On a new path

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Four years and three Prime Ministers since the referendum, and the UK is no longer an EU member state. From new regulations to the CMA and the investment potential in Dublin, Melanie Mingas takes a look at the impact

Regardless of your personal take, Brexit has happened; from 11pm local time on 31 December, the United Kingdom ceased to be an EU member state.

From financial services to fishing, the impact is far reaching, but the official line is that for telecoms, ICT and the digital economy, it’s business as usual.

It’s a line echoed over the last four years by everyone from government to Deloitte — and in the initial weeks post-deal, it certainly appeared to be the case.

“Brexit has not had that huge of an impact on the telecoms industry,” says Alex Lumley, associate, tech and commercial, at Baker McKenzie.

“UK operators are still able to provide cost order services to customers across the EU and that’s on the basis of the WTO rules. Although we’re out of the EU, telecoms is still fundamentally the same for the UK operators,” he adds.

While there was little choice but for the UK to press ahead with its adoption of the European Electronic Communications Code (EECC) in its final days of its EU membership, now the focus is on how the UK will diverge from the EU’s regulatory regime for telecoms post-2024.

“That is the more fundamental piece moving forward: how the UK is moving away from the EU regulatory regime as it exists today and what specific changes it wants to make now it can do that,” Lumley explains.

The evidence so far suggests that freedom to do business will be a priority, over the top (OTT) services are also on the list, and with the Telecoms Security Bill currently in parliament it’s clear security will take priority, at least for this year. Competition rules will also need to diverge from EU competition law in the near future, as the Competition and Markets Authority (CMA) steps into its new role — more on that later.

“We are seeing an approach which is more liberal. Fewer services are regulated, which is interesting, and it really is one of the first examples of the UK moving away from regulators,” Lumley says.

“It will be interesting to see what the UK decides to do and how it wants to position itself as a regulatory system for telecom operators,” he adds.

Given the UK’s extensive input in the original EECC, the question of where Europe could go in its divergence is also of relevance. However, at TechUK, markets director Matthew Evans says that divergence is a chance for Britain to showcase its capabilities.

“That is going to be an interesting debate to follow, to understand where the UK sector believes it could go further in some areas. That could be around access regulation, there could be some interesting, innovative approaches there as we seek to certainly reinforce our position in digital infrastructure," Evans says.

TechUK also hosts the Broadband Stakeholder Group, which is examining further areas of potential divergence.

“That will be an interesting one to watch and we are keen to have that conversation with government and the sector,” Evans adds, revealing that “ideas and papers” will be put forward later this year. “We still need to fully understand the impact of the agreement with the EU, but we will be looking to kick that off in one form or another,” he says of the months ahead.

Data adequacy

The UK accounted for 11.5% of the world’s cross-border data flows in 2015, and the question of what would happen to data adequacy post-Brexit has dominated concerns since the 2016 referendum. The last-minute confirmation of an extension to the existing rules is likely more reflective of the country’s digital industries than political successes, but it was a result all the same.

“First and foremost in our asks was around data adequacy,” says Evans. “That was essential for our sector, as it was for financial services and adjacent sectors.”

Now that can is firmly kicked into H2, Evans continues: “It is a great step that we have an extended transition period, which will allow us to fully complete, hopefully a positive outcome on data adequacy, which needs to happen and certainly go through the EU process.

“It’s great to see we are on a pretty positive path towards that.”

During negotiations, TechUK worked with the UK Government and European Commission, as well as its partners at DigitalEurope.

Advocating for the tech, telecoms and IT sectors, TechUK started discussions with its members pre-referendum to get a head start on understanding the potential implications.

However, Evans says: “It is worth saying the UK tech sector did not want Brexit. Our view was that we were better off remaining within a reformed EU.”

A March 2016 poll of members at Tech London Advocates echoed that sentiment. It found 87% opposed Brexit, 10% declined to take a stance and 3% supported a UK departure. Dozens of other polls — then and since — have produced similar results.

“Ultimately, the most important thing for our members is that there was a deal, and the structure of that deal allows us to build on it and actually establish that adequacy agreement and build more on some of the services area as well,” Evans says, citing some of the near-misses the UK escaped during negotiations, such as dropping the CE mark immediately or putting tariffs on imported television sets.

“There are plenty of things the government has moved on which mean we are in a better place in terms of being able to provide goods and services to our end users than we would have been in a hard Brexit scenario,” he adds.

The role of Dublin

Although Evans is positive on the outlook, a question mark hangs over any economic activity, and companies — much like investors — need certainty, which is why many are heading to Ireland.

“A lot of investments in the UK are coming to Ireland just to have a presence in the EU, or for the talent or for diversification reasons more generally, rather than any regulatory reason,” says Leo Clancy, head of technology, consumer and business services at the agency charged with attracting such investment, IDA Ireland.

Visas are another reason. Ireland has adapted its system so the spouses of skilled tech workers have an automatic entitlement to work; and, of course, there’s the temptation of a 12.5% tax rate.

Add to this the regulatory pieces in the UK that are yet to be finalised, and Ireland becomes very attractive for private sector firms looking for an EU gateway.

In November, BT confirmed it had established a Dublin-based procurement co, BT Sourced; a separate entity from BT Ireland and a subsidiary of BT Group plc.

Some of the largest US telcos have run their procurement out of Dublin for many years, so the move wasn’t a complete surprise, still BT said its strategy is to “make it easier for potential European partners to join us”.

The group’s chief procurement officer, Cyril Pourrat, told Capacity: “Moving our procurement function to Ireland allows us to set up a new organisation that has the feel of a start-up and all the energy that goes with it, and we are excited about the prospect of accessing the deep talent pool in Ireland.

“Our strategy is to form partnerships with other European telcos that not only leverage combined scale but provide a transformational platform for joint innovation, strategic collaboration and partner-driven growth. Being based in an EU member state would make it easier for potential European partners to join us.”

In late January, Indigo Telecom’s subsidiary 4site set out to recruit 100 Irish fibre planners, GIS engineers, design engineers, telecoms surveyors, project managers and sales and support staff for its fibre centre of excellence in Limerick. That decision was based on the availability of skilled talent, which Ireland has cultivated by having one of the highest tertiary education attainment levels in Europe.

“We looked at various locations to expand our existing fibre centre of excellence as we see unprecedented demand for our services in new markets such as Germany and the US,” said 4site CEO and Indigo board member, Ian Duggan, at the time. “We decided on the mid-west of Ireland due to the very best local talent that we can continue to build on and develop further.”

“The telecoms ecosystem is very strong in Ireland,” says Clancy, who himself spent 13 years at Ericsson, and four as a fibreco CTO, before moving to IDA Ireland.

Naming Ericsson alongside Cisco, Genesys, Avaya and Motorola as some of the global names with an Irish presence, he adds: “We also have Verizon, through the acquisition of Fleetmatics, probably one of the biggest tech acquisitions ever; and Cubic Telecom, which provides much of the wide area connectivity for connected cars. The telecoms ecosystem is very rich; we are certainly a place that understands telecoms.” However, Clancy reports the “biggest trend” is arrivals from the US.

“US companies that might have invested first in London and then looked at Ireland later down the line, have come to Ireland first. We have certainly seen that over the last four years and that doesn’t show up as a Brexit win or a Brexit project, it just shows in our stats as general wins, but there is an element of that,” Clancy says.

It comes as little surprise that foreign direct investment (FDI) to the Emerald Isle remained strong in 2020, with 246 investments across all sectors, compared to 250 the previous year, and more than 20,000 new jobs created.

Tech and telecoms have long been prominent drivers of these figures, so too has manufacturing, and as the latter digitalises, a continuum is emerging — driving more investment from non-tech because of the strength of the tech base.

“Those in pharmaceutical, engineering, information services, like Mastercard’s investment, they come here more and more so for tech,” says Clancy.

“Pure play tech and telco” accounts for 35-40% of total investment by jobs, “and probably a little more so by companies,” Clancy says, and he expects the market share to hold as total FDI continues to increase. Announcing a new strategy in January, the target to 2024 is to attract 800 investments and 50,000 new jobs, with a focus on driving activity away from the cities and into the regions.

Competition conflicts

Another area where questions remain is on the point of competition law.

The Brexit agreement recommends that the UK’s Competition and Markets Authority cooperates with the European Commission. However, now the transition period is over, there could be a conflict of authority.

Explaining the situation in a piece for Capacity online, Virna Rizzo and Jordan Le Gallo, from Globalaw member firm Cohen Amir-Aslani, wrote: “Now that the transition period has ended, the one-stop-shop principle has fallen away. The European Commission is no longer authorised to rule on potential mergers within the territory of the UK.

The CMA is now the only referral authority in the UK. This opens the possibility for merger deals meeting both the UK and EU merger regulation (EUMR) merger control thresholds to seek merger control clearance from both the UK and the EU regulators.

“However, it also introduces the prospect of acquisitions being cleared by one regulator but blocked by another.”

The impact could result in further costs and regulatory burdens as firms tackle the uncertainty that may result from the need to comply with the two separate regimes.

Rizzo and Le Gallo say these businesses will need to ensure they comply with both EU and UK competition law and should consider the impact of dual UK and EU merger filings in their planning strategies. However, of greatest concern is the advice to be mindful of, “the potential risk of parallel cartel investigations and their leniency strategy in light of such potential dual investigations”.

Forced divestments are another point to consider. Rizzo and Le Gallo explain: “In order to avoid the risk of a forced divestment and the heavy costs associated with that, most buyers will notify the CMA if there is any risk for the merger to give rise to serious competition concerns. We can therefore reasonably expect Brexit to have a considerable adverse effect on the CMA, which is likely to need substantial additional resources in order to deal with its increased case load.”

On the point of resources, the authority reviewed 62 total deals in 2019 and has confirmed it will add 50 to its annual load. A recruitment drive has commenced, and Rizzo and Le Gallo predict the CMA will “double in size” by 2022.

Renegotiating roaming

Roaming has already taken a Covid-related hit in the last 12 months, nosediving 73% in 2020, and it could take until 2024 to return to pre-pandemic levels. While the final Brexit deal did not rule out the ability for mobile operators to charge roaming fees again, all have implemented caps.

As Juniper Research author Scarlett Woodford explained in a January report: “Any decisions by UK operators to reintroduce roaming changes would negatively affect customer satisfaction.”

It sounds simple enough, but there are other adjustments that can be considered if profit margins are tight.

She tells Capacity: “The roaming revenue loss is not a temporary shortfall that can be recuperated. In response, UK operators should make changes to their existing business models, using analytics to renegotiate existing wholesale and retail agreements.

“UK operators should also look to diversify their product portfolio, in order to include technologies such as 5G roaming and VoLTE roaming services. Following Brexit, any decisions by UK operators to reintroduce roaming charges would negatively affect customer satisfaction.”

She advises: “UK operators must approach changes to their roaming policies with caution, in order to avoid an increase in the number of silent roamers and accompanying lost revenues.”

To rule the waves

For Britain to make a true success of its solo venture, the consensus is that it needs to turn attetion away from fishing and instead to the fibre — or lack thereof — under its streets.

A January report from the Public Accounts Committee said the government is likely to miss even its revised target of 85% national full-fibre broadband coverage by 2025, due in part to a “litany of failures” at the government department in charge, the Department for Digital, Culture, Media and Sport.

In addition, of the £5 billion earmarked for the rollout, only £1.2 billion is now budgeted to be spent by 2024. As of December, Ofcom figures showed that just 18% of UK homes have access to full-fibre connectivity.

Redstor CEO Paul Evans says a successful roll-out would help the environment by reducing travel and commuting, while relieving housing demand in less affordable cities. It would also “make the country more pandemic-resilient for the next time”.

“It seems strange that the government is committed to old solutions such as bridges over the Irish Sea, a new third runway and the HS2 rail project, when, with superfast fibre, you could have bridges and runways to the world from every single home at a fraction of the cost. We need to make the UK the fastest, most connected country in the world, with fibre from Lands’ End to John O’Groats.”

His comments are echoed by Andy Taylor, director of commercial finance at Hyperoptic.

“In the five years leading up to Brexit, the UK government and regulator embraced the principles of private-led investment in full-fibre telecoms networks as a driver of economic growth and social wellbeing. It aligned consistently with the cross-European approach to enabling next generation broadband markets.”

Taylor says the country is now “at an inflection point” in its fibre roll-out, where the benefits of this regulatory and investment approach are beginning to show but more needs to be done.

Taylor adds: “Now is the time to double down on these principles and ensure that the private investors in fibre are incentivised through policy and regulation.”

To support this — and compete with Ireland — the country also needs to address its “limited pool of existing engineers” in any new immigration requirements.

Referencing the 18% full-fibre coverage figure, Taylor says: “Access to the European labour market is an important factor in guaranteeing supply of skilled labour whilst ensuring that the domestic supply stays fairly priced.

“The ideal and best-case outcome for fibre delivery in the UK would be to have an exceptional framework for European labour, applicable for highly skilled engineering roles. However, that is not the current direction of the government’s immigration policy, which is regrettable as it creates a risk for fast, large-scale fibre deployment.”

Over at TechUK, the revised budget is a point of frustration and Evans says: “Our view is that that isn’t good enough.

“There are lots of pressures on the government, but Covid-19 has definitely shown us that where you don’t have really high-quality broadband, you are absolutely disadvantaged by that, and that universal target is really hard to hit, but the sector is absolutely straining to deliver it,” he continues.

“We will push to get as much of that £5 billion as possible into 2025.”

Business as usual

While it is true to say that telecoms is one of the industries least affected by Brexit, in other ways it has been the first industry to demonstrate how an independent UK could operate.

But liberal regulations and a focus on easy business are only the start. Brexit itself has politicised innovation, and the country’s ability to “unleash its potential” will be key to the perceived success of the so-called divorce deal.

On the practicalities of making that happen, Redstor’s Paul Evans says: “I think what the government must do is continue to have a really straightforward, understandable tax regime and not muck about too much with regulation.

“I think sometimes there is a tendency for governments to do too much. They should probably do a little less, peeling back regulation and red tape and keeping a nice, obvious, transparent tax regime which is understandable to people.”

There’s also the Covid factor. If executed properly, a digital-led economic recovery could lay strong foundations that endure for decades, and while many have been vocally opposed to Brexit, Matthew Evans says telecoms is in a “relatively good place in terms of mitigating any negative impact”.

That doesn’t guarantee a rosy future, and many moving parts have still to fall into place — the Telecoms Security Bill included — however, for now at least, the sentiment is largely positive.

Evans concludes: “From our point of view, the UK tech sector is in a strong position and obviously we depend on the rest of the economy, so a swift economic recovery as we emerge from the health crisis is essential. The new relationship with the EU gives us the foundation to build and strengthen that relationship but it also gives us the opportunity to adapt to best practice from further afield if we see it.”

For the rundown on how Brexit will impact data centres, click here