By Adrian Baschnonga, Lead Telecommunications Analyst, EY
Following the EU referendum vote in June, there is plenty to consider in terms of both immediate and long-term consequences for the telecommunications industry.
Customer demand and network investments are two key areas that will dominate any short-term appraisal of the fallout from Brexit, while policy direction and legal frameworks are natural talking points in what remains a highly regulated sector.
The uncertainties introduced by Brexit arrive at a time when sector performance has been improving.
The latest Ofcom UK market report shows that the telecoms sector grew by 0.5 percent in 2015, reversing five straight years of revenue decline.
Demand for super-fast broadband remains robust while household spend on telecommunications services has been rising in real terms.
However the economic outlook has suffered following the referendum vote, with the Bank of England this week downgrading UK GDP growth for the third quarter.
How this will translate into customer demand is as yet unclear, yet the telecommunications industry has previously proved resilient during periods of economic uncertainty.
During 2009, home broadband and telephony were well insulated to consumer spending cutbacks, although mobile expenditure was proportionately more exposed.
If we fast forward to 2016, the prognosis on the consumer side remains relatively reassuring.
Out-of-bundle spend on mobile could be vulnerable to belt-tightening but operators have substantially overhauled their packages in recent years and in-bundle revenues now account for two-thirds of UK mobile retail revenues, up from 42 percent at the start of the decade.
However, the signs may be less positive for the enterprise market.
A YouGov and CEBR survey showed that UK business pessimism in the economic outlook had nearly doubled to 49 percent by the end of June, and such anxiety levels could translate into softer demand.
For operators this may mean enterprise buyers seeking ‘the same for less’ or ‘more for the same’ when contracts come up for renewal.
Nevertheless, management comments have been largely bullish – underlining ongoing network investment – while operator share performance has recovered from an initial hit, buoyed by a strong Q2 reporting season.
As things stand, the utility-like nature of core telecoms services and operators’ subscription-based business models stand the sector in better stead than other industry verticals.
Yet the supply-side environment poses additional questions, particularly when you consider the potential for long-term shifts in policy and the prospects for the UK’s digital infrastructure.
While the scope for changes in rules and attitudes remains real, the likelihood of drastic changes remains low.
For a start, the UK has been very much the poster child of sector liberalisation and the EU’s regulatory framework borrows substantially from the UK experience.
In addition, attitudes to consolidation have hitherto been well aligned.
The EU’s decision in May to block a merger of UK mobile operators reflected concerns voiced by the Competition Markets Authority (CMA).
In broader terms, both Ofcom and the EU share a common interest in preserving facilities-based competition within sub-segments of the sector and have shown a more flexible stance on convergence-based M&A.
Nevertheless, Brexit poses challenges to the EU’s Digital Single Market strategy.
One of the most tangible elements of such reforms has been the abolition of mobile roaming fees and there are fears that prices could rise as a result of Brexit.
However, existing EU regulation has already spurred operators to launch zero-rated roaming packages to win and retain customers, and market forces are likely to keep such strategies in place.
The ramifications of Brexit on the infrastructure landscape also generate uncertainties.
With the UK outside of the EU, access to R&D funding and various programmes – from the Investment Plan for Europe to a number of multi-region 5G partnerships – will suffer.
Yet here too, there are indications of resilience: existing broadband rollout contracts by and large don’t involve substantial amounts of EU funding, while domestic objectives such as the broadband universal service obligation show that the UK is in line or ahead of EU policy.
However, the fact that EU State Aid rules may no longer apply could leave the UK free to adopt more flexible public funding of infrastructure in the future – important when you consider the UK is lagging in ultra-fast broadband of over 100Mbps and that capex levels could suffer in the wake of a slowing economy.
It may well be that the UK has to accept some degree of EU State Aid as part of its post-Brexit agreement.
In the near term, the Autumn Statement may shed light on public spending plans to boost infrastructure rollout.
While policy uncertainties are a fact of life in the post-Brexit world, it is arguable that other areas of EU reform, such as the General Data Protection Regulation, present greater challenges to the corporate world in general.
For their part, policy makers in the telecoms sector have been balancing the need to stimulate investment and maintain competition for a number of years now, and Brexit will not alter this dynamic.
The good news for operators is that demand for data services has never been higher and their networks are seen as a key pillar of productivity growth, both of which augur well for the long-term health of the sector.