There are two key trends in the telecoms world at the moment: consolidation and data sovereignty.
Both consolidation and data sovereignty have powerful imperatives behind them. But they also create an inherent paradox that will be as much a political problem as it will be a commercial consideration.
Consolidation drivers
Consolidation is driven by the fact that telecoms service providers are facing a perfect storm of increasing costs, downward pressure on margins, and intensifying competition – not least from hyperscalers such as Microsoft and AWS that boast vastly superior capital reserves and revenue streams.
For the service providers, 5G has proven hugely expensive to deliver and has as yet offered little benefit to mobile network operators. Similarly, the cost of rolling out full fibre services to homes and businesses comes at a high price with no guarantee of a profitable return.
These pressure drove consolidation in the initial roll out of cable broadband services and we are seeing it again in the era of full fibre – including the merger between Charter and Cox and AT&T’s acquisition of Lumen’s Mass Markets fibre internet business.
Vodafone also provides an ongoing example having been forced to move away from its global strategy as the cost of delivering both 5G and fibre broadband in multiple markets has proven to be unachievable. It has sought consolidation to achieve the financial scale needed, including a merger between Vodafone UK and Three UK which will reduce the number of mobile network operators from four to three in the world’s sixth largest economy.
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By GlobalDataThe UK regulator’s decision to allow Vodafone and Three to merge and its decision to back a joining together of O2 UK, Virgin Media and Disney demonstrates that Ofcom understands the challenge telcos are facing. The EU is also reviewing its own telecom merger guidelines and assessing whether market fragmentation is damaging to EU providers versus larger global competitors.
The question of data sovereignty
But where do these mergers stand in the light of an increasingly fraught geopolitical situation in which the cyberattacks are a crucial threat vector?
Would a French government seriously consider a move that threatened the sovereignty of Orange, or would America let a non US company take control of AT&T?
The size of the American market and the scale of its leading providers probably takes such an option off the table, but for much of the world downward pressure on voice and connectivity margins make service providers relatively accessible takeover targets from a cost point of view.
Bans on Huawei operating in the US, Australia, and in most European markets raises questions about protectionism, but there is no doubt that many Governments feel that there national infrastructure cannot be owned or rely on providers from nations who could potentially be an adversary in a future conflict. There is no clear correct answer to this problem and governments around the world will need to make tough choices when balancing competitive market economics, the development and deployment of next generation access technology, and very real cybersecurity concerns.
