Brexit will likely have minor implications on the UK telecoms market over the next five years

24 June 2016

Brexit will likely have minor implications on the UK telecoms market over the next five years  

24 June 2016

The decision to leave the EU will open a period of discussions and negotiations between the UK and the EU which could last up to two years. The exit model and the framework of the new relationships between the UK and the EU are far from clear, and so is the impact on the UK economy. Pyramid Research expects minor Brexit implications on the telecoms industry outlook over the next five years as the telecoms market is less vulnerable to macroeconomic changes and cycles than other industries.

Pyramid Research expects: 

  • The Brexit impact on the UK telecoms market to be less material than that on other industries. 
  • Low-to-mid single digit impact in UK telecoms service revenue through 2020 compared to a pre-Brexit forecast.

The telecoms industry is less vulnerable to Brexit implications than other industries.

Pyramid Research expects any change in the most relevant macroeconomic drivers – broader industrial policy, trade with the EU, regulation, foreign investment, immigration and fiscal policy among others – to have minor implications on the UK telecoms market, both in the short and long term.

The telecoms service industry accounts for 2% of the nominal GDP in the UK and – over the last decade – has shown (i) low correlation with the broader country’s macroeconomic environment and (ii) healthier revenue trends compared to other telecoms markets in Western Europe.  

The large majority of telecoms operators’ revenue comes from the consumption of domestic services and the telecoms service industry has no relevant import/export trade with the EU and no material exposure to the price of commodities. This makes the telecoms outlook post-Brexit less vulnerable and uncertain than that of other industries.

Pyramid Research expects minor Brexit implications on the following key components of the telecoms industry:

  • Regulation – Brexit impact will be better known at the conclusion of the negotiations between the UK and the EU. The UK may not diverge significantly from the EU regulatory framework and harmonization rules regardless of the regulatory model that will be adopted. However, any short-term regulatory uncertainty may postpone some investment decisions, particularly on wireless spectrum, net neutrality, digitization of services and content within the broader technology ecosystem (i.e., Digital Single Market).  
  • Technology – Operators are unlikely to change their roadmaps in terms of future investments in next generation telecoms and IT networks. International technology firms may downsize their plans to invest in R&D in the UK as the country may apply different investment criteria and implementation rules compared to the EU – however, this is unlikely to affect the innovation cycle in the UK telecoms industry.  
  • Competition – We don’t expect major changes in the telecoms competitive environment. Operators have started to monetize their NGN investments and will likely continue to compete on enhanced offerings of services and content within the digital ecosystem rather than on pricing.UK could be the next move for Google Project Fi MVNO business model as Google generates 10% of its advertising revenue in the UK market.           
  • In-market consolidation – The UK market has room for fixed-mobile consolidation as a significant number of leading operators are entirely or mostly focused on either mobile services (Vodafone, O2 and Three) or on fixed services (Sky, Virgin Media and TalkTalk). We believe joint ventures between fixed and mobile operators may unlock convergence opportunities in the UK and will happen regardless of the regulatory business model which will be adopted. However, Brexit may add an additional catalyst to consolidation as joint ventures offer some opex/capex saving protection against a possible revenue loss caused by Brexit implications.   

Roaming is an area of uncertainty although it accounts for a minor share of the total operators’ revenue. Most MNOs are already on or ahead of the glide path to summer 2017 in terms of the EU’s regulated elimination of premium roaming retail prices, and although there is now an option to opt out of that timeline, it’s unlikely that UK MNOs will abandon the concept completely. According to Current Analysis, all UK MNOs should seek to reassure their customers that they will continue working on bringing down roaming prices.

Brexit may slow down the recovery of the UK telecoms market through 2020.

As mentioned in above, Pyramid Research expects minor revisions to its 5-year telecoms forecast.

Exhibit 1 shows that based on Pyramid Research’s preliminary assessment of the key changes and drivers, Brexit may slow down the recovery of the UK telecoms market over the next five years and lead to a low-to-mid single digit impact in UK telecoms service revenue through 2020. The base case is a 4% revenue loss in 2020 compared to a pre-Brexit forecast; telecoms revenue may be worth GBP 32.2 bn in 2020 instead of GBP 33.4 bn.

However, this will not change the broader outlook – after several years of revenue pressure, the UK market is set to return to revenue growth from this year onwards, a trend similar to what we forecast across most European markets between 2016 and 2018. The adoption of telecoms services over next generation fixed and mobile networks moves beyond an early adopter status and helps operators stabilize or increase their ARPUs, and the broader telecoms regulation seems less severe than in the past.  

Exhibit 1: Telecoms service revenue, UK, 2012–2020 – Pyramid Research forecast

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We anticipate the following minor changes and implications to our five-year UK telecoms forecasts: 

  • Change in population and number of households – Immigration has been the largest trigger for population growth in the UK over the last decade. Stronger control over migration and a possible relocation of some multi-national corporate HQs to Europe could reduce the net migration flow, thus affecting the future population growth and the number of households. This will have a direct negative impact on telecoms services volumes (subscriptions to fixed and mobile services) whereas ARPUs are likely to remain nearly unchanged. Demand for residential and commercial properties has been an important driver of fixed broadband and pay-TV penetration growth. 
  • Slower GDP growth due to short-term uncertainty and falling investment – We expect business revenue to suffer more than consumer revenue as the UK could become less attractive as an industrial and financial hub and as a base for multi-national corporate HQs. Business revenue accounted for 25% of the total UK telecoms service revenue in 2015 and represents one of the major drivers of growth; slower GDP growth may increase pressure on B2B spend. 
  • Minor capex reductions to offset the revenue loss – Operators have streamlined their opex and capex base over the past few years and this has created a better operating leverage, which allows operators to transform revenue growth into additional profits and cash flows. Any revenue loss due to Brexit implications may lead to some short-term capex reduction and this could slightly affect operators’ ability to monetize long-term revenue opportunities. 

 

Pablo Iacopino – Director, Europe – +44 (0) 207 9366 878 – pablo.iacopino@pyr.com

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