The telecoms sector is a vital part of the UK economy, supporting businesses in conducting their operations, helping consumers stay connected and providing means for entertainment. Telecoms services have become even more important over recent years due to the increasingly digital economy, a trend that has accelerated during the COVID-19 pandemic.
Despite the sector’s growing importance, its revenue is expected to have contracted at a compound annual rate of 1.3% in constant terms over the five years through 2020-21 to £50.5 billion, while profitability is also expected to have fallen.
High uncertainty caused by Brexit and constrained disposable incomes have weighed on consumer spending, limiting demand for higher-margin products and lowering average revenue per user (ARPU). The UK telecoms market is saturated and exhibits a high level of competition, which has further constrained performance. High regulation and consumer preferences have also affected the sector.
Recent changes and challenges
Wireless expansion
The composition of the telecoms sector has changed significantly over the past decade due to the ubiquity of smartphones, with many consumers regarding them as a necessity rather than as a luxury. Ofcom states that 98% of UK households had mobile telephony in 2020. This uptake has been boosted by developments in wireless technology, particularly 4G network coverage and capabilities.
Ofcom says that an estimated 75.6% of mobile subscriptions were 4G-enabled in 2019, up from 72% in 2018.
This has supported demand for wireless telecoms services at the expense of traditional wired telecoms services, with many consumers disconnecting their landlines and SMEs relying on wireless services for all of their communication needs.
In the first quarter of 2019, over 20% of adults lived in a mobile-only home, compared with 18% over the three months through March 2018 and 14% over the same period in 2016, according to Ofcom.
At the same time, the scope for further growth through 4G has become limited, as most smartphone owners now use the network. This, combined with falling prices due to high competition and regulation, has constrained the performance of the Wireless Telecommunications Carriers industry, in which revenue is expected to have contracted at a compound annual rate of 2.7% over the five years through 2020-21.
The roll-out of the 5G network in 2019 has supported demand for wireless services to an extent; however, the higher price point for 5G and the limited availability of both infrastructure and 5G-enabled devices have so far kept 5G uptake low.
Deloitte’s Digital Consumer Trends 2020 research on 4,150 consumers, carried out in May 2020, found that just 2% of UK respondents were using 5G.
Shifting focus
Consumer preferences have affected demand for wireless services, as the growth of apps with multiple features has resulted in people moving away from phone calls and SMS services.
According to Ofcom, the number of SMS and MMS messages sent fell by nine billion in 2019 to 65.1 billion, from 74.1 billion in 2018.
MNOs have faced increased competition from over-the-top (OTT) instant messaging services, such as WhatsApp and Facebook Messenger. Additionally, voice over internet protocol (VoIP) services, such as Skype, have already begun to displace revenue generated from traditional voice services.
Ofcom's Technology Tracker 2020 found that 46% of adults used their mobile for video or voice calls using VoIP. As these OTT and VoIP services require data, consumers are increasingly demanding higher data allowances from wireless operators.
Ofcom reports that the average monthly data volumes per mobile user increased by 0.7 gigabytes, or 22%, to reach 3.6 gigabytes per month in 2019. This compares with just 1.3 gigabytes in 2015.
Operators have responded by focusing more on data plans and have started to adapt their prices according to the data allowance included rather than based on texts and calls available. According to the CEO of Telefonica UK, Mark Evans, the cost of an average mobile tariff has dropped 19% since 2016 but mobile data consumption has boomed 146% over the same period.
Service bundling
Consumers have increasingly opted for bundled services, which are typically cheaper than buying the same services individually.
Ofcom reports that 78% of total mobile revenue in 2019 were from bundled services.
Moreover, according to Ofcom’s Pricing Trends for Communications Services in the UK report from January 2020, 80% of UK households buy more than one communications service from the same provider, such as a dual-play landline and fixed broadband bundle. The same report also states that in July 2019, average savings for households that purchased bundled services when requiring a fixed broadband connection ranged from 20% to 28%.
Although operators that offer bundles typically benefit from higher demand, it has weighed on their revenue due to the lower prices offered.
The proliferation of mobile connections has reduced the potential market for wired telecoms carriers and has also negatively affected ISPs. IBISWorld expects revenue in the Wired Telecommunications Carriers and Internet Service Providers industries to have declined at respective compound annual rates of 4.2% and 3.6% over the five years through 2020-21.
However, the requirement of a landline to support broadband internet, coupled with the advent of next-generation fibre-optic connectivity, has kept the value of fixed-line telecommunications services high, limiting their decline. According to Ofcom’s Connected Nations 2020 report, nearly 99.4% of UK premises, both residential and commercial, have access to a decent broadband connection.
Internet provision
As technology has developed, demand for faster, more reliable internet connections has increased. The scope for internet services has expanded, leading to investments in research and development so operators could provide faster internet in more locations.
Average monthly broadband data use increased by nearly 80% between 2017 and 2020, standing at 429 gigabytes per connection in 2020 and up from 315 gigabytes in 2019, according to Ofcom's Connected Nations 2020 report.
The report also stated that superfast broadband delivered by cable lines is available to 96% of UK homes, although only approximately 60% are subscribing to it.
Growing broadband usage has supported demand for internet service providers (ISPs). However, ISPs are facing increasing competition from wireless internet service providers (WISPs), particularly in rural areas that have struggled with very slow broadband speeds.
The Connected Nations 2020 report states that approximately 1.4 million homes and businesses have coverage from a wireless internet network, based on providers' estimates. IBISWorld estimates that revenue in the Wireless Internet Service Providers industry grew at a compound annual rate of 4.7% over the five years through 2020-21.
During the past five-year period, EE, Vodafone and Three have all entered the WISPS industry by providing home broadband via the 4G and 5G spectrum they hold. Nevertheless, WISPs still account for a minor share of the telecoms sector. According to Ofcom’s Communications Market Report 2020, just 4% of households had taken up mobile broadband in 2020, compared with 80% for fixed broadband.
Regulation and competition
The telecoms sector is highly regulated and has a high level of competition. Telecoms carriers and providers are subject to tighter regulatory controls than retail counterparts due to the type and sensitivity of services offered. As a result, there has been an intense price-based competition that has lowered ARPU and has posed a challenge to the sector.
For example, in 2010, Ofcom limited mobile termination rates (MTRs), which are wholesale fees that one telecoms operator charges to another for terminating calls on its network, giving resellers more control over their own prices.
In 2016 MTRs were at an estimated nominal price of 0.68p per minute and from April 2020 the rate was at an estimated 0.468p per minute.
Following these changes, the wireless market has become more competitive, as reduced MTRs have reduced operating costs, which means that operators can pass falling costs on to customers in the form of lower prices.
Another example of regulation increasing competition is BT Group agreeing to the legal separation of Openreach, which connects nearly all UK businesses and homes to the national broadband network, following intervention from Ofcom to improve competitiveness. Ofcom regulates prices for local loop unbundling and wholesale line rental network access.
The wholesale charge paid by BT's rivals declined by 17% between 2018 and 2021 due to pressure from Ofcom.
Therefore, these companies have been able to reduce prices for consumers in order to be more competitive, which has weighed on revenue and profitability.
Furthermore, since 2017, Ofcom has imposed a 37% cap on all new usable mobile spectrum that a single operator can hold, which has increased competition.
Market consolidation and acquisitions
There has been a flurry of consolidation and acquisition activity within the UK telecoms sector over the past few years, as operators have sought to improve margins and invest more to meet rising demand for faster and cheaper services.
Major deals include BT’s £12.5 billion takeover of EE in 2015, expanding its reach in the sector, and US-based Comcast’s acquisition of Sky in 2018 for £30 billion. Most recently, in May 2021, Liberty Global’s Virgin Media and Telefonica’s O2 merged in a £31 billion deal following clearance from the Competition and Markets Authority. The newly formed Virgin Media O2 has over 47 million customers and combined revenue of £11 billion, aiming to challenge BT for broadband and 5G customers.
COVID-19 impacts
Increased demand
The sector has proved its importance to the economy during the COVID-19 pandemic due to the high reliance on technology in modern society. Social distancing measures and nationwide lockdowns increased the amount of time consumers spent at home during 2020-21.
Data from the Office for National Statistics shows that 35.9% of the employed population did some work at home in 2020, an increase of 9.4 percentage points on 2019.
Telecoms services have been vital for many businesses, allowing them to continue operating with minimal disruption. BT reported a surge in people upgrading to next-generation full fibre broadband at the start of the pandemic due to people working from home requiring faster internet connections.
The sector’s services have also supported the public’s well-being during the pandemic, as they have allowed people to keep in contact with friends and relatives and provided access to entertainment through various digital leisure activities, including video streaming and playing video games.
According to data from Ofcom, people across the UK spent an average of six hours and 25 minutes per day watching TV and online video content in April 2020, up one-third on the previous year.
Similarly, Openreach reported that UK broadband usage more than doubled in 2020. Networks have held up well thanks to telecoms operators’ continued investment in infrastructure, with Ofcom stating in May 2020 that average broadband speeds fell by only 2% during the initial lockdown despite traffic surging by between 35% and 60%.
Sector revenue
Despite the rise in demand for telecoms services, the COVID-19 pandemic has had a negative effect on operators’ revenue and profitability due to the financial impacts of the pandemic on businesses and consumers.
Ofcom's Affordability of Communications Services findings state that 19% of UK households, or 4.7 million, reported at least one affordability issue with their communications services in November 2020.
A plunge in consumer and business confidence, declining disposable incomes and tight budgets have led to the loss of some business and customers seeking cheaper deals. This has further been exacerbated by the slow uptake of more expensive 5G services. The largest telecoms operator in the UK, BT Group, reported total revenue of £21.3 billion in 2020-21, a 7% decrease on the previous year. Meanwhile, its profit margin fell to 12.1%, from 14.3%. The company has stated that it does not expect earnings to recover to pre-pandemic levels until 2022-23.
Within the sector, mobile phone retailers are expected to be the worst affected due to the forced closure of non-essential stores for much of 2020-21. In the satellite telecommunications market, major companies and start-ups alike reported impediments to income generation in the midst of commercial disruption. Major player SES has reported that it could take two to three years for revenue to return to 2019 levels amid ‘ongoing COVID-19 headwinds'. Additionally, as a result of financial difficulties, ARPU has fallen across the sector.
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