Why are customers so willing to spend on expensive smartphones but not on cars and houses?

The world is supposed to be in deep recession. Demand for all manner of goods and services is said to be exceptionally weak, especially in developed countries. Yet we have recently been witness to crazed Apple customers queuing up overnight to buy the latest iPhone as if their lives depended on it. Some five million iPhone5 devices were sold within the first three days of the launch — a record. What is going on? Why are customers so willing to spend on expensive smartphones but not on cars and houses?

The answer may be that underneath the overall economic gloom, consumer patterns are shifting to a completely new trajectory. Perhaps the cumulative impact of social and technological change may have shifted us to a consumption landscape where an economic recovery will not re-inflate demand for yesterday’s products.

The United States was the world’s largest market for cars till China replaced it in 2006. Conventional wisdom is that American consumers are being held back by economic troubles, and will again begin to buy cars when the recession ends. But, what if the next generation of US consumers does not see the automobile as a symbol of status and freedom, as was the case with their parents and grandparents? Unlikely as this may seem at first glance, there is growing evidence that this is indeed happening. The proportion of 17-year-olds with a US driving licence has dropped from almost 70 per cent a generation ago to less than 50 per cent today. This decline was already underway before the Great Recession and cannot be explained away as a cyclical deviation. Instead, studies have shown that rising internet penetration lowers the likelihood of having a driver’s licence.

We are finding similar trends in other developed countries as well. In Britain, for instance, the number of trips made per person per year has declined by 10 per cent since the late ’90s. It appears that people are shopping, meeting friends and working online rather than travelling for these activities. In short, a communications-based lifestyle is replacing the old transportation-based lifestyle. Automobile sales may well improve in the West once the recession is over, but they may never go back to the old trajectory.

Traditional ways of thinking about consumption may no longer apply in this new world. For instance, the old way of measuring the consumption basket was to look at the allocation of expenditure. Today I may use Google, YouTube, Facebook and Twitter all day but it will not show up in my consumption basket, as I will not have “spent” any money on it. The small sum that I pay for the broadband or mobile connection does not reflect my use of these services as I pay for them by providing “eyeballs”, contributing a blog or sharing a photo. Yet, one can hardly ignore these activities, since several of the world’s largest companies now derive their success directly from such consumer behaviour.

Even the way we use time has changed fundamentally. Time surveys show that Americans spend almost the same time watching television today as they did in 2003 (roughly two-and-a-half hours a day). However, they also found that television viewers were probably also checking emails, shopping online or using social networking sites. They were spending the same time in front of the television, but paying only intermittent attention. Such is the new world where we routinely multitask, switch technologies and pay for services with “eyeballs”.

Moreover, it is not merely the youngest consumers who are making the shift. A study by Nielsen found that consumers in the 25-34 age bracket were the most likely to shift from the old “feature phones” to smartphones, but those in the 35-44 bracket were just as enthusiastic as those in the 18-24 category. In fact, the youngest group only accounted for 19 per cent of high-app users compared to 39 per cent for the 25-34 cohort and 25 per cent for the 35-44 cohort. In other words, a very large segment of the population is adapting to the new world. This has very big implications for how we think about consumer goods and services, urban design and public policy.

So, what should we expect from consumers in emerging markets? In some areas, the trajectory of consumer behaviour in emerging markets will continue to follow the past experience of developed countries. For example, the rising penetration of basic household durables like refrigerators and washing machines follow fairly predictable paths, even if the shift has been often much quicker in the case of emerging markets.

Nevertheless, we need to be very careful when extrapolating developed-country experiences to today’s emerging markets. We can see how emerging markets can often leapfrog technologies. For example, India skipped the fixed-line telephone stage and jumped directly to mobile telephones. Over 41 per cent of Indian households had a mobile phone in 2011, compared to 17.4 per cent who had a fixed line phone, according to Euromonitor data (if anything, this data understates mobile penetration in India).

Other emerging markets have witnessed similar trends. A study by Boston Consulting Group comparing the behaviour of mobile users in China, the US and Japan found that the Chinese were the most active users of almost all mobile services. Clearly, as late entrants, consumers in the developing country have aggressively embraced the new technologies and lifestyles.

In other words, we currently stand at a moment in history where the cumulative impact of social and technological change is causing a shift in the trajectory of the world’s consumption patterns. The world will eventually emerge from this recession; but many old industries will probably never revive. In many cases, emerging markets will simply leapfrog into the new landscape without passing through all the phases experienced by developed markets. In fact, the hyper-urban societies of Singapore and Hong Kong show how quickly an emerging market can move to the frontiers of technological, social and economic experience. Indeed, in some ways these cities may be a better place to experience the future than the West.