The impact of the pandemic on digital connectivity trends

The importance of mobile networks

Mobile networks have experienced a heavy increase in both voice and data traffic, albeit the rate of increase appears to have slowed since the start of the pandemic. This is due to the enormous increase in individuals now working from home and using online learning, e-commerce and digital health services, but also the surges in streaming applications and gaming services, which require considerably more bandwidth than tools such as video/ voice calling. Content and data consumption profiles have therefore changed too. Looking ahead, the increased appetite for these products and services is likely to encourage the growth of other novel technologies, such as through the expansion of actual and virtual reality (AR / VR) across multiple sectors.

Thankfully, mobile networks around the world have generally been able to cope with this increased demand. We wonder whether governments and regulators might now take a more pro-operator view towards mobile networks following COVID, given they have played such a critical role to support society, businesses and livelihoods. This would clearly be welcome by the industry given prevailing financial and competitive pressures.

Declining revenue for mobile networks

At the same time, it is unclear how much financial benefit mobile network operators will see from their core business as a result of COVID, in particular due to the social and regulatory pressures on operators around zero-rating of applications and on removal of data caps which diminish their ability to benefit from surge pricing.

Additionally, the significant reduction in international travel means lower roaming revenue for mobile network operators.

There has also been a reduction in consumer spending on new, high-end devices (like, for example, 5G handsets).  This reduces revenue for device manufacturers but also mobile network operators, which often utilise new devices as a means through which to lock customers into new contracts. Customer retention perhaps has never been more challenging for the sector.

Accelerated government policy and funding for connectivity infrastructure

Given the increased reliance on digital connectivity as a result of COVID, there will, no doubt, be an increased scrutiny and focus on governments’ digital agendas. Governments are likely to revisit incentives and funding for network rollouts and upgrades. Some are already looking at ways to remove or rebalance impediments to rollout or maintenance – for instance, in relation to planning procedures or access to third party land and infrastructure.

In terms of funding, we expect that governments and regulators will look to the businesses who have been the net winners in the crisis to help support these developments; for example, in the form of greater capex contribution expectations from OTTs. In any case, the improvement of the regulatory environment and incentives for rollout will further strengthen private investor interest in funding telecoms assets in many markets – such assets becoming yet more ‘bankable’ for the likes of infrastructure funds and private equity investors.

We have set out below our predictions on the impact of COVID on the development of some key connectivity infrastructures:

Effects on 5G

The growth and development of 5G risks a slowdown due to:

• the logistical challenges that the effects of the pandemic pose, such as stretched existing cashflows and financing, slow-down in construction and delays through the supply chain. That said, the construction of mobile networks appears to have continued despite this;
• consumer take-up of new devices and services has slowed, with 5G investment possibly being viewed as a more discretionary spend; and
• health-related rumours which have circulated around 5G being linked to COVID-19 which might make operators more cautious about their roll-out of 5G. Whilst such rumours don’t stand up to scrutiny, time will tell if they affect consumer sentiment.

However, given the demand for high-quality connectivity, we expect governments to refocus on stimulating 5G network rollout.

The role of Satellite

The effects of the pandemic on terrestrial connectivity infrastructure potentially strengthens the opportunity for satellite technologies, given that:

• there is an increased demand for satellite-enabled entertainment (in line with other technologies);
• there is an increased use of video calling and conferencing and app consumption which could require more network capacity that could be provided by satellites (particularly in geographies with limited fixed line and mobile penetration); and
• delays to 5G rollout and uptake may make other means of boosting capacity on networks more attractive to operators.

At the same time, the pandemic impact presents some serious challenges to this particular vertical:

• General economic slowdown has led to a shortage of financing for capital intensive satellite projects and financial difficulty for some organisations. Whilst other organisations might not be impacted as seriously themselves, the expected disruptions to supply chains will mean that organisations should consider diversifying these chains and / or factoring in longer lead times than they might otherwise have expected.
• A reduction in international travel (both for business and leisure) and trade wars may well mean that airlines and the international transport sector may no longer be such a lucrative segment for the supply of connectivity solutions.

Fibre

Many countries have invested heavily in fibre. Fibre penetration can vary considerably internationally, so each country has different challenges. However, we expect that there will now generally be increased impetus to develop fibre infrastructure, especially given the bigger demands on broadband as a result of COVID. International fibre connectivity through cross-border cable systems is also likely to attract renewed interest from investors looking at long term stable returns.