With the prospect of Brexit and Ofcom’s increasing regulation, the UK telecoms industry is going through a period of intense change and disruption. Although, this isn’t all bad. UK telecoms can gain an advantage of regulatory policies and stay ahead of their competitors by seeking out opportunities in regulation.
Deregulation in the 1980s and 1990s set the UK telecom industry free to create new services and set international standards. This, combined with the advance of mobile communications, saw the telecom industry expand and develop rapidly. With the approach of the millennium, the market began to mature further and M&A activity increased. As the market has consolidated, Ofcom and the EU have become increasingly concerned about consumers and competition and as a result, we are now seeing waves of new regulations being implemented. With this in mind, the industry needs to adapt, innovate and harness regulation to its advantage.
Below, we have recapped the Ofcom and EU Regulation history to-date, detailed what Brexit could mean for the market and summarised how telecom companies can maximise the opportunities presented.
Openreach, Ofcom and BT - the telecom triangle
The UK’s telecom market was unshackled with the privatisation of BT in 1984. Further ‘opening up’ of the market from the early 1990s led to the UK becoming one of the most open and competitive telecom markets in the world. As a result, there was a requirement for an independent regulator to be set-up - Ofcom.
In 2006, Ofcom established Openreach in an agreement with BT, to ensure that rival telecom operators had equality of access to BT's local network. Openreach is a subsidiary of BT that owns the infrastructure that connects nearly all businesses and homes in the UK to the national broadband and telephone infrastructure. In early 2016, it was decided that access to the BT Openreach networks would be widened further. BT’s competitors had campaigned for Openreach to be split from BT as a separate entity, however Ofcom’s February 2016 review concluded that it wasn’t needed at this time.
The European Union and its impact on the UK telecom market
The EU is increasingly regulating the telecom market within the single market, as they review and control M&A activity, impose roaming charges and are now looking at establishing one digital market. In late 2015, the European Competition Commissioner blocked a deal between TeliaSonera and Telenor in Denmark over concerns it would lead to higher prices for consumers. In May 2016, the European Commission blocked the takeover of O2 by Hutchinson Whampoa due to fears that it would lead to higher prices in the UK.
Also, the EU are now looking to regulate the roaming charges a mobile network operator can impose on its subscribers for using its services outside of the network's member state. Regulatory policy, which proposes to abolish end-user roaming charges in the EU, will come into effect in June 2017. Such an interjection is a clear example of the increasing impact that the EU is having on the European and UK telecom market. The death of roaming charges in the EU is expected to wipe 2% off mobile operators’ revenues. In 2015, total UK telecom revenue was £37.4 billion according to the Ofcom stakeholders report. Thus, up to £748 million could be wiped off UK telecom revenue streams per year as a result of the ban on roaming charges coming into effect in 2017.
The UK telecom sector has the potential to be profoundly affected by Brexit. It is probable that the key elements that underpin the EU framework will continue to be applied in the UK context, however, with Brexit, there would be elements of the regulatory framework that could be adapted, if not wholly amended, to be bespoke to the UK. The UK would also be free to adopt its own definition of ‘electronic communications’ which could, unlike the current EU definition, bring content services into scope. This would bring ‘quad play’ bundles within Ofcom’s remit, and thereby allow them to impose ex ante regulations where the market for quad play services was not functioning effectively. Ex ante refers to “before the event” market intervention by a regulatory body and includes measures such as pricing regulation. The objective of ex ante regulatory intervention is to produce benefits for end-users by making retail markets competitive on a sustainable basis.
In addition, consumers would be affected by Brexit by virtue of the fact that the law applying the ban on roaming charges would be removed by Brexit, unless the UK Government acted to ensure it remained on statute. This would be a disadvantage to consumers travelling to the UK as they would have to pay roaming charges for the use of their service providers services in the UK. This disadvantage to the consumer, may be an advantage to the industry however as the ban on roaming charges will be damaging to the operation of mobile operators, removing lucrative revenue streams. If the ban is not applicable in the UK, mobile operators will continue to derive high-profit margins from the revenue gained from roaming charges to customers travelling to the UK.
What does it mean?
The telecom industry is very heavily regulated by national and supranational authorities and is expected to see continued downward revenue pressure from Regulation. The telecom market in the UK is at a major crossroads, as we move from deregulation to new Regulation, coupled with maturing mobile markets and the possibility of Brexit. These changes make strategy and planning for telecom companies more challenging.
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