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Fuelled by growth in the digital economy and changing consumer demands, the telecoms industry is enjoying unprecedented demand for network services. Forecast growth from new markets, such as internet of things (IoT) applications, is eye-watering. In the UK alone, mobile data traffic soared by 64% in 2016 while residential and small business fixed broadband traffic grew by 40%.
Technology investment is crucial to the industry’s ability to keep pace. High-speed broadband is increasingly viewed as a fundamental human right, with calls for the industry to increase investment in networks to deliver improvements in fibre-optic connectivity and 4G coverage.
Technology is also a key enabler of competition and therefore a driver of innovation. Technology development has enabled new entrants offering VoIP and cloud-based communication services.
As ever, the industry has its challenges. The economics of running a network remain complex and increased traffic does not necessarily translate into increased profits. The proper functioning of the market still requires effective regulation to facilitate competition and protect consumers.
However, the market must be allowed to develop in a way that encourages commercial investment in new networks. One of the key challenges in the coming year will be for regulators to settle on a balanced approach to intervention as the EU regulatory regimes are overhauled.
Against this backdrop, five key trends we expect to see in 2017 are as follows:
Growth in IoT
The market for connected products is still at an early stage, but rapid growth is predicted as applications gain traction, particularly in the fields of automotive, healthcare, energy and mining. Research firm Gartner predicts that the number of connected devices in 2020 will be twice the number of mobile devices, at 25 billion connections.
The regulatory regimes across Europe are based on a common European framework that was last updated nine years ago. The industry has changed significantly over this period in relation to consumer demand, communications technology and the competitive landscape. The EU is carrying out a review of the EU Telecoms Directives as part of its Digital Single Market review and has recently outlined its proposals for reform (note our earlier briefing on these proposals).
In parallel, Ofcom has been carrying out a strategic review of communications. Both reviews share the objective of rebalancing the regulatory regime so as to encourage investment in high-speed networks. Proposals include a new universal service regime to provide guaranteed access to broadband networks of a minimum speed and a lighter-touch approach to regulating providers in relation to networks that operate on a wholesale-only basis, or which are co-funded by other operator investors.
A key focus for Ofcom has been the thorny question of how to ensure the proper functioning of BT’s wholesale arm, Openreach, which runs the network on which other providers rely. Some operators have been calling for a break-up of BT but, although not ruling that out, Ofcom’s preference is to achieve greater functional independence by creating a wholesale subsidiary with an independent board.
As BT has been unable to agree to such a structure, Ofcom has referred the matter to the EU to force the structure upon BT. It remains to be seen whether this will force BT back to the table or whether we are in for a protracted battle on the issue.
Progress on 5G and fibre deployments
While 5G services are unlikely to be launched in the UK much before 2020, next year will see some crucial steps towards the development of 5G services. Spectrum auctions in the UK in 2017 will include airwaves in the 3.4GHz range, which can be used for 5G services.
In the Chancellor of the Exchequer’s Autumn Statement, the government committed to invest more than £1bn over the next four years on the roll-out of new fibre networks and 5G. This will be delivered through:
- A new £400m Digital Infrastructure Investment Fund – which is expected to be matched by private investment – to invest in new fibre networks;
- A new 100% business rates relief for new full-fibre infrastructure for a five-year period;
- Funding to local areas to support investment in national fibre networks to meet business and public sector demands. A consultation with industry on delivery methods is expected shortly; and
- Funding for a coordinated programme of integrated fibre and 5G trials.
The EU’s decision to block the merger of 02 UK and Three UK clearly signals a desire by competition authorities to maintain an adequate level of in-country competition among mobile network operators. However, it is likely that “cross-market” mergers (involving the merger of an operator with a business in a different sector or country) would be treated more favourably and the industry will no doubt be closely following the US regulatory authorities’ review of the AT&T and Time Warner deal.
Operators will continue to develop new service lines to increase profitability. Many operators already provide content services and we can expect to see further expansion into areas such as cloud services, financial services and content provision.