Current UK Network Landscape – A Flat Market and Tighter Margins!

The telecommunications industry contributes 4-5% of the UK’s GDP and plays a vital role in the economic and social well-being of the country. 

However, the telco industry in the UK is saturated. Research conducted by McKinsey concluded that revenue growth is down by 4% and EBITA is down from 25% to 17% over the past 5 years. In parallel, it is estimated that infrastructure costs for telcos could double with 5G broadband development. With rising costs and falling revenue growth and profitability, the landscape for our telco clients is challenging.

In this series of blogs, we will explore (1) the impact of the race to 5G and the continued importance of satisfying customers and (2) new network business models in this challenging  industry landscape.

The race to 5G 

As the digital world evolves and online services become integral to everyday life, we are moving into a new era where speed – of upload, download, latency (the delay that happens in data communication) - will determine Britain’s role in the future digital economy.

UK consumers benefit from high availability of superfast broadband, but low fibre to the premises coverage means that the UK trails in ultrafast broadband compared to the rest of Europe. There is a clear requirement for an uplift in infrastructure to futureproof the UK superfast broadband network

In response to this evolving digital landscape, the Exchequer Autumn 2017 statement outlined an investment of over £1bn over the next four years for the UK’s networks (including an investment in 5G). The Government’s objective is to give everyone in the UK access to speeds of at least 10Mbps by 2020 – no matter where they live or work. However, this is no small challenge – currently, 1.1m UK premises cannot regularly access these speeds.

5G is still some years away from commercial availability. In preparation, Ofcom auctioned off additional spectrum to support the next generation of mobile networks. Mindful of maintaining a consumer-focused ‘fair’ marketplace, Ofcom capped the maximum amount of mobile spectrum a British company can own at 37%. The 5G spectrum auction results leave EE in the strongest position, despite not acquiring as much of the available spectrum as O2 or Vodafone, as it already had so much more than rivals. After EE, Vodafone has the second most, with O2 having the third most spectrum overall.

What does this mean for UK Telcos in the race for for 5G dominance in the UK? Most importantly, it flags a number of risks:

  • The vast majority of UK copper and fibre broadband infrastructure is still under BT control and rival providers will have to continue leasing BT-owned wholesale network capacity (via Openreach) to serve their own customers. It remains to be seen whether the newly “independent” Openreach delivers on its promise of making it easier for BT’s retail competitors to provision new circuits and services using that infrastructure;
  • It will be interesting to see the extent of the impact of alternative providers of wholesale fibre network infrastructure (e.g. CityFibre has already partnered with Vodafone to deliver fibre to the premises (FTTP) infrastructure to 5 million homes and businesses) on the infrastructure landscape; and
  • There is an additional risk to network rollout due to the expected impact of Brexit, as a large amount of rural network rollout is dependent on EU subsidies. It remains to be seen what the effect of Brexit will be on these subsidies, and consequently how the UK’S future network infrastructure development will be financed.

Finally, the deployment of 5G is likely to mean that consumers benefit from more choice and innovation in communications services. Fixed and mobile networks are likely to continue to become more similar. Consumers want to transition seamlessly from one network to the other, from mobile to wifi, both relying on fibre connectivity to the core network. Convergence of the assets used to deliver services is likely to increase with the advent of 5G because more fibre will be needed closer to the end user. Operators are likely to consider the benefits of leveraging their assets for both fixed and wireless networks rather than operating as stand-alone providers. Therefore, a dense fibre network will be key to the success of 5G.

Read part 2: The Continued Importance of the Art of Customer Service 

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Kevin Clarke Principal