Fixed-mobile substitution (FMS) is a reality that fixed operators have had to adapt to over many years, but the current economic slowdown will exacerbate these trends. The differences in the underlying cost structure of fixed and mobile telecoms puts fixed at a relative disadvantage in economically tough times. At a wholesale level, costs in fixed reflect the underlying cost of the copper loop, and this is reflected in retail pricing structures that typically have a high monthly element and a smaller variable element. This has the consequence that fixed - whether broadband or PSTN - has generally to create products that differentiate themselves from mobile products through offering better value for money for more intensive usage. Generally, more and more value, real or perceived, has to be added into a fixed broadband bundle to maintain a clear differentiation. Next-generation access and services are therefore a continuation of a historic trend in fixed telecoms that started with flat-rate calls packages.

Unlike their mobile counterparts, fixed service retailers rarely have much room for manoeuvre in creating affordable low-cost, low-usage products that can compete against pre-paid mobile or smaller mobile contracts. The economics of the successive generations of mobile networks mean that mobile operators can eat into more and more of then lower-usage end of the fixed services customer-base. This is what has happened to voice, but 2008 has shown that mobile broadband can act as an affordable substitute for light-usage DSL.

Those affected by the economic slowdown fall into two broad groups:

Those whose disposable income is actually squeezed or who face some uncertainty over future disposable income levels may well stay with fixed services, but will look to longer contracts not only as a means to limit the monthly outgoings, but also to create an element of certainty in household budgeting. This may not be entirely rational purchasing behaviour, especially since deflation rather than inflation looks like the greater risk in developed economies, but recent volatility in energy prices and mortgage rates showed that many consumers are prepared to sacrifice some potential gains for a degree of certainty. If there are winners here, it will be

• those players with the financial structure to enable them to offset reduced current ARPU against future revenue, and

• triple-play providers that are able to offer the most compelling additional value to differentiate, typically, in our view, broadcasters.

A second group will be of more concern for fixed-line players: those whose disposable income has been severely cut through unemployment or through debt recall. Unemployment will accelerate households' decisions to give up fixed voice - and perhaps fixed broadband - services, either because they are unaffordable, or because a mobile alternative offers a more affordable way of controlling spending. Because job insecurity affects disproportionately younger people, and delays their getting onto the property ladder, it will increase the average age at which they adopt a fixed broadband or voice line at all - according to our estimates by up to three years. What is particularly worrying for fixed players is that fixed-mobile substitution is rarely a symmetrical process where they could hope to win back 'lost' customers once their circumstances improve. The effects of a recession are likely to be long enough for mobile customer relationships to be strengthened, and in an upturn, mobile networks and services will be able to grow with their needs.