Brexit Likely to Offer Telcos Challenges, Opportunities

The potential impact on the telecom sector of a U.K. vote to leave the EU is uncertain and subject to widely varying views, attorneys and consultants told us. The EU referendum takes place Thursday, and the outcome is reportedly too close to call. Brexit (British exit from EU) might -- or might not -- adversely affect the U.K. and/or EU telecom sector, or, conversely, could allow Britain to become a vital player on the world stage, they said.

The predominant view within the industry is that Brexit would be "challenging for the UK" as the country breaks away from alignment with its closest geographic neighbors, said Hogan Lovells (London) telecom lawyer Peter Watts. In the short-to-medium term. that would involve a change of focus and approach that would likely present transitional challenges, he emailed. "There is a fairly widely held view that, from the perspective of the telecoms and internet industry, little will ultimately change as the costs to the UK of truly breaking away would be too great." At best, the U.K. would be tied into the European single market, and the rules that go with it, but with less influence over those rules, Watts said. At worst, it would be left outside the market and international business would cut investment in the country, he said.

"We should not entirely ignore" the leave viewpoint, said Watts. There the argument is that telecom and internet businesses are essentially global, and the U.S., China and others exert as least as much influence, and drive as much investment, as the EU, he said. Under this analysis, if the U.K. aligns more closely with the U.S. in regulatory terms, it would become more attractive to U.S. telcos and tech companies because they would be more easily able to exchange products, data and so forth, he said.

"More ambitiously," the U.K. might be able to deftly pick and choose by subject and strike deals with all the leading countries, positioning itself as global hub for the internet and telecom sectors, much as its financial services and legal sectors have done, said Watts. "In these worlds, in the short/medium terms, as with any transition, interactions with our EU neighbours would be different from those we currently have but (on this view) over time the UK would position itself as an 'honest broker' with everyone." Watts said the remain view is very much predominant within the industry.

Brexit probably won't hurt competition in Britain's telecom market but may make the EU more protectionist, said consultant Innocenzo Genna, who represents smaller players. The U.K. has strongly supported competition in the telecom arena, and its government has usually been pro-competitive in EU Council negotiations, he said. Without that focus, the EU may move toward protecting its dominant national operators, he told us.

Brexit could affect EU efforts to end mobile roaming charges, although it's an issue that could be negotiated, Genna said. The worst part of Brexit for the U.K. will be that internet startups will move to Europe to benefit from the EU's free movement of services across borders, he said.

Brexit would be a "regulatory nightmare" for telcos, said John Strand, of Danish telecom consultancy Strand Consult, in a Tuesday research note. Regulators worldwide take inspiration from each other in areas such as roaming, consolidation and net neutrality, he said. Much of what is offered as regulation isn't about solving specific problems, such as reducing barriers to market entry, but about "creating policies that sound good to the voter," he said. Brexit could spark a "political and regulatory avalanche that spreads around the world" and harms the industry's ability to invest and make money, he said.

The EU has a bad image and, regardless of the U.K. vote, will have to reinvent itself and the European project, said Strand. That will take time, and in the interim, politicians will look for actions that are easy to communicate to Europeans, he said. The EU will see the telecom industry and regulation as an obvious area to focus on, Strand wrote: "The EU will take steroids and turbocharge the regulation related to telecommunications." Ramped-up telecom regulation in Europe will spread to other parts of the world, he said. To counter this, telcos "should assume the role of consumer watchdog," he said.

If the U.K. leaves Europe, it will have to repatriate legislative and policy processes from Brussels, with the help of much stronger input from consumers, small businesses, think tanks and universities, wrote telecom policy analyst Ewan Sutherland in an April paper. If the government doesn't drive and help fund this, entrenched interests could control the transition and the design of the new telecom regime, he said.

In an era of consolidation, with little pressure from new entrants, and given the openness of EU markets, it's hard to see obstacles in the way of operators, said Sutherland, a research fellow at the University of the Witwatersrand (South Africa). BT Global Services has a substantial footprint for virtual private networks, as does Vodafone for mobile operations, he wrote. If Britain's regulatory regime diverges from the EU's, players such as O2 and Three might lose some economies of scale in their lobbying and litigation, and be more inclined to divest themselves of their U.K. interests, he said. But the limited range of pan-European services such as internet backbone should be able to continue with little change, he said.

The "obvious exception" is with mobile roaming charges, said Sutherland. If the U.K. leaves the EU and isn't a member of the European Economic Area, its operators will no longer have access to regulated wholesale prices from operators in Europe, he said. "Evidence from other countries on the European periphery is that United Kingdom operators would be forced back on commercial negotiations, the outcome of which would probably be negative."