A sector under pressure: Is regulation strangling the telecommunications sector?
BDO's recently released 2017 Telecommunications Risk Factor Survey paints a picture of a sector under pressure. Dramatic and unexpected changes in the political, economic and business environment over the last 12 months are seen to have strongly impacted telecom companies. The proportion of respondents to the survey who cited regulatory change and uncertainty as a significant risk jumped more than any other risk since the previous year’s survey. Could it be that the regulatory burden being imposed is increasingly affecting the business prospects of fixed line and mobile telcos?
Marked intensification of risks
BDO investigated the risks, opportunities and challenges facing around 60 of the largest fixed line and mobile telcos across 18 different markets in the Americas, EMEA and Asia-Pacific. The report reveals consistent areas of risk: the digital transformation agenda, regulatory burden, cybersecurity, the volatile macroeconomic and political environment, and infrastructure investment challenge.
It would go well beyond the scope of this short article to consider everything in detail so I’ll simply mention some highly revealing figures: the percentage of respondents who cited regulatory changes as a significant risk rose from 42% to 80%, competition from 60% to 80%, the fast arrival of technology from 55% to 72%, infrastructure investment from 17% to 52%, and cyber warfare from 42% to 69%. The fact that the numbers seeing the regulatory burden as a critical risk has nearly doubled in just 12 months is striking. In fact “regulatory changes and uncertainty” are seen as the top risk In the Americas (100%), the fifth highest one in EMEA (77%) and the sixth highest in Asia-Pacific (57%), where risks are generally perceived to be lower.
Regulatory burden increasing
Over the past year, telcos have been particularly concerned about the dual impact of EU regulations on data roaming and diverging global regulatory frameworks regarding net neutrality and widening access to the Internet. The regulatory regime everywhere is generally more rigorous than in the past and the growing compliance burden seems to be affecting profits and scope for investment. The end of roaming charges in the EU on 15 June 2017 is a good example. In a price-sensitive market, due not least to competition from over-the-top providers (e.g. WhatsApp with 100 million voice calls daily), it’s difficult to offset the loss of data roaming revenues. And it’s not only telcos in the EU that are suffering. In Brazil, for example, telecom providers may be fined, restricted in their sales or have their licence to operate terminated if they fail to meet service standards and compliance targets. What’s more, new accounting standards such as IFRS 16 are adding to telcos’ financial risk because they are now required to report more debt on their balance sheet.
Regulatory strangleholds?
The telecom sector is at the heart of the connected, digital landscape, enabling people to consume and communicate information, businesses to interact with each other, and producers to showcase goods and services. The economy is increasingly digital and this is the context in which the EU’s Digital Single Market (DSM) initiative aims to improve access for consumers and business to online goods, and create the right environment for digital networks and services by designing rules that “match the pace of technology and support infrastructure development”. So while EU legislation has contributed to a fall in telecom service prices of around 30% in the past decade, it has been largely at the expense of the sector’s profitability. By ending roaming charges, the EU has benefited Europe’s consumers. But with revenues at risk, how are telecom companies supposed to finance proposals such as the investment in very-high-capacity networks, roll-out of 5G technology and free Wi-Fi in public spaces, as set out by the European Commission in its ‘connectivity package’ of September 2016?
The report shows consistent themes emerging around the risks, opportunities and challenges facing the telecoms sector. Not surprisingly, for me as a regulatory and public policy specialist, the ramifications of an excessive regulatory burden and inexorable regulatory change are particularly interesting. The survey indicates that telcos are concerned. Only time will tell if they have the innovative ability to free themselves from these regulatory strangleholds or policymakers move to lighten the burden somewhat!
For further insights, you can also listen here to my podcast interview with two of the BDO telco experts who carried out the survey, Christian Goetz of BDO in Germany and Tom Mannion of BDO Consulting in the USA.