Cloud Services

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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kq4ym 7/11/2016 | 9:21:31 AM
Re: Backwaters As "it seems likely that jobs and investment will drain away from the UK economy," one wonders how such a possible fiasco could have happened. But, then again, folks are wondering the same about our own political circuses going on until November or maybe later in the U.S. But, who knows what the future may see no matter which way voters express their hopes.
inkstainedwretch 6/29/2016 | 6:38:24 PM
Re: Backwaters I've no standing to interpret Brexit voters, but here's the thing about Trump voters: for decades, they've been voting for conservative politicians who have been absolutely clear about their intent to follow trickle-down and free-trade economic policies. These voters were told explicitly over and over again through the last 35 years that trickle-down and free-trade would result in a massive redistribution of wealth upwards and the likelihood that the country would lose manufacturing jobs.

And now these very same people are angry that there has been a massive restribution of wealth upwards and that they've lost their jobs?

It might be because they lack any sense of responsibility, and it's so much easier to blame a scapegoat. It might be because they lack the acuity to understand what they've done. I can tell you for a fact that part of it is because they have a knee-jerk contempt for people who don't agree with them. These are people who are likely to be helped by exactly what you propose -- higher minimum wage and earned income tax credit -- but because those are things "liberals" are proposing, Trump voters will oppose those measures with a nearly religious fervor. Really, these people should be Sanders voters, but they'd never vote for a Jewish socialist. ("Social Democrat" doesn't mean anything to them, so don't even bother.)

Our only hope is that there are more Americans afraid of making a feckless, bumbling buffoon President than there are Americans throwing tantrums.

--Brian Santo

TV Monitor 6/29/2016 | 4:21:41 PM
Re: Backwaters inksteinedwretch

Brexit voters are like Trump voters, in that they are expressing their frustration against system through votes. English working class fill they are left out either way, and the best thing they could do for themselves is to drive out immigrants competing for low-wage jobs. They have nothing to lose, so why not just torch everything and dance around the fire drunk all night. Trump voters are the same, they feel they are left out and are blaming their misery on immigrants and free trade agreements.

What the US politicians must learn from the Brexit disaster is that they must not allow income inequality to grow any further, and take steps to boost income of working class, via higher minimmum wage and earned income tax credit.
inkstainedwretch 6/29/2016 | 3:02:08 PM
Backwaters I cannot see how choosing to relinquish political and economic clout will help anyone in England in any substantive way.

If Scotland and perhaps Ireland find a path to stay in the EU, I wonder if it's possible that they might end up gaining some of that influence, especially if they become England's conduit into the EU.

England is in little danger of becoming a failed state, and in the long run will do okay, but if that's the bright side, we might need to refine the definition of "bright."

-- Brian Santo
[email protected] 6/29/2016 | 1:09:28 PM
Re: Research Yeah, great point.... it just gets uglier by the minute.
mendyk 6/29/2016 | 12:58:50 PM
Re: Research It will be interesting to see exactly how these types of relationships change. Despite all the current panic and angry reaction, it's hard to imagine a total separation. There's also a decent chance that Brexit ends up more a symbolic move than anything else. Call me an optimist. Go ahead. I dare you.
Duh! 6/29/2016 | 11:42:00 AM
Research One more downside for Telecom: UK participation in EU Research projects will have to be unwound.  A lot of them have merit, and UK industry and academia plays a key role in many.  While some of them have non-EU private sector participants, it's hard to imagine that UK researchers will have the same amount of impact. To say nothing of loss of funding.  What a shame.
mendyk 6/29/2016 | 10:20:18 AM
Re: The possible upside If we want AI to be truly useful, we will focus all energies on creating AI-based government. We'll end up there eventually, anyway. As far as knowing what governmental and quasi-governmental agencies do, the depth of ignorance is immeasurable.
brooks7 6/29/2016 | 10:14:50 AM
The possible upside  

Here in the US, over 98% of officials are re-elected.  When I get a ballot in November, I will be asked to vote for over a dozen officials and a handful of propositions.  Most of the local officials never even make it on to my radar screen.  So, I vote against all the incunbents.  Since I have never even heard of them, they have done nothing that makes my life better.  I think that is the standard we should hold our government and government officials at all times.

That is the way I look at the EU.  If people had no idea what it did or why it existed, then that is a commentary on the EU.  It had no real impact on people's lives in any way that it can articulate to people.

Want a terrible example of how to tell people of your impact (and this is a terrible way)?  The TV show COPS was started by the Sherriff of Broward County Florida - Nick Navarro.  If you go back to the first couple of seasons, you will find it is Broward County Sherriff Deputies on every episode.  The reason that Nick Navarro bought into the show?  Publicity for the work that his department did.  At least I knew his name and has some idea on what he did.  

I am hopeful that we get out of this election cycle the notion that being a politician is not a guaranteed job for life.  That the officials are there to make our life better and they probably need to tell us what they do.  Until lots of them get voted out, that will not happen.


mendyk 6/29/2016 | 9:15:55 AM
Re: A personal perspective from a Brit For those who wondered what the world was like in the 1930s, we're now getting a little taste of it. Let's hope it doesn't develop into a full-blown appetite.
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