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Telecom's latest threat: The demographic time bomb
The average age in many developed nations is creeping higher and will increase even further over the next 25 years
by Alan Tumolillo
Japan, Italy, Germany and Spain have crossed a demographic threshold: there are more people over 59 years of age in each of these countries than there are people under the age of 20. For the next 25 years each of these countries will continue to age, so that by 2025 there will be close to two people over 59 to every one under 20. By 2025 Japan is projected to have 1.94 persons over 59 for every one under 20; Italy will have 2.20. The US, thanks to continued immigration, is projected to have only 0.93 persons over 60 for each person under 20.
Among the large-population developing nations - China, India, Mexico, Indonesia and Brazil - the trend is similar, but the impacts will take longer to be felt. China has a massive youth population which is already in decline; India's is just about stable and will decline post 2025.
Youth matters
The trend towards an older population in Western Europe and Japan, even the US, should be a major worry for the telecom industry for several reasons.
First, youth drives new telecom markets. The youth sector is always the driving force in new technology - cellular, paging, video games, instant messaging, i-mode in Japan, SMS in Europe. By 2025 Japan will have over 5 million less young people; that's likely to be at least 2.5-3.0 million less cell phones that won't be in service using 3G technology and several hundred million messages, transactions and calls that won't be made over the 3G networks every year.
Second, the elderly reduce spending on appliances and applications. Seniors, as they enter the end of their productive years, reduce consumption and see a drop in income. The elderly are not as interested in video games, sending video grams over cell networks or buying new phones every year.
Whatever technology was "hot" when the current elderly were young (e.g., TV, music systems) is used less than when they were kids. There is no reason to expect that the elderly will use devices and networks at the same rate as when they were young. Yes, they will be online, but to communicate, not to be entertained.
As individuals age, their relative and absolute health care costs rise on average across the age cohort. A person under 25 years of age has, on average, $445 in health care costs; a person over 65 sees average costs of $2,933, almost 6.6 times that of the young person.
As all of these countries see aging populations, there will be enormous shifts in a nation's resources towards care for the elderly. Looking at just the US and ignoring any inflation impacts over the period, we note the following shift in resources. If health care costs in 2000 for the under 20 age group were "H", then given that in 2000 there were 0.58 people over 59, each with health care costs on average 6.6 times higher, then the elderly health care costs are 3.83*H.
Fast forward to 2025, where we have 0.93 elderly for each person under 20, health care costs are now 6.14 times that of the youth population. In countries like Japan where the youth population and overall work force are declining, the burden will truly be enormous, sapping much of society's resources.
Additionally, as people plan for retirement they are less interested in high-risk investments and more interested in capital or estate preservation and income-producing investments. Since people live longer (if you make it to age 55, then you have a life expectancy of another 25 years on average), there is no way that the average person can simply live by reducing assets nor can they expect that markets will rise forever - the belief system of the late 1990s as regarding bull markets.
Hence, as individuals see the end of their productive lives, they tend to focus on finding income. This will mean, gradually, less interest in speculative stocks, high-risk junk bonds, and, in general, in companies with unproven business plans.
Decline of Japan
Let's look at Japan. The economy has stagnated for ten years or longer. No longer do we see big headlines about "Japan Inc". There has been much analysis of structural problems in Japan's economy - the role of the big banks, the inefficiencies of the service sector, protectionist policies for the service industry, the real estate bubble. All of these are true. But one thing missing is the decline of the youth sector.
In Japan in 1990 there were approximately 32.8 million people under the age of 20; by 2000 this had dropped to 26.2 million, or a loss of 6.6 million or over 20%! By 2025 this will decline by another 5.3 million. This is a staggering diminution of the youth market - how many fewer schools will be needed; how many fewer cell phones will be purchased; how many fewer PCs, video games, software packages, CDs, and so forth will be sold?
Going beyond telecom, we can see whole industries contracting: clothing, housing, entertainment, office space, automobiles, and just about everything as Japan becomes a smaller and older country. This will mean a dramatic reduction in the outlook for NTT and for DoCoMo at least in terms of their domestic operations.
The US fares better than most countries simply due to its ability to absorb immigrants. This sole fact will allow the US to grow when all other Western European nations and Japan contract under declining fertility rates and aging populations. Immigration doesn't seem to be acceptable social policy in Japan and it is a difficult social policy in Europe, where many nations are ethnically and linguistically defined.
Japan already suffers from the problems of an aging society. A less vibrant society awaits Japan and this will lead to the continual decline in domestic telecom.
This suggests that a long-range strategy for telecom, factoring in how the population will age and the diversion of resources over the next 25 years, will be required, as follows:
Eliminate complexity in services: Complex services will be abandoned by the large elderly cohort and play to a diminishing youth market.
Reduce capital investment overall in networks: A lean network has a better chance of surviving in this environment where every revenue dollar will have to be fought for.
Invigorate the health care vertical market: If there is one vertical market that will see sustained growth, it is health care. This suggests that imaging applications, remote diagnostics support, patient databases, billing platforms, drug industry networking, hospital and acute care facilities networking will generate long-term growth in an otherwise contracting market.
Make communications completely transparent: The ability to communicate over networks should always and continuously be made easy so that the elderly do not abandon networks.
How serious is this?
We leave you with this simple-minded analysis. NTT DoCoMo has a market cap of approximately $130 billion (May 2002). NTT owns 67% of DoCoMo. NTT's market cap is only $68 billion. Deducting the value of DoCoMo that NTT owns from its own market cap yields a market cap for the landline network in Japan of - $19 billion
While it is not possible to attribute all of the problems with NTT to a declining youth population, it is important to realize that NTT has no growth ahead of it, only absolute decline. What is an overbuilt, costly network worth in the face of a declining market? Every single day that passes means (a) less people in Japan, (b) less children and youth in Japan, and (c) more elderly in Japan.
Allan Tumolillo is chief operations officer for Probe Research
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