Telecoms services are expected to be of growing importance to the UK’s increasingly digital economy over the coming years, which is likely to require significant investment in expanding services to make sure the United Kingdom is not left behind, particularly as consumers keep demanding better quality and faster connections.
Some familiar trends are expected to continue shaping the sector. For example, regulation is anticipated to increase and further consolidation is likely to occur. Additionally, high competition and falling prices are expected to continue to weigh on the sector’s revenue and profitability.
Expanding capabilities
As the COVID-19 pandemic highlighted the importance of the telecoms sector to the wider economy, demand for telecoms services is expected to continue rising over the next five years. The sector exhibits a high level of technological change, with continued investment in new infrastructure and innovation being key in developing the capabilities of the sector and meeting ever-increasing user expectations. Emerging technological advancements, such as artificial intelligence and the Internet of Things, are likely to require higher-quality telecoms networks.
A big leap forward for the sector is the roll-out of 5G networks in 2019, which can deliver faster and better mobile broadband services and enable innovative new services for various sectors, such as manufacturing, transport and healthcare.
According to Ofcom's Connected Nations 2020 report, 5G services were available at approximately 3,000 sites across the UK at the end of the year, a ten-fold increase from 2019.
Telecoms companies are expected to continue to invest strongly in expanding 4G and 5G networks to reach more regions and cover a larger consumer base, which will likely boost demand for wireless telecoms services, with some consumers shifting away from wired services.
5G could be key in helping the economy quickly recover from the pandemic-induced recession.
According to The Global Economic Impact of 5G report by PwC, 5G is forecast to boost UK GDP by £43 billion by 2030.
In its Digital Consumer Trends 2020 report, Deloitte claims it is likely that the majority of phones will support 5G within two years. However, it is likely to take a few years before the effects of 5G are felt. However, as adoption rates rise, the high level of competition in the telecoms sector is expected to push prices of 5G services lower, constraining revenue and profitability.
Shifting services
The telecoms sector is also expected to help drive economic growth through changes and expansion in wired telecoms services. In the coming years, traditional public switched telephone networks (PSTNs) are due to be phased out and replaced by all-IP technologies as wired network carriers update their technology, with both BT and Virgin Media O2 planning to fully migrate customers away from their PSTNs by 2025.
Despite the UK being a world leader in superfast connectivity with 96% of homes covered, it significantly lags behind key competitors in terms of next-generation full-fibre broadband with only 18% of homes covered, equating to 5.1 million premises, according to Ofcom.
In comparison, it was available to 70% of households in Portugal and 77% of households in Spain in July 2018. Nevertheless, coverage increased by 2.1 million premises in 2020, largely due to investment from providers BT, CityFibre and KCOM. Meanwhile, the report also states that 27% of premises, or 7.9 million, have access to gigabit-capable broadband.
Satellite telecoms activities are also expected to expand over the coming years.
The UK Space Agency (UKSA) is targeting a 10% share of the global aerospace market by 2030, up from 5.1% in 2018-19.
It also states that new technologies such as autonomous vehicles, artificial intelligence and robotics ‘rely on fast, reliable connectivity and need to operate in remote areas that may be difficult or expensive to reach using ground-based signals or fibre'.
Additionally, Ofcom estimates that 0.1%, or 43,000, of UK premises have no access to decent fixed broadband and 4G. The UKSA suggests that satellite telecoms can fill the gaps so that space and ground-based systems complement one another to ensure 100% coverage.
In the Future Telecoms Infrastructure Review by the Department for Digital, Culture, Media & Sport, it is stated that the government expects to see a more converged telecoms sector in the longer term. Therefore, high investment in both wireless and wired services will be required to reach targets, although it will take a number of years for these to be completed.
Sector funding
In recent years, the government has supported the telecoms sector through various funding initiatives, such as a £1.1 billion infrastructure investment package, which included £740 million in funding through the National Productivity Investment Fund for fibre and 5G investment. In addition, it allocated a £25 million investment fund for 5G testbeds in the 2018 Spring Statement.
Similarly, in Budget 2020, the government announced a Shared Rural Network agreement with the four MNOs to radically improve mobile coverage in rural areas, meaning that 95% of the UK's landmass will have high-quality 4G mobile coverage by 2025.
At the start of July 2021, the government launched a £30 million Future RAN Competition, which is a key part of its 5G Diversification Strategy and aims to turn the UK into a leading global destination for developing next generation of 5G networks.
Satellite telecoms operators have also received some support. In November 2020, the government backed the development of space hubs across England and provided funding to support projects in Wales, Scotland and Northern Ireland. The space hubs will aim to use the funding to create a strategy for the UK to take maximum advantage of the commercial space race.
Additionally, the government completed the acquisition of cutting-edge satellite technology firm OneWeb in November 2020 and subsequently committed to US$500 million (£394.7 million) of investment in the company.
In the November 2020 Spending Review, the government announced the start of the £5 billion UK Gigabit Programme, which aims to deliver next-generation gigabit-capable broadband to every home by 2025, helping to tackle 20% of the UK premises in rural areas that are the hardest to reach. £1.2 billion of this funding was allocated for between 2020 and 2025.
The government also allocated funding of over £260 million for 2021-22 for transformative digital infrastructure programmes, including the Shared Rural Network, the Local Full Fibre Networks Programme, the 5G Diversification Strategy and the 5G Testbeds and Trials Programme.
Coverage targets
Although the government proposed a target of FTTP across every home in the UK by 2025, it later revised the target to 85%. However, a report from the Public Accounts Committee, published in January 2021 states that the government is likely to miss this target.
BT has suggested that the government needs to cut business rates on new fibre lines to hit the 85% FTTP target, as this would free up close to £1 billion for BT, which could be spent to connect a further three million homes.
The government indicated that full fibre or gigabit broadband infrastructure will be mostly built by private investment. In its Wholesale Fixed Telecoms Market Review 2021-26, Ofcom states that it ‘expects the combination of competitor build plans and Openreach’s commercial plans to result in gigabit-capable network coverage of 80% of the UK by the mid-2020s through commercial investment.’
In its Wholesale Fixed Telecoms Market Review 2021-26, Ofcom stated that it will not impose cost-based price controls on full fibre services until at least 2031, which is expected to encourage investment.
BT’s Openreach has updated its full fibre target to reach 25 million premises by the end of 2026 at a cost of up to £15 billion, up from the initial aim to cover 20 million at a cost of £12 billion by the mid- to late 2020s.
The newly merged Virgin Media O2 has committed to invest at least £10 billion in broadband and 5G services over the next five years. Previously, Virgin Media has laid out plans to have its whole network consisting of 15 million premises capable to gigabit speeds by the end of 2021.
Other large-scale plans for gigabit-capable networks include CityFibre’s roll-out to eight million premises in over 100 towns and cities and Hyperoptic’s target of rolling out its full fibre network to two million residential and business premises by the end of 2021 and five million by 2024.
Additionally, telecoms companies have been able to draw private investment to help in building infrastructure. For example, French-owned Altice became BT’s biggest shareholder after it acquired a 12% stake in the company for £2.2 billion in June 2021, citing the opportunity presented by the national roll-out of next-generation broadband.
Smaller telecoms firms have also benefited. In September 2020, it was announced that US fund Oaktree Capital Management had agreed to pay £100 million for a majority stake in Zzoomm to fund investment in new broadband networks. Additionally, London-based telecoms company G.Network has raised £1 billion to upgrade London’s broadband lines to fibre. In June 2021, investment group LetterOne backed a £1 billion plan by broadband infrastructure firm Upp for the roll-out of a fibre network to one million premises in eastern England by 2025.
Rising regulation
As telecoms services have expanded, so has the need for stricter security requirements, translating into greater costs for telecoms operators. For instance, the government’s ruling in July 2020 to ban Huawei 5G equipment from 31 December 2020, as well as requiring all Huawei equipment to be removed from 5G networks by the end of 2027, poses a significant challenge for the telecoms sector going forward. BT, Vodafone and Three will all be affected by this.
Mobile UK has stated that removing Huawei from UK networks completely could cost £6.8 billion, while BT initially suggested it would be impossible before 2030. BT has also said it will cost it £500 million over five years to comply with the restrictions.
The government has committed to invest £250 million to mitigate the impact of removing Huawei equipment by the 2027 deadline. Companies will face fines of up to 10% of revenue or £100,000 a day if they do not comply with rules, as laid out in the Telecommunications (Security) Bill.
Many of the contracts to replace Huawei equipment are expected to be won by Nokia and Ericsson. However, in a boost to smaller open RAN tech suppliers, Vodafone has pledged to use their equipment to provide 5G signals for a fifth of its UK network sites by 2027.
The phasing out of Huawei equipment in combination with the pandemic has caused delays to the delivery of 5G.
In an auction for MNOs to boost their 5G networks in March 2021, just £1.36 billion was raised, falling short of analysts’ predictions that it could raise over £2.5 billion. This is likely due to the challenging economic conditions created by the pandemic.
A 2020 report compiled by the Centre for Policy Studies suggested that further delays to the roll-out could lead to as many as 11 million homes missing out on connectivity by 2027, costing the economy more than £41 billion and stalling growth in demand for higher-value telecoms services. Further, the Huawei ruling could delay Britain’s roll-out of 5G networks by up to three years and cost an extra £2 billion, according to The Financial Times.
Other regulation that can affect some telecoms companies in the coming years include Ofcom forcing firms to notify customers of better deals when their contract expires, which came into force in February 2020, and the ban on mobile phone networks locking handsets to their networks, which stopped them from being used on rival networks, from December 2021. These regulations are expected to result in lower costs for consumers, to the detriment of telecoms firms.
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