Brexit’s Far-Reaching Impact on UK Operators

Vote to Leave Raises Concerns, But Also Opportunities

We recently outlined the potential impact of Brexit on the UK consumer market (see Brexit’s Effects on Short-Term Market Forecasts). In this piece, I share my views on how UK businesses and network operators could be affected.

A leading concern is that lower business confidence and market uncertainty result in some companies putting their investment plans in the UK on ice. The consequence could be a fall in operator and IT spending that may hinder some companies’ digital transformation strategies.

These effects could be particularly relevant to small firms less able to weather the current uncertainty. But some big names, including Virgin Group and Siemens, have also admitted holding fire on investing in the UK. This pause for thought may only be short-lived, but in the increasingly relevant enterprise sector the impact could be significant.

More severe still is the threat that some companies consider moving their European headquarters outside the UK. This is an option that Vodafone has identified, citing concern over freedom of movement. If such a trend took hold, spending on the enterprise sector could be affected in the much longer term too.

A weaker pound makes infrastructure investment, which is usually made in euros or US dollars, more expensive. This could supress short-term network spending — a worrying scenario that threatens to undermine the UK’s strong position in 4G and lofty ambitions in 5G connectivity. Further, being outside the EU would mean missing out on crucial research and development funding from the European Commission’s Horizon 2020 programme, which has earmarked almost €80 billion over a six-year period. The UK government could elect to make up, or even exceed, the shortfall, but there’d be no guarantee.

It also remains to be seen how many of the positive attributes of access to the emerging European digital single market will remain in place. This represents an important opportunity for the UK as a leading digital economy. Focus areas include spectrum harmonisation and fighting cybercrime. But being outside the EU could diminish the UK’s say in these important topics.

Meanwhile, any restrictions on freedom of movement into the UK could result in a loss of new talent, shared experiences and diversified thinking that is so critical to technology innovation.

In an earlier blog, I argued that Brexit would unlikely lead to higher roaming charges, even though UK networks would no longer be directly accountable to legislation from Brussels (see Could Brexit Result in Higher Roaming Charges?). Nonetheless, the temptation would still remain for operators to hike prices back up in an effort to boost top lines that have been severely affected by regulation in recent years. Such a scenario could lead to higher bills for businesses and consumers.

Despite widespread concerns, it’s important to recognise the potential benefits of greater regulatory sovereignty that could enable policy to be tailored more specifically to the UK’s individual characteristics. There could be important ramifications. For example, Ofcom may find it has more power to push through a formal separation of BT Openreach, should the company fail to sufficiently address the regulator’s concerns (see Ofcom Proposes Radical Reform to BT Openreach). BT CEO, Gavin Patterson, has previously warned about lengthy litigation if Ofcom forced through such a move, but his options would be diminished if the company could no longer take the case to Brussels.

In fact, BT could be one of the providers most affected by the vote to leave. Its exposure to the UK is significantly higher than other companies such as Virgin Media and Vodafone, both of which have parent companies operating across multiple markets.

Telefonica will likely also regret the outcome, with some bankers suggesting that the value of O2 UK will take a hit. This would be a blow to any near-term initial public offering. It could be that the weaker pound makes O2 a more attractive target to a non-UK buyer, but economic uncertainty would also be off-putting.

The reality is that it’s still too early to assess the impact of the vote, particularly as exit negotiations may take many months. Traditionally, the telecom sector has been resilient and the demand for mobile data services — as recently highlighted in Ofcom’s annual market review — has never been higher. This argues well for the future, but the ultimate effect will only become apparent after many years.