Telecommunications, Media & Technology Key Themes For 2022

Fitch Solutions / Telecommunications / Global / Fri 03 Dec, 2021

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Key View 

  • The TMT sector's key themes for 2022 are closely interlinked and interdependent, but the main investment focus will be on digital infrastructures (fibre, 4G/5G, data centres etc), as these are the principal enablers of digital transformation.
  • These assets are also direct and indirect contributors to climate change, while technology can offer up some solutions to climate change mitigation, so we expect ESG issues to be highlighted.
  • The technology sector ecosystem is also heavily dependent on resources drawn from diverging geopolitical power bases, and so such tensions are also expected to intensify in the year ahead.
  • Finally, local, regional and global ideological differences will lead to increased cyber-risks, so we expect to see a renewed focus on cybersecurity in 2022.

Environmental, Social & Governance 

Technology companies have been active in the ESG space for some time now, but we note that the Covid-19 pandemic’s impact on the demand for data and its acceleration of the global shift to Industry 4.0 has highlighted ESG issues, adding urgency to sector stakeholders’ efforts.

Telecommunications operators hold a unique position given their role as key enablers of disruptive technologies that provide solutions to ESG concerns, as well as their proximity to the end-user. As technology and ESG-targeting use cases have developed, telcos have realised the potential opportunities that their unique position affords them. As a result, we will see operators allocate a greater volume of resources towards ESG as they attempt to heighten their credentials with their customer bases, whilst also tapping new value-added verticals providing tech-enabled services to other industries.

Until now, much of the ESG effort from telcos has concentrated on the Environmental aspect of ESG and we expect this to continue into 2022. A telco’s relationship with this pillar is multi-faceted: on the one hand, operators are critical enablers of technologies that are being employed to mitigate climate change. On the other, the industry is a major contributor to CO2 emissions – according to the European Telecommunications Network Operators Association (ETNO), the sector contributed 2.6% of the total global CO2 emissions in 2020.

The pandemic has created a monumental surge in the demand for data and digital infrastructure is using more energy than ever before. At Fitch Solutions, we do not expect the heightened data demand to ease and therefore we believe sustainability will become a top priority in the future strategic agendas of telcos, particularly over the near term as the wider climate discussions remain relevant in the wake of COP26. Most telecoms operators are aligned with the GSM Association’s (GSMA) goal of overall sector carbon net neutrality by 2050, though some operators – most prominently STC and Telenor – have delineated earlier goals to demonstrate their commitment to environmentalism. 

Greater Level Of Tangible Commitment From Telcos Over Medium-Term

Operators' Carbon Net Neutrality Goals

Note:*Telenor goal of net neutrality in Nordic Operations. Source: Operators, GSMA, Fitch Solutions

The Covid-19 pandemic has also highlighted social inequalities, thrusting the ‘S’ in ESG under the spotlight and spurring telecoms operators – as key enablers of disruptive technologies – to allocate additional resources to develop more relevant and impactful solutions. Stay-at-home orders stressed the digital divide between populations and the lasting impact on the demand for data has encouraged operators to ramp up their spending on connectivity infrastructure.

Moreover, the pandemic has also underlined disparities in the global access to healthcare. As a result, we anticipate greater operator activity in digital healthcare and related solutions over 2022 as they increasingly attempt to carve out a space in the industry, chiefly in regions where access to healthcare is deficient – most notably in Africa and Asia.

Lower access to traditional healthcare services will drive uptake of digital health services, particularly in rural areas where healthcare facilities are more sparsely located. Given the fact that we do not expect the urban-rural divide in regions like Sub-Saharan Africa to alter dramatically out to 2040, telemedicine services will remain relevant over the long-term thus presenting a lasting lucrative opportunity for operators.

Opportunities For Tech-Players In Regions With Low Access To Healthcare

UN Global UHC Index Scores, 2017

Note: UHC = Universal Healthcare Coverage. Scores out of 100: higher score = better healthcare availability. Source: UN Universal Health Coverage Report 2017, Fitch Solutions

Lastly, we anticipate a similar trend in the mobile financial services (MFS) space. Restrictions on movement accelerated the shift to online banking models, on which operators are keen to capitalise. In 2021 we observed a flurry of M&A activity among operators attempting to establish their own mobile banking products and we believe this will continue into 2022, partly in response to the emergence of online-only 'neobanks'. Furthermore, in order to successfully build on the growing demand for telemedicine and fintech verticals, operators will be required to augment their cybersecurity services in order to protect the sensitive data that these verticals involve.

As the least-discussed element of ESG, ‘Governance’ is harder to quantify and measures being taken are less-sector specific. It is likely we will continue to see operators focus on managerial board diversity and corruption, though we suspect that greater concentration will be afforded to data security given the burgeoning volume of data that telcos handle.

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Digital Infrastructure 

Over 2022, digital infrastructure will continue to see a wealth of activity and attention from telcos looking to derive value from their assets, as well as infrastructure owner-operators attempting to manage multiple layers of the digital ‘stack’: towers, fibre and data centres.

Telecoms companies are opting to divest infrastructure assets which they see as no longer holding sufficient returns on investment. Telecoms towers have been the primary divestment choice among operators, though we have also observed some unloading of fibre assets in more developed markets. Moreover, we have observed increasing activity among telcos and infrastructure owner-operators in the data centre space over 2021 and we believe that this momentum will continue over 2022, with more operators seeking to acquire cloud computing capability as the global demand for data shows no signs of abating.

As the world accelerates to Industry 4.0, telcos are required to explore advanced verticals like the Internet of Things (IoT), cloud computing and MFS in order to remain relevant. Traditional mobile offerings no longer provide sufficient revenue to sustain long-term growth or the capital to explore these disruptive new verticals. As a result, telcos are opting to divest their less advanced or more capital-intensive digital infrastructure assets to provide an instant injection of capital to fund new ventures.

For most operators, this has involved offloading their tower assets. Technological development has resulted in broadly similar coverage and quality between operators and, as such, towers no longer provide sufficient returns on investment. The same considerations are behind the growing trend of operators opting to offload their fibre assets and we anticipate that this will continue over the medium term, mostly in more developed markets where intensifying demand for fibre outside key metropolitan areas now outstrips operators’ ability to deliver it profitably.

For example, Spanish incumbent Telefonica is reportedly considering selling a minority stake in its domestic fibre network whilst eyeing opportunities in advanced technology. Spain thrives as one of the region’s most fibre-penetrated markets with Telefonica owning the country’s largest last-mile fibre-to-the-home (FTTH) network, leaving few locations left to which it can profitably extend the service. By hiving-off its fibre network, Telefonica would benefit from a greater valuation of the asset whilst retaining a degree of strategic control. In a similar way to tower-owners leasing vertical space, a separate fibre network entity can offer wholesale access, boosting network occupancy and  financial returns.

Towercos Take Advantage Of Growing Cloud Demand

Global Cloud Computing Market Size Forecasts, USDmn (2019-2024)

f = Fitch Solutions forecast. Fitch Solutions

The capital released from asset sales will continue to be used by operators to fund core 5G deployments and offer advanced services to enterprises where we believe 5G will make its greatest impact. As a result, upgrading existing cell sites for 5G – or adding new ones – is a key priority for all operators. 5G networks in their current state (largely limited to consumer mobile use) are not yet providing sufficient returns on investment, challenging cash-strapped operators to sustain a robust level of deployment: another factor adding impetus to asset sales.

In an attempt to achieve early monetisation of their nascent 5G networks operators are exploring private 5G standalone (SA) networks where infrastructure is purpose-built for specific use cases. We have observed a growing number of partnerships between telcos and large companies such as BMW and Lufthansa collaborating on SA 5G networks for industrial use cases and we expect this to persist over 2022. In early December 2021, Amazon Web Services announced a private 5G managed services for its cloud partners and clients.

The IoT is another area of focus for operators looking to achieve competitive edge and valued-added services utilising the money released from asset sales. In addition, some IoT use cases serve a telco’s wider strategy: smart home utility devices are a highly synergistic vertical given an operator’s already established presence in the home, but they also effectively display a growing level of commitment to ESG.

For digital infrastructure owner-operators like tower companies (towercos), it is no longer enough to specialise in just one – or even two – layers of the digital stack. As a result, we believe infrastructure companies will actively pursue cross-layer mergers and acquisitions and we are likely to see an uptick of these types of deal over the medium-term. Recent examples include IHS Towers’ acquisition of TIM Brasil’s fibreco entity and American Tower’s offer to buy data centre operator CoreSite Realty Corporation for USD10.1bn.

Under-resourced emerging markets offer the most affordable opportunities for owner-operators to penetrate multiple layers of the digital stack and we suspect there will be a wealth of activity in these markets over the medium term. However, many emerging markets face unique downside risks to the digital infrastructure business, a key one being access to power. As a result, we will also observe a growing interest in power-as-a-service from owner-operators, as well as greater allocation of resources in pursuit of hybrid solutions using renewable energy, which also serves ESG goals.

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Geopolitical tensions will continue to play a major role in the Technology industry during 2022, likely extending out to the medium term (2024/25). We expect US-China relations to deteriorate in 2022 ahead of the 20th Communist Party of China Congress and US mid-term elections in Q422. Tensions between the two economies will also filter down to within-coalition issues.

As a result of strained cross-straits relations, we expect the semiconductor industry to experience heightened political risks, in addition to the pressure it is already experiencing as a result of global supply chain disruptions during 2020-2021. Demand for semiconductors is set to increase on the back of digital infrastructure and device proliferation (5G being a key driver) as well as high-performance-computing, given the global increase in digital infrastructure investment.

Our core view at Fitch Solutions is that China and Taiwan will avoid full-scale conflict over the next five years, though tensions have already spurred reaction from manufacturers in Taiwan. In Q421, Taiwan Semiconductor Manufacturing Company (TSMC) announced it will set up a fabrication plant in Japan, committing USD7bn to the project. We believe that the company is not only extending capacity outside Taiwan due to operational challenges such as water shortages or limited capacity; increased risks of conflict and trade frictions in Taiwan have likely motivated the company’s decision to establish new operations in geographies where it can have a manageable level of long-term certainty.

In 2022, we will also see the beginning of long-term trends in the semiconductor industry.

In the US, the Creating Helpful Incentives to Produce Semiconductors for America (CHIPS) Act was passed by the Senate in June 2021, which includes USD52bn funding for domestic semiconductor production and R&D, with the aim to gain back some of the production capacity ceded to Asia over the last three decades. At the time of writing, the bill is stalled in the House of Representatives due to lawmaker disagreements on the bill’s formulation. We expect funding will be approved in 2022 amid continued bottlenecks in the semiconductor value chain.

In the EU, the European Commission kickstarted the Digital Decade strategy in Q121, highlighting the need to double the EU’s share in global semiconductor production, and we expect a European Chips Act to be enacted in 2022, with similar motivations to that of the US’ CHIPS Act.

China’s 14th Year Plan places the spotlight on favouring investment in domestic research, design and manufacturing of semiconductors to avoid excessive dependence on foreign firms. The focus of China’s efforts will be channelled towards national champion Semiconductor Manufacturing International Corporation (SMIC), though we expect that it will still fall behind other leading players such as TSMC or Samsung Electronics, which currently produce the more advanced 5nm chips favoured by device manufacturers requiring high performance, low latency and low power consumption.

TSMC Dominance Highlights Overdependence Risks

Semiconductor Foundry Market Shares, % (2020)

Source: TrendForce, Fitch Solutions

While semiconductors will be a key issue in terms of hardware self-sufficiency, we expect continued geopolitical implications of digital sovereignty over 2022, which will also impact the software market. National and regional strategies of digital development spurred by the rapid digitisation spurred by the Covid-19 pandemic will be a key factor for digital markets. For instance, we are observing increasing oversight on data privacy and the use of consumer data that arises from services, though we expect that marked regional differences in the regulation of data sovereignty will have geopolitical consequences.

In May 2021, the US Federal Trade Commission (FTC) issued new guidance on the use of artificial intelligence (AI) for transparency and fairness purposes. The regulatory body has announced it will take a proactive stance against discrimination and bias that can arise from algorithms, building upon previous guidance issued in 2020 and 2016.

Meanwhile, the EU issued in April 2021 a draft on AI legislation, which will be complementary to existing regulation such as the GDPR. The proposed law proposes a multi-tiered approach to different levels of risk, and expects to impose maximum fines of 6% of annual turnover, larger than the 4% stipulated by GDPR. In addition, the legislation will have extraterritorial reach; any AI system that gathers input and provides output from within the EU will be subject to it. We also expect the EU will progress to enact the Digital Services Act, as well as the Digital Markets Act in 2022. The new legislation aims to tackle monopolistic behaviour from large tech players – mostly US-based - and is expected to create friction with the US government.

The EU and the US set up the Technology Council in 2021, a platform that aims to promote transatlantic digital trade and cooperation in regulation. We believe that the different approaches to technology regulation, with the US having a lax approach that favours its national champions on one side, and the EU aiming to lead on the regulatory front, will add frictions to their cooperative efforts, further splitting the technology industry. 

Finally, we expect that China will continue its crackdown on technologies in 2022, as the country advances its technological sovereignty plans. In November 2021, the country’s Data Security Law came into effect, which aims to limit the amount of data that providers can collect from customers. The new regulation aims to set rules for how companies collect, store and use customer data, and will have special oversight over ‘critical ‘industries, such as financial services, transportation and energy. Similar to the EU’s ambitions, the legislation applies to foreign companies that operate in China, which we expect to add another layer of regulatory complexity to technology players.

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Growing internet access and the digitisation of the global economy has inevitably increased cyber risks exposure across all industries. As such, the rapid shift towards the digital economy has in many instances been lacking a proportionate increase in cybersecurity capabilities, further emphasising the importance of cybersecurity across industries and the public sector. The level of risk across every industry differs, and industries that provide ‘critical’ infrastructure, such as the power or healthcare sectors are those facing the highest costs in the event of a cyber incident. 

From the perspective of players in the Technology industry, the digitalisation of the economy, and hence an increase to cyber risk exposure, will pose both upside and downside risks. Within-industry silos are progressively breaking, as telcos, digital integrators and cloud hyperscalers co-operate and partner to offer a wider suite of services. In addition, telecoms providers are now capitalising on growing appetite for large-scale investment in digital infrastructure, and especially data centres.

Meanwhile, hyperscalers such as Google, Amazon Web Services or Huawei are expanding their geographical footprints to capitalise on growing digitisation in emerging markets. As a result, both ends of the digital ecosystem are increasingly dependent on each other, which means that cyber risks extend down the value chain. As a result, we expect heightened M&A activity within the cybersecurity space arising from Technology players. On the downside, technology providers will face larger operational costs as the need to protect their systems increases; at the same time, we expect in-house capabilities will offer opportunities for these companies, as they will be able to commercialise the very same systems that protect their operations.

The Technology industry inherently makes use of technology across its entire supply chain, both for its internal operations and its services, which makes it particularly vulnerable to cyber-attacks. Hence, technology players are currently at the forefront of cyber risks, being the first line of defence. Looking forward to 2022, we will witness an increased emphasis on cybersecurity capabilities within technology companies, with telecoms operators being a key growth driver in this segment. 

Our Megatrends 2020 survey highlighted two key trends that we expect will be heightened in 2022. First, firms across every industry feel less prepared to deal with cybersecurity issues. As digitalisation spreads across every sector, we believe companies are now more realistic about their cyber risk exposure as their digital-based operations increase. Second, cybersecurity is seen as a major destination for technology investment, being in many cases prioritised over investment in IoT or AI. This will spur investment in cybersecurity services and infrastructure across every industry, with the Technology industry being a major beneficiary.

Rapid Digitalisation Has Increased Cyber Risks Awareness

How Well Is Your Industry Prepared To Deal With Cybersecurity Concerns?

Source: Fitch Solutions Megatrends Surveys

At the macro level, regulation is key to mitigating the exposure to cyber risks, and reporting is of particular importance to learn from previous attacks and adapt both technical and regulatory requirements to emerging threats. In 2021, we witnessed increased governmental oversight over cybersecurity of critical infrastructure, which we expect to continue over 2022. In Q421, the EU parliament adopted NIS2 Directive, which expands the scope of ‘important’ sectors for which stringent cybersecurity requirements apply, including medical device manufacturers, the food industry or waste management providers. We also anticipate the EU’s Cyber Resilience Act to be passed in 2022, which imposes a duty of care to connected device manufacturers to address cyber vulnerabilities. In Q121, President Biden signed the Executive Order on Improving the Nation’s Cybersecurity in Q221, which introduces the compulsory reporting of security breaches.

Cybersecurity will be of particular concern in emerging markets, where the institutional environment and domestic capabilities are significantly less prepared to face sophisticated attacks. For instance, we are observing a large-scale influx of digital infrastructure investments in the African continent, with Google being the latest major company to capitalise on this largely untapped market. Other players, such as Microsoft and Amazon Web Services already operate data centres in larger markets like South Africa. Unless the growing investment momentum in digital infrastructure and services is matched by improved cyber capabilities, we expect emerging markets to experience larger exposure to cyberattacks than their developed counterparts.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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