initiatives that are high on the risk/reward scale.

There are a couple of longer-term effects that I can see happening. First, I think there will be even greater-than-usual pressure on suppliers. We have already started to see a slight decrease in handset ASPs--this despite a growing percentage of smartphone sales. There will also be an opening for equipment vendors with particularly aggressive pricing. Second, if wireless does start to show visible effects from the economic downturn, we could see a reduction in capex spending plans. 3G might not get as widely built out, there could be less need to increase data network capacity, and we could see a delay in 4G rollout plans. 

Of course, in every cloud there's a silver lining and we could see some uncharacteristic winners emerge from an industry downturn.  Operators, in an attempt to avoid an all-out price war, will introduce more flexible pricing options, such as bigger bundles of data services, better plans for occasional use, and a renewed focus on prepaid. A slowdown in mobile data adoption could spur the development of advertising-oriented business models for mobile content. Smartphone sales could also benefit, as these devices represent an increasingly viable option for consolidating multiple functions on a single multi-purpose device. And vendors who have had difficulty cracking the relative oligopoly that characterizes many segments of today's market (handsets, network equipment, billing systems) might have an unprecedented opening.  

We'll know a lot more in six months.

Mark Lowenstein is Managing Director of Mobile Ecosystem.  He can be reached at mlowenstein@m-ecosystem.com [1]. Click here [2] to subscribe to his Lens on Wireless newsletter, including the latest issue, "The iPhone Effect: Ten Hidden Themes."