Communications
Communications
Is legislative intervention necessary for 5G and fibre infrastructure investment?
- Governments across the UK and EU should support investment by removing some of the barriers causing delays and additional costs to the infrastructure companies
- There is a need to introduce incentives to install broadband and mobile infrastructure in some areas, especially in those that are hard to reach – where the cost of installation can be much higher and where the return on investment may also be much slower or negligible
- There is likely to be consolidation in the market driven by the economies of scale achievable only by a combined entity and by the need to achieve a return on investment. However, with consolidation comes greater concentration and market power; therefore, the EU and UK need to find a way of balancing consumer risk with commercial reality
Significant investment is needed across Europe to help deliver the dream of 5G and superfast broadband for everyone as the demand for connectivity grows exponentially each year. In the UK, the communications regulator, Ofcom predicts that data usage will grow at a rate of 25% to 55% per year until 2030. Given that there has been 40% growth in past few years alone, it is likely that growth will lean towards the top end of the prediction. To sustain such growth, telecoms operators are being required to invest heavily in new infrastructure for standalone 5G networks and fibre to premises across the UK as well as in the EU.
However, this all comes at a time when telecoms operators are feeling the pinch. Revenues are down and costs are up. Given strong governmental support across Europe for the roll out of further infrastructure to ensure digital inclusion, telecoms operators have been placed in a difficult position. In the UK, the government announced its ambition for delivering standalone 5G in all populated areas by 2030. What then should governments do to assist operators in achieving these goals?
Removing barriers
Over the years, there has been much discussion about the barriers faced by the infrastructure providers. These issues typically fall into the following three categories:
- legislative barriers, such as planning laws and business rates;
- access barriers, such as difficult or absentee landowners; and
- commercial barriers, such as return on investment and lack of a skilled workforce.
These are all areas where governments are able to assist. In April 2023, the UK government published the UK Wireless Infrastructure Strategy (UKWIS) as part of its 10-point plan for rural connectivity. The plan proposes a number of planning reforms, including greater access to public sector assets and land, and updating the powers granted to infrastructure companies under the Electronic Communications Code. While these are all beneficial changes, the strategy is largely a consolidation of existing objectives within the digital infrastructure space, such as commitments made to improve mobile connectivity in rural communities in Project Gigabit launched in 2018.
Government incentives
The UKWIS includes a number of incentives, including the continuation of the £5 billion Project Gigabit to deliver future proof broadband to rural areas (£1 billion of which has already been made available to suppliers), continued investment in the Shared Rural Network, and reviewing the cost of the annual spectrum licence fee, which currently costs mobile network operators in the UK over £3 billion.
Similar measures also exist in Germany. The German government's mobile communications funding programme may subsidise up to 90% of investments in mobile telecommunication towers and their connection and development, where the areas to be subsidised do not have capable connectivity and the cost of the creation of such connectivity is non-recoverable.
In the EU, the upcoming Gigabit Infrastructure Act proposes to lower the high costs of and speed up communications infrastructure deployment. It focuses on greater access to existing physical infrastructure, streamlining and accelerating the issue of permits for civil works, and a right to access in-building physical infrastructure and fibre wiring. The legislation will be a step towards achieving the EU's connectivity objectives set out in its "Digital Decade" policy programme 2023, but there is currently no clear deadline for when the proposal will be adopted. The measures taken by the German government to implement its “Gigabit Strategy" have addressed connectivity as a prerequisite for digital inclusion.
European telecoms consolidation
Across Europe, there is a greater consolidation of companies in the wider telecoms sector. However, the consolidation in digital infrastructure is probably only just beginning for a number of reasons.
The huge cost of installing new infrastructure coupled with the time that it takes to receive a return on investment means that consolidation is not only desirable but also inevitable.
In addition, there are simply too many communications service providers with over 100 alternative broadband networks (altnets) in the UK alone. Many of these are confined by their geography: they are solely dedicated to creating networks in specific locations. While this may be useful in the initial buildout phase, altnets offer limited connectivity in the scope of a fully operational fibre network.
Furthermore, anecdotal evidence suggests that altnets (and their investors) may have overestimated customer penetration rates, meaning demonstrated returns are likely to be lower than originally anticipated.
It is surprising that greater network consolidation has not occurred yet, given the encouraging signs of support from network operators. This may be attributable to fund dynamics, as many altnets are backed by institutional investors that may be reluctant to recognise losses.
Governments across Europe can support the push for consolidation and facilitate merger activity by refraining from imposing artificial barriers or conditions. However, this would have to be balanced with the need to protect consumers and to ensure that the market for communications services remains competitive. The question is how far governments in Europe will need to go to modify the existing rules on merger control? For now, all eyes will be on the proposed merger between Vodafone and Three in the UK when this comes before the regulators.
Further Osborne Clarke Insights
Wireless Infrastructure Strategy maps role for the future of telecoms in the UK
Is consolidation in the telecoms industry in the interests of consumers? TMC Annual Review 2023
Will 2023 be the year 5G private infrastructure and networks finally arrive?
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Authors
Jon Fell Partner, UK jon.fell@osborneclarke.com
Nigel Boobier Partner, UK nigel.boobier@osborneclarke.com
John Deacon Partner, UK john.deacon@osborneclarke.com
Caitlin Foley Associate, UK caitlin.foley@osborneclarke.com
Felix Hänel Senior Associate, Germany felix.hanel@osborneclarke.com