Regulation is a key consideration for those working with and investing in the Telecom, Media and Technology (TMT) sector, according to research by business advisory firm FTI Consulting. Based on a survey of 143 senior executives and advisors working within the TMT sector, the research identifi es a range of insights that will be of interest to regulators, corporates and advisers alike.
On 6th May the European Commission will publish its long awaited Digital single Market strategy aimed at breaking down what it sees as barriers blocking “the free fl ow of online services and entertainment across national borders”. It adds: “Creating a connected digital single market is one of the ten priorities from the President-elect Jean-Claude Juncker. Its completion could generate up to EUR 250 billion of additional growth in Europe in the course of the mandate of the new Commission (2014-2019).”
Regulatory approval of mergers within the sector is a focal point of this balancing of competition and investment. “Paying careful attention to the ‘mood music’ coming from the European Commission and other national regulators is more important than ever,” says hugh kelly, Managing Director, Economic and Financial Consulting at FTI Consulting.
Predictability is key
Unpredictable regulation, or the possibility of retrospective action taken by regulators only after mergers and other developments are finalised, is clearly of concern to respondents to our survey. Asked about the investment criteria that they regard as being important when choosing a location or organisation for investment/expansion, a “stable, regulatory and political environment” is the second most important factor, cited by 51% of respondents. This is beaten only by “market accessibility, size and growth prospects,” at 63%.
Overwhelmingly those who work both in and with the TMT sector believe that regulators tend to be behind the curve, reacting to events rather than shaping them. Nearly two thirds (62%) believe that regulators are “aware of issues but have a ‘wait and see’ approach”, whilst according to nearly a third (32%) regulators “are aware of issues, and [are] starting to take steps to address them.”
“Our research suggests that, although those working in the TMT sector and their advisors certainly don’t want to see excessive or intrusive regulation, they would find it useful for the regulators to be more transparent as to their frameworks for determining what may or may not be acceptable to them. There is also a clear incentive for investors to engage more closely with the regulatory community, and to understand the objectives, frameworks and remedies that may apply to a given transaction,” says Neil Clements, Managing Director, Economic and Financial Consulting at FTI Consulting.
Balancing regulation and incentives to invest
Regulatory scrutiny is considered by 50% of those asked to be the principle barrier to increased M&A and investment in the TMT sector. This is considerably ahead of the second factor, a lack of suitable targets, which is cited by 37%. In a sector where investment in infrastructure is essential for growth and 45% of respondents think regulation has meant that firms in general are struggling to be viable, it’s not surprising policy makers have started to ask if something needs to change.
“Of course”, comments Alberto Carpani, Director, Economic and Financial Consulting at FTI Consulting “we should not be surprised that the majority of respondents believe that regulation has such a significant impact on profits. After all, the pricing, licensing, and merger decisions fundamentally determine the level of competition and prices in many markets. Profits for some will be increased by more regulation, for
others by less regulation.”
As the regulated telecoms markets converge with less regulated media and technology environments, the prevailing frameworks for regulated telecoms markets may be insufficiently flexible to adapt. “It should be concerning for policy makers that the regulatory environment is exerting such downward pressure on M&A activity and investment in the sector,” says Hugh Kelly. “Whilst regulation needs to protect consumers and ensure proper competition, those aims must be balanced with encouraging the investment and innovation that is needed to drive the TMT sector forward.”
The effect of regulation on investment
Regulation has had a clear impact on overall TMT investment decisions with more than three quarters of respondents (78%) citing that it is either a determining factor or one of the factors affecting the confirmation of a deal. Regulation was “the determining factor,” for 14% and “one of the factors,” for 64%. Just 1 in 10 dismissed regulation as not being a factor at all in this consideration.
“Where mergers are approved there will be a focus on remedies to address any competition concerns such as spectrum divestments and support for mobile virtual network operators,” says Hugh Kelly. Those managing M&A in the TMT sector will need to consider the impact of potential remedies that the authorities may impose to secure merger approval. In a sector with a relatively high level of customer churn, firms will continue the drive for increased loyalty and tie-in, especially by investing in quad play offerings (mobile, fixed telephony, internet and TV). However, such barriers to customer switching could well encourage the regulator to act in defence of consumer choice as regulators have already done in sectors such as banks and utilities.
One particular indication that increasing complexity of regulation is seen as a challenge to investment and growth is the fact that when asked: “Where do you see opportunity for TMT expansion for organisations like yours or your clients (whether you presently operate there or not)?” perhaps surprisingly, Africa, a territory characterised by the absence of consistent regulatory frameworks, came second alongside Asia Pacific, with both scoring 38%.
Africa is recognised as being a vast market with huge potential. However, this is far from an homogenous market, and it is evolving in different ways to the European experience. The relative roles of fixed and mobile infrastructure are very different to Europe, and African operators are leading the way in innovating to engage with customers, mobile banking being a clear example. Operators and their investors are weighing up the potential for healthy returns and new opportunities in this nascent market against the risks inherent in a regulatory environment that is still developing. As this environment continues to evolve, the scope and impact of regulation will vary from country to country, and the absence of common frameworks inevitably adds uncertainty as to the outcome of intervention by regulatory and competition authorities. “Investors assuming a “one size fits all” approach to managing regulation in Africa will be disappointed,” concludes Neil Clements.
The debate on net neutrality came to the fore recently when the US Federal Communications Commission (FCC) approved rules changing how internet services are regulated, with broadband internet (fixed and mobile) moving from the lightly regulated “information services” classification to a more heavily regulated “telecommunications services”.
“In essence, this will allow the FCC to consider restrictions on how prioritisation of content is applied,” says Marzena Rembowski, Director, Strategic Communications at FTI Consulting. “The United States has taken an aggressive stance in the net neutrality debate, while in the European Union the debate is still going strong with no clear outcome in sight. Member States in the European Council have taken a more lenient approach, allowing for providers of internet access different traffic management measures, thus going in a very different direction than the European Parliament who, in April 2014, voted strongly in favour of clear net neutrality rules. These different positions set the way for very difficult political negotiations in the coming months.”
This regulatory turmoil is clearly of concern for the TMT industry, as can be seen in the research, with nearly half (45%) of those working in TMT saying that net neutrality is “important – regulators should be putting in place measures to prevent operators from discriminating between different types of internet content”.
“Interestingly, our research shows that this is clearly a concern that is more important for those working in the TMT sector compared with those working with it,” says Marzena Rembowski. “For the latter group, less than a third (30%) thought that net neutrality was important and that regulators should be putting in place measures to prevent operators from discriminating between different types of internet content, while 58% thought that it was not important at the moment but that regulators should be aware of it. The uncertainty of how net neutrality will be regulated in the EU and whether the new US rules will be legally challenged is clearly going to impact the industry this year.”
Recent announcements from Ofcom to undertake a strategic review of telecoms markets and the European Commission’s single market initiative suggest that major
changes in the way the TMT sector is regulated may be on the way. Inevitably there will be winners and losers in the process and the current uncertainty of how the regulators will rebalance the competing priorities of competition and investment is perhaps the key reason why those working in the TMT sector regard regulation as the most important issue facing the industry today.
In conjunction with TMT Finance, FTI Consulting conducted online research from 25th Feb to 4th Mar 2015 with n=143 respondents involved in the TMT sector.
These respondents were broken down into the following categories: ‘Working in the TMT sector’ (n=60 respondents): Fixed Telco, Mobile Telco, Content Provider, Technology Provider / vendor, Other Media Organisation; ‘Working with TMT’ (n=74 respondents): Consultants / Advisors, Bank, legal Firm, Private Capital & the remainder (n= 9 respondents): Regulator & Other.
The research included 20 questions. Further details of the results and methodology can be obtained by emailing Dan.Healy@fticonsulting.com