Reproduced from Practical Law with the permission of the publishers. For further information visit www.practicallaw.com.
Scope of this article
As a result of the lockdown measures taken in response to the 2019 novel coronavirus disease (COVID-19), we have seen an increase around the world in the demand for digital connectivity, the amount of data being consumed, and a related increase in the load on telecoms networks (including terrestrial and submarine fibreoptic networks, as well as data centres).
It is clear that without the telecoms infrastructure that supports a virtual existence, businesses, economies and societies around the world would not have managed to continue to operate and function to the extent that they have.
As the world’s appreciation of the importance of telecoms infrastructure to the global economy and our way of life grows, this article explores:
- How the telecoms industry has responded to the challenges brought about by COVID-19.
- Whether the increased importance of telecoms infrastructure is likely to lead to any uptick in investment
behaviour in the short and long term.
Impact of COVID-19 on telecoms networks
Generally, telecoms networks around the world have shown themselves to be resilient and able to cope with the increase in demand during the COVID-19 crisis. Data consumption has increased dramatically due to lockdown restrictions, in particular from a massively increased amount of video conferencing, as employees work from home and students rely on online e-learning following the closure of education institutions. However, most network operators maintain a buffer of additional “surge” capacity in the normal course of their operations to deal with peak demands, and in most cases it seems that even the current level of increased usage is still below this planned peak.
We look at the main types of telecoms infrastructure and how they have coped.
In the UK, mobile networks have been largely resilient. In a brief update on the impact of COVID-19, Three UK reported a 12% increase in 4G and 5G usage and an 8% increase in call volume in March 2020. Three UK also noted that the impact of COVID-19 on mobile usage was smaller than its effect on fixed lines, due to the tendency for smart phones to utilise home networks (such as Wi-Fi calling) (see ISPreview: COVID-19: Three UK Reveals Impact of Crisis on Network Traffic (6 May 2020)).
Despite the resilience of mobile networks, figures have also shown a decrease in 4G speeds of approximately 18.3% due to COVID-19 (see Opensignal: Mobile Experience during the COVID-19 pandemic: 4G Download Speed (8 April 2020)). Vodafone has separately noted the need for further spectrum to cover the increases in demand due to COVID-19 (see RCR Wireless News: Vodafone urges London to award more 5G spectrum now due to COVID-19
(6 April 2020)).
One of the more publicised issues facing mobile network operators (MNOs) has been attacks on, and vandalism of, 5G masts, and the harassment of telecoms engineers, due to conspiracy theories linking 5G and coronavirus. Such attacks, in destroying infrastructure, affect mobile service coverage (including 3G and 4G) and may mean those in the relevant coverage areas are unable to obtain a signal. This is a particular concern in relation to contacting emergency services or the NHS. In response to the attacks, Ofcom has published various education pieces, statistics and figures on 5G electromagnetic field measurements, which are aimed at dispelling the myths and incorrect facts about 5G and assuring the public that there are no links between 5G and coronavirus (see Ofcom: Ofcom update on 5G vandalism (7 April 2020)).
Fibre providers have reported increases in the use of data across their networks. For example, BT has noted a 35% to 60% increase in the use of data across its fibre network (see BBC News: Coronavirus: BT has “plenty of capacity” despite Netflix quality cuts (20 March 2020)). Interestingly, the peak use of fibre networks (between 8.00 pm and 10.00 pm) has not increased dramatically. However, increased numbers of people working from home has meant an increased demand on networks during typically non-busy periods.
Ofcom released its “UK Home Broadband Performance” report on 13 May 2020, noting there was some degradation in broadband performance in the second half of March 2020, in particular on average download speeds, upload speeds and network latency. Effects of COVID-19 on average download speeds among broadband providers varied. Some providers’ speeds increased (such as BT), and others decreased (such as Virgin Media which fell by 10%,
and KCOM which fell by 14%, albeit coinciding with the release of a Call of Duty video game update on 10 March 2020) (see Ofcom: UK Home Broadband Performance: The performance of fixed-line broadband delivered to UK residential customers (13 May 2020)).
Many UK operators have noted that their fibre networks are designed to cope with the increased usage demand and have done so during the crisis. However, operators stress the need for continued monitoring and will make changes to capacity as and when needed.
Submarine cables, the backbone of the internet, carry approximately 99% of the world’s international internet, voice and data traffic. Demand for internet capacity has been growing in excess of 40% per year for some time.
The demand for internet capacity (from the increased use of streaming services, downloading content and video chats) has resulted in further increased demand on cable capacity. Despite this, operators of most existing cable routes have plenty of “unlit” capacity, which means they are able to handle increased traffic without too much difficulty, although in the short term at least some may experience supply-chain issues with equipment suppliers. If, for example, they need to purchase additional “line cards” to meet increased demand, there may be a delay between ordering and delivery.
As requirements for data and digital communications increase during the pandemic, so does the demand for data centre services. For example, in March 2020, DE-CIX, one of the world’s largest internet exchanges, saw a 10% rise in data traffic; a 50% increase in video conferencing; and a 25% increase in online and cloud gaming traffic through its exchanges (see Capacity Media: The new normal: is Covid-19 changing the internet? (27 March 2020)).
Most operators have been able to cope with the increased demand due to having spare capacity from existing network planning intended to cover traffic growth (see Data Centre Dynamics: Internet user behavior is changing as people stay home due to Covid-19 (18 March 2020)).
Industry’s response to COVID-19
In response to the increased demand on usage, the industry has proactively introduced several measures to ease the strain on telecoms infrastructure, including more proactive monitoring of traffic and management of congestion.
- The big content providers have adapted throughput of video quality during peak hours to lessen demand on internet bandwidth. Netflix, for example, agreed to reduce traffic in countries around the world for 30 days, including Europe and Australia, by 25% across its entire service by reducing bit rates that determine picture and audio quality (see BBC News: Netflix to cut streaming quality in Europe for 30 days (19 March 2020)).
- In some countries, wholesale service providers of fibre networks have offered internet service providers extra capacity (for a limited time) to cope with the added capacity crunch (such as the National Broadband Network in Australia).
- There have also been marked improvements in network capacity by telecoms providers focused particularly on supporting healthcare services (such as tele-health), education (such as e-learning) and online working.
From a consumer-facing perspective, the government, Ofcom and the telecoms industry have issued a joint statement announcing the commitment of major telecoms companies to several measures designed to protect and assist residential consumers during the pandemic (for example, by offering support to the most vulnerable and to those who find it difficult to pay their bills) (see GOV.UK: Government agrees measures with telecoms companies to support vulnerable consumers through COVID-19 (29 March 2020)).
Regulatory response to COVID-19
There has been some regulatory intervention, to ensure that the industry continues to operate effectively during the
COVID-19 crisis, including:
- Facilitating ongoing maintenance and repairs. In the UK, unlike other elements of the wider construction industry, ongoing repair and maintenance to telecoms networks has continued, as the government has deemed such work to be essential. The UK government has provided guidance, noting
that work to repair and maintain telecommunications networks must be permitted to continue, given the importance of fully operational telecommunications infrastructure to home working, and of ensuring connectivity to emergency services and hospitals (see Department for Digital, Culture, Media and Sport: COVID-19 guidance for telecommunications infrastructure deployment in England (2 April 2020)).
- Ensuring non-discrimination in traffic management measures do not create a problem. Under the “net neutrality” provisions of the Open Access Regulation ((EU) 2015/2120), telecoms providers in the EU are not permitted to place restrictions on an end-user’s ability to access a full range of content and services except if needed to prevent “exceptional or temporary network congestion”. Any such measures must, even then, be transparent, non-discriminatory and proportionate.
Given the increased internet traffic resulting from the COVID-19 crisis, the European Commission and the Body of European Regulators for Electronic Communications (BEREC) issued a joint notice reminding operators of their obligations under the Open Access Regulation, and that any exceptional traffic
management measures should not discriminate between individual content providers (see Joint Statement from the Commission and the Body of European Regulators for Electronic Communications (BEREC) on coping with the increased demand for network connectivity due to the Covid-19 pandemic).
- Education of consumers in relation to managing their connections. Ofcom has provided consumer-facing advice on ways to manage connections in the home, to ensure consumers have ongoing connectivity during the crisis (see Ofcom: Stay Connected during the coronavirus (24 March 2020)).
- Guidance and planning for the industry during and post-COVID-19. Ofcom has responded to the COVID crisis in several ways:
- ensuring its “Plan of Work for 2020/21” includes a focus on strategic issues which will support people and businesses affected by the pandemic, including better broadband and mobile, enabling strong and secure networks, and fairness for customers (although these were already strategic priorities for Ofcom before the crisis) (see Ofcom: Ofcom’s Plan of Work 2020/21 (30 April 2020));
- updating its approach to regulation by suspending deadlines on ongoing consultations and delaying the launch of new consultations so that the industry can focus its time and effort on business-critical matters. This could negatively impact the progress of regulatory initiatives, particularly the implementation of the European Electronic Communications Code (EECC) regulation. Ofcom has recently announced it would seek to extend implementation deadlines to ensure service providers have enough time to make necessary changes to their systems and therefore comply with the new rules, which may otherwise be difficult to achieve during the COVID-19 pandemic (see Ofcom: Consultation: Fair treatment and easier switching for broadband and mobile customers: Proposals to implement the new European Electronic Communications Code); and
- promising to impose swift decisions regarding broadcasting breaches, with a particular focus on preventing the spread of 5G misinformation to minimise the impact of conspiracy theories.
- Review of short and long term impact. The Department of Digital, Culture, Media and Sport Select Committee has launched an inquiry to consider the short and long term impact of COVID-19 on industries within its remit, including the telecoms industry (see Parliament: Impact of COVID-19 on DCMS sectors).
Impact of COVID-19 on investment behaviour in the short term
Although there have been increases in demand for telecoms services and infrastructure, in the short term, there is, we think, unlikely to be much change to existing investment behaviour other than to cement the existing trend of increasing appetite from investors for digital infrastructure, of which telecoms is the driving force. As shown above, many of the telecommunications networks have shown resilience in the face of COVID-19 and have enough capacity to serve customers and cover the boost in the use of their networks experienced. Further, despite the initial peak in internet usage across Europe, local regulators have seen a stabilisation in internet traffic, and in some cases a reduction in demand compared to pre-coronavirus levels (see BEREC: Internet traffic in Europe continues to stabilize (30 April 2020)).
Despite the impacts of COVID-19, all four of the UK’s MNOs have confirmed their commitment to the delivery of their previously announced Shared Rural Network project to improve 4G coverage in rural areas. Ofcom has noted that investment in 5G connections will remain of critical importance and is planning that the auction of 700MHZ and 3.6-3.8GHZ radio spectrum should take place shortly. Ofcom has stated that in the light of COVID-19 the auction
remains a priority but may be delayed because, for example, it is now more difficult to continue work to clear the 700 MHz spectrum.
Despite the uptick in use, in our view, there are unlikely to be any short term changes to investment behaviour in relation to fibre. In particular, there was already a healthy amount of investment in fibre rollouts in the UK taking place and, indeed, the deal activity shows no sign of slowing down. This is true both in relation to secondary market M&A activity but also with regard to fresh rollouts, particularly in respect of fibre-to-the-premises (FTTP) projects where an increasing number of operators, backed by large-scale investor cash, seek to sew up large amounts of market shares in targeted regions, especially around cities. This investment was already expected to increase because of various government schemes to support investment. One of these is a £5 billion commitment to support the rollout of full fibre, which was announced in the UK government’s 2020/2021 budget (just as the COVID-19 lockdown was
starting). This funding could help the development of projects in those areas (such as rural locations) which might otherwise be less economically viable for pure private sector ventures. However, details of how it will be allocated are yet to be provided.
The submarine cable industry has been going through a period of significant investment for some years now and we have not so far seen any reason to think this will not continue because of the impact of COVID-19. In fact, our clients are reporting rapid increases in demand for increased international connectivity, though it is not yet clear whether this represents advance orders for capacity that would have been ordered in due course anyway, or whether this
represents genuine new (and lasting) demand. We see several planned projects continuing much as they were before the pandemic. These are often led by one of the major internet players (in particular, Google, Facebook, Microsoft and, to a lesser extent, Amazon). We think this will continue and these companies seem likely to thrive in the new environment.
With investors increasingly viewing this asset class as the gateway to investing in digital infrastructure, given its similarities with more traditional “bricks and mortar” infrastructure, 2020 was already looking to be a good year for data centre M&A activity, as expanding use of cloud services and trends towards outsourcing fuelled the need for data centre services. COVID-19 has been noted to be having a “mildly positive” impact on the cloud infrastructure services
market (see Synergy Research Group: After Four Months the Value of 2020 Data Center M&A Deals Already Passes 2019 Total (23 April 2020)).
There will likely be short term disruptions to existing projects, development of brownfield data centre sites and network rollouts (including rollouts of new fibreoptic and 5G networks and infrastructure) due to lockdowns, construction industry restrictions (particularly around social distancing) and supply chain issues. However, it is expected that telecoms will recover quite quickly.
Investment in telecoms infrastructure beyond COVID-19
It is unclear whether the effects noted above are short term effects, and whether the patterns of behaviour, data consumption, and wider societal trends around travel, transport and ways of working will return to “normal” once the crisis is over (see DLA Piper: Infrastructure in a post-COVID-19 world, 28 April 2020). However, COVID-19 does have the potential to create an environment where telecoms industry investment is encouraged because of increased
demand, meaning that use cases are more immediate, and because there is greater likelihood of government intervention in stimulating investment in the industry. This may manifest itself in the following ways:
- Acceleration of digital transformation. Recognising the need to deal with the impacts from any future pandemics, COVID-19 may encourage industries to move towards digital transformation (that is, cloud enablement, automated solutions and virtualisation) far quicker than they normally would, to ensure
resilience of their businesses. Analysys Mason has noted that the COVID-19 pandemic is likely to “amplify the value of cloud-enabled automated solutions” (see Analysys Mason: COVID-19 will only have short-term impacts on telecoms software and services vendors (4 May 2020)). From a consumer perspective, COVID-19 may have the effect of pushing consumers along the adoption curve of various use cases for telecoms network connectivity. For example, the quick adoption of video conferencing for non-work related uses may lead to more ready adoption of med-tech, tele-health and online learning.Such an increase in demand reduces some of the risk involved in investment in telecoms infrastructure, which usually involves a high degree of market risk because of the need to build out infrastructure before having any assured customer demand. Before the pandemic, we were already seeing increased amounts of institutional and infrastructure investor cash flowing into the industry with those investors’ increasing familiarity and sophistication in this space allowing them to accept these market risks. The increase in demand may help to shore up the business case for investment into the industry and expand the pool of active investors and lenders.
- Deals for added capacity. As businesses go digital, and more platforms dependent on telecoms infrastructure are adopted, there may be a greater demand globally for fibreoptic access networks and the infrastructure that supports those networks (data centres and submarine cables) as well as for capacity in those networks. This might also spark a demand for innovation in the manner in which network capacity is sold. For instance, in the fibre network market, rather than traditional dark fibre deals, we may see deals where the owner of a fibre network sells or leases spectral bandwidth on an identified fibre along the network, something which is starting to become accepted in the submarine cable market but has not yet been
seen in terrestrial infrastructure.
- Urban and rural digital divide. It is widely thought that a lack of private investment in fibre in rural areas is creating a digital divide between the urban and rural areas of the UK, where urban areas have generally good fibre coverage, but rural areas are seen as being left behind. If the ways of working we have become adjusted to during lockdown (for example, working from home, fewer in-person meetings and more reliance on video conferencing) persist or result in permanent change, or if the current lockdown or social distancing measures extend into the longer term, it is likely that this digital divide will be more strongly felt as we place ever greater reliance on digital solutions in our daily lives.
The UK government has already committed itself to securing gigabit capable broadband to every home in the UK by the end of 2025, including committing £5 billion in the 2020-2021 budget to help those in the hardest-to-reach 20% of UK premises. It is likely that COVID-19 may accelerate the use of such funding and
development of programmes to support that funding being used. Such government subsidies may, therefore, make it viable for operators (and the investors that back them) to develop more projects in rural areas. It may also generate interest in other technologies such as 5G, satellite and fixed wireless technologies to bridge this digital divide (the latter two of which have already been used for this purpose).