Is regulation stifling innovation in the telecoms industry?

Telecoms has long been seen as a vital engine of digital transformation. But as the pace of innovation accelerates in adjacent sectors such as AI, cloud infrastructure, and quantum communications, is telecom regulation keeping up or holding things back?

According to Ofcom’s Communications Market Report 2024, the UK telecoms sector generated £32.8 billion in revenue in 2023, marking a 3.8% year-on-year decline. Retail fixed and mobile services contributed £14 billion and £13.7 billion respectively, with wholesale services accounting for the remaining £5.1 billion. Mobile services now represent 49.4% of total retail revenues, up from 48.4% in 2022, indicating a steady shift towards mobile-first consumption. Meanwhile, full-fibre broadband lines increased by 53% to 5.7 million, overtaking cable lines for the first time. 

Yet for all its scale, the sector faces a fundamental question. Is the regulatory model fit for a market where innovation increasingly takes place outside the traditional boundaries of network operators?

Andy Reid, the standards champion at UK Telecoms Innovation Network (UKTIN), and formerly of BT, believes many of today’s rules, conceived in a different era, are probably no longer aligned with how innovation now happens.

“A lot of the current telecoms regulation may have outlived its course,” he says. “The network operators are not the major players they once were.”

Reid highlights how regulation, particularly in the UK and EU, still targets operators based on assumptions dating back to state monopolies. Meanwhile, the real power in telecoms innovation increasingly lies with hyperscalers and consolidated vendors.

Power shifts

The relationship between the network operator and their customers is weakening. The perception of the end consumer is increasingly that the things they want come from the hyperscalers – the network operator is simply a way of getting there. A choice between, and loyalty to, Android or Apple is often a bigger decision than the choice of network operator.

“Over the last month what proportion of calling from your smartphone was through a hyperscaler app like WhatsApp or FaceTime compared to a conventional call – so who do you think is giving you service?” asks Reid.

At the same time, there has been considerable consolidation in the market that supplies the network operators. “This is now particularly acute in the UK with the removal of Huawei for strategic reasons and leaves Ericsson, especially, in a particularly strong position” he notes.

This vendor consolidation also makes it harder for start-ups and smaller players to find a route to market. Telecoms operators favour turnkey contracts with a large vendor that reduces integration complexity and focuses accountability. That, in turn, creates a bottleneck for innovation.

“No small player can easily get to their prime end customer, the network operator. They need to work through a large vendor who is not always motivated to work with innovative start-ups,” Reid explains.

Telecoms operators are increasingly piggybacking on innovations emerging from the datacentre and hyperscaler ecosystem. Optical components are a striking example. According to Reid, the number of optical transceivers sold to data centres is many times those sold to telecoms operators.

Against this backdrop, the UK government has launched several initiatives to diversify the telecoms supply chain and support innovation. These include the £250 million Open Networks R&D Fund, the Telecoms Technology Missions Fund (£70 million), and targeted funding for projects such as the New Innovators in Communication Networks 2024 competition. UKTIN itself was backed by a £10 million grant to foster telecoms-focused R&D and collaboration.

But Reid questions whether these efforts are enough to overcome the systemic market structure that inhibits small innovators.

“Start-ups often aren’t clear who they’re selling to,” he says. “Even if you have a good technology, the question is whether your target customers have the funds and the willingness to buy from you.”

Even open standards such as the O-RAN initiative face challenges. Reid warns that dominant players often flood standards bodies with resources to influence definitions in their favour.

“They can put in just enough to make sure it’s not really effectively open.”

So what does regulation mean for innovation?

At present, it often means looking backward, reinforcing legacy assumptions about who drives change. But with technologies like quantum communications and AI-based network automation emerging, there is an opportunity to reset that thinking.

“There are more open areas,” Reid says, pointing to AI, optics and network automation. “When quantum comes along, it could be a big opportunity, because you can deploy it as small standalone services without full network integration.”

For regulation to support innovation in telecoms, it needs to shift from primarily protecting competition among operators to enabling access, openness and experimentation across the broader ecosystem. That might mean embracing innovation in regulation itself.

The UK has made some moves in this direction. But as Reid and others suggest, the real test will be whether those moves actually reshape the structure of telecoms innovation and enable a market that embraces innovative ideas, regardless of where they are coming from.