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Brexit: It's Hard to See an Upside

The UK's decision to quit the European Union has had global reverberations but it's hard to tell exactly how bad the aftershocks will be.

June 29, 2016

6 Min Read
Brexit: It's Hard to See an Upside

Having only just come into common usage in the UK during the past few months, "Brexit" -- the shorthand term referring to the British exit from the European Union -- went viral last Friday once it became clear that the UK adult population had, apparently, decided it didn't want to be part of a regional club any more.

The European Union looks set to have 27 members instead of 28 and, according to some political observers, the UK's decision could be the catalyst for referenda in other EU member states that, if they follow the UK's example, could lead to the disintegration of the EU.

And whatever happens next, once the dust settles and us Brits recover from the shock of the result, the impact is going to be negative. It's hard to find a silver lining. And it could, at worst, be disastrous for the UK's communications and technology sector.

Why? Initially because of the fear, uncertainty and doubt that the result has created. Then, if the UK does begin the formal process of extracting itself from the EU (which it is expected to do), it seems likely that jobs and investment will drain away from the UK economy, a situation that would hurt network and data center operators and the service providers that use them.

The FUD factor
The current challenge facing not just the UK but all of its trading partners (so, the world, basically) is that no one actually knows what's going to happen. And that uncertainty is creating confusion, impacting on investment and leading companies to consider whether being based in the UK, and doing business with UK companies, is in their best interests.

It had an immediate impact on June 24, the first day of business after the referendum vote, when investors took fright and share prices crashed, including those of the UK's leading telcos. (See 'Brexit' Vote Hits BT, Vodafone.)

The impact on business confidence and potential for economic growth is already one that network operators have been thinking about. BT Group plc (NYSE: BT; London: BTA), for example, is planning a more significant investment in fiber-to-the-premises (FTTP) broadband but the timing and level of capex allocation for that plan is now likely to come under greater scrutiny as the impact of Brexit becomes clearer. (See BT's Broadband Chief Preps for 5G With FTTx Plans.)

Likewise, Liberty Global Inc. (Nasdaq: LBTY), the owner of the UK's cable operator Virgin Media Inc. (Nasdaq: VMED), has previously indicated that it would most likely deploy its capital elsewhere rather than in the UK, a consideration that puts a question mark over Virgin Media's £3 billion ($4.02 billion) Project Lightning broadband plan. (See Virgin Media Plots £3B Invasion of BT Turf.)

There are also questions over the ongoing status of London as Europe's leading financial center as a Brexit could impose additional rules and costs on cross-border trading and make it harder for companies to hire staff from other European nations to work in the UK. If financial companies relocate and trading activity shifts to Frankfurt, for example, that would have a negative impact on an operator such as BT and other specialist service providers that count financial institutions and the broader ecosystem amongst their customer base. As a result there could even be a silver lining for Deutsche Telekom AG (NYSE: DT), should trading and activity shift to Frankfurt, as the German communications sector, financial technology startups and economy in general would benefit as the UK's shrinks. (Deutsche Telekom does, however, hold a 12% stake in BT, whose share price closed Tuesday about 18% lower than on June 23, the day before the result of the UK referendum became known.)

What everyone needs right now is some degree of certainty. No one even knows for sure if the UK will implement the withdrawal process -- the UK government has to begin a process as stated under Article 50 of the Lisbon Treaty of 2009 before it can start negotiating with the other 27 member states its exit from EU.

In the meantime, Vodafone Group plc (NYSE: VOD) has told the BBC is contemplating moving its headquarters out of the UK (it is currently located outside London in Newbury), though the operator has made clear it's too early to make a decision either way.

Orange (NYSE: FTE), though, has committed to maintaining some operations in the UK, though it doesn't have anything like the same presence as Vodafone. (See Eurobites: Orange Commits to UK Jobs.)

A new digital divide
Vodafone had already warned, prior to the referendum, that a Brexit would harm the UK's chances of being able to shape the digital future of Europe. "The next big opportunity is in digital. Britain is particularly strong in digital, and it would be a missed opportunity if it tried to sit outside," noted CEO Vittorio Colao in an interview with the BBC.

That observation is shared by Ronan Kelly, CTO for the EMEA & APAC Regions at Adtran Inc. (Nasdaq: ADTN). "The wider ambition of the EU to foster the development of a Gigabit society will continue. I believe Brexit will mean that instead of being part of the EU Gigabit society, the UK will find itself competing with it."

In addition, the UK also now looks like a less attractive location to build a data center. That's because the European Union has a common data transfer and protection policy across all member states (the Data Protection Directive), making it easy, currently, for companies to use UK-based data center facilities and cloud services to do pan-European business. Following a Brexit, however, new rules and conditions would most likely need to be brokered about data storage and transfer, making it more onerous and potentially more expensive for companies to use UK facilities.

It also bodes ill for the UK's technology startup scene, which had been booming in recent years: Investments will most likely go elsewhere and smart young European entrepreneurs will be less likely to set up shop in the UK.

All in all, I believe Brexit is likely to have disastrous consequences for the UK comms and IT sectors and, potentially (once there is some clarity about what will happen and when), it could provide some new business opportunities for others. Those others, though, won't be based in the UK.

One of the claims of the main Brexit flag-wavers was that leaving the EU would give the UK its "independence" again (really... it is beyond satire) and the opportunity to make all of its own laws and decisions. Well, it's clear that the UK has taken a (narrow) majority decision to shoot itself in the foot. To use a very British phrase: what a cock-up.

— Ray Le Maistre, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, Editor-in-Chief, Light Reading

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