Global Summary Telecommunications Mar 2021

MAR 2021

GLOBAL SUMMARY TELECOMMUNICATIONS Week Commencing 15th March

Global Summary Telecommunications | 20210315

Contents Global...... 4 Premium-Centric Markets Show Fastest Post-Covid Recoveries On Telecoms Index...... 4

Africa...... 7 Quick View: E-Services, Tech-Intensive Businesses To Benefit From Botswana Data Centre ...... 7

Europe ...... 9 Quick View: Israel FTTH Market Gains Momentum With Bezeq Launch...... 9

Middle East ...... 11 Quick View: Israel FTTH Market Gains Momentum With Bezeq Launch...... 9 Quick View: Connected Car Project To Boost STC's 4IR Momentum ...... 13

North America ...... 15 Quick View: Rogers-Shaw Merger A Boon For 5G/IoT But Costly For Consumers ...... 15

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THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data included in the report are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research. fitchsolutions.com 3 Global Summary Telecommunications | 20210315

Global Premium-Centric Markets Show Fastest Post-Covid Recoveries On Telecoms Index

Key View

• The average score for the 10 Developed Markets we survey as part of our Risk/Reward Index improved by 0.2 points to 77.2 out of 100. • Fourth-quarter 2020 data had not been reported for all markets at the time the Index was refreshed, meaning that assessments continued to be weighed down by the Covid-19 pandemic on global supply chains and consumer spending attitudes. • All 10 of the markets surveyed were impacted most in the mobile and pay-TV segments, while fixed broadband also took a hit to a certain extent.

Full-year data will likely show an improved outlook as physical retail channels re-opened and new flagship smartphones - such as Apple's first 5G devices - were launched, boosting mobile subscription growth rates. However, highly saturated markets such as Japan and markets where disposable incomes are likely to remain constrained due to high unemployment rates and slower economic recoveries amid third- and fourth-wave Covid-19 breakouts, will not improve to the same degree. It will be interesting, too, to see whether the traditional pay-TV business will rebound, as the loss of sporting coverage during the pandemic forced consumers onto alternative, streaming-based platforms, from which they may not return. This is an issue for all 10 of our Developed Markets, which have a high penetration rate of linear cable and satellite TV services.

The United States has outperformed in this quarter's update, increasing its overall score by 1.2 points to reach 83.5 out of a potential 100 points. The country benefits from 1.1-point improvement in its Country Risks profile, with the transition to a Democrat-led government promising a more balanced approach to domestic and international politics and economic relations after the inward-looking and abrasive approach favoured by the departing Republican regime. The new government does have its work cut out, however, dealing with very high unemployment rates and a still-growing Covid-19 infection rate that the new range of vaccinations will not be able to curb in the short term. There is also little sign, so far, of the new administration easing off on the economic pressure being applied on China, a country that remains at the centre of the global technology supply chain, so further improvements to the Country Risks score are likely to be less pronounced in the coming quarters.

The US also sees a 2.2-point increase to its Industry Rewards score, to 85.9 points, as Q3 and preliminary Q4 data showed a strong resurgence on mobile subscriptions, mostly in the postpaid/contract arena. Some of that growth will have been driven by iPhone upgrades, but we believe many consumers and businesses that had relied on low-cost prepaid plans are now shifting to postpaid given the need for more robust data packages in a work-from-home environment that is unlikely to disappear post-Covid.

Canada is the other outperformer, seeing its overall RRI score improve by 0.7 points to 77.5. There is a 0.7-point increase to its Country Risks score, linked to a marked thawing in its political and economic relations with the US, its closest neighbour and principal trading partner, again linked to the change in government in the US. More significant, however, is the 1.5-point improvement in Canada's Industry Rewards score, with Q3 data showing a marked recovery in subscriber growth after the initial wave of Covid-19-driven lockdowns and supply chain disruptions. The availability of the new iPhones in Q4 will ensure that this upward momentum continues. In Canada and the US, while pay-TV-dependent telcos were hit by customer migration from their linear TV services, they at least benefited from increased traffic wingflo over their networks and greater usage of broadband services in general, particularly for entertainment and productivity purposes, and this has helped push fibre connection uptake rates to faster than those previously envisaged.

Most Mature Markets Recovering Quickly Selected Developed Markets Telecoms RRIs, Q221

Note: Scores out of 100, with high scores denoting low risk. Source: Fitch Solutions

Canada overtakes Germany to become the fifth most attractive Developed Market, its improved scores easing it just ahead of the European industrial powerhouse, which itself sees no notable score changes this quarter. This is not to say that Germany has performed poorly; rather, it is the case that the country moved in the directions and at the pace we had been expecting and the relatively slow vaccine distribution programme will likely hold the country back in the short to medium term.

Israel, by contrast, has outperformed in terms of its vaccination drive, with one of the highest inoculation rates in the world at the time of writing. This will help the country's economic recovery, relative to its peers, as it is a tech innovation hub in the Middle East but depends highly on uninterrupted trade and distribution flows for success. Its telecoms market, however, is a different matter altogether: power is concentrated among three key providers, all of whom compete aggressively for control over a very small addressable market, with price competition exacerbated by the presence of a large number of sub-brand, discount and specialised players.

Israel's Rewards profile is not much changed since last quarter, with the short-term boost in broadband usage providing a small degree of uplift in this quarter's update. There is, however, a one-point increase to Israel's Country Risks score as lines of communication between Israel and some of its neighbours reopened in light of a Trump government-brokered accord. That agreement is based on a very tenuous understanding concerning economic stability, but the political risks remain elevated and the accord may not prove to be long-lasting. The long-term outcome will not have much impact on the relatively unattractive nature of the Israeli telecoms market and there are few opportunities for new and/or foreign investors in this relatively closed ecosystem.

DEVELOPED MARKETS TELECOMMUNICATIONS RISK/REWARD INDEX, Q2 2021 Industry Country Industry Country Regional Global REWARDS RISKS RRI Rewards Rewards Risks Risks Rank Rank

USA 85.9 68.3 79.7 94.2 90.5 92.3 83.5 1 1

UK 85.4 64.2 77.9 96.6 91.0 93.8 82.7 2 2

France 81.2 63.3 75.0 91.6 86.2 88.9 79.1 3 5

Australia 74.3 68.7 72.3 92.1 87.5 89.8 77.6 4 7

Canada 79.5 61.5 73.2 82.3 92.8 87.6 77.5 5 8

Industry Country Industry Country Regional Global REWARDS RISKS RRI Rewards Rewards Risks Risks Rank Rank

Germany 78.1 55.9 70.3 91.6 93.1 92.4 76.9 6 12

Israel 75.9 78.9 77.0 69.7 79.1 74.4 76.2 7 14

Spain 83.1 55.1 73.3 85.8 76.7 81.3 75.7 8 15

Japan 74.7 59.3 69.3 85.8 87.7 86.8 74.6 9 20

Italy 67.7 49.6 61.3 91.6 74.0 82.8 67.8 10 36

Regional 78.6 62.5 72.9 88.1 85.9 87.0 77.2 - - Average

Global Average 50.0 50.0 50.0 50.0 50.0 50.0 50.0 - -

Note: Scores out of 100; higher score = lower risk. Source: Fitch Solutions' Telecommunications Risk/Reward Index

Africa Quick View: E-Services, Tech-Intensive Businesses To Benefit From Botswana Data Centre

The Latest: State-owned Botswana Fibre Networks (BoFiNet) is building a Tier III+ data centre in the capital Gaborone. Set for completion in late 2021, it will host at least 400 racks in 1,000 square metres of white space, making it the country’s largest data centre.

Implications: BoFiNet is investing to meet growing demand for enterprise and consumer cloud services and applications, areas where only private players - including SEACOM and Liquid Telecom - have been investing so far. To date, the state has invested mainly in the development of backbone infrastructure, including international cable systems, including access to the East and West Africa Cable Systems. The wholesale fibre service provider will leverage its 9,200km fibre footprint to augment its data hosting offering.

The government will be a key beneficiary of the data centre as it pursues its 11th National Development Plan 2017-2023, focused on increasing capital spending on key projects including boosting technology infrastructure deployment and ICT services adoption. Under the plan the government has committed resources for the implementation of e-Government, e-Health, e-Education and e- Commerce services. We anticipate an acceleration in cloud migration in order to generate efficiencies in public service delivery and operations, as well as to underpin new e-government services.

Within the plan, the Smart Botswana initiative targets the use of disruptive technologies to improve transportation, logistics and security. However, deeper opportunities exist for the integration of technologies such the Internet of Things, Artificial Intelligence and even 5G-powered applications targeting more efficient use ofesour r ces such as water, electricity and urban spaces. The country's first smart city, Kgale Lake City (construction of which began in 2018), will serve as a key testbed for these technologies.

Meanwhile, in the private sector, increased cloud migration from large enterprises is also a lucrative proposition for BoFiNet. We believe prospects are strongest in more technologically intensive verticals such as financial services, ICT, manufacturing and logistics.

BoFiNet Seeking A Larger Slice Of The Market Middle East And Africa: Cloud Spending (USDmn), 2020-2024

e/f = Fitch Solutions estimate/forecast. Source: Fitch Solutions

Upsides for stronger uptake of IT solutions and services from this base are posed by the country’s strong economic outlook, and Botswana’s growing appeal as a business-friendly investment destination. Our Country Risk team expects that Botswana's GDP will recover by 5.1% in real terms in 2021 after an estimated 8% contraction in 2020. That said, we anticipate limited adoption of cloud solutions among small firms in the short to medium term, as many businesses currently have very low utilisation of technology beyond basic services and applications.

What’s Next: Through the launch of its data centre, BoFiNet will look to market its data hosting capabilities to more firms in the region to boost its revenues. Fitch Solutions believes the Middle East and Sub-Saharan African cloud computing market will be worth USD2.42bn in 2021, rising to USD6.46bn by 2024.

However, the operator will face strong competition from neighbouring South Africa which has long been the region’s data centre hub, hosting a range of local, regional and global players. In 2019 Microsoft and Amazon Web Services built data centres in the country to serve both local data demand as well as the wider region. We believe that over the near term, relatively expensive Internet costs and deep power deficits may dim the appeal of BoFiNet’s offering.

Europe Quick View: Israel FTTH Market Gains Momentum With Bezeq Launch

The Latest: Israel’s incumbent telecoms operator, Bezeq, has launched its Fibre-to-the-Home (FTTH) service. Bezeq aims to cover 40% of households nationwide by the end of 2021 and calls its offering as ‘Israel’s largest infrastructure project’. Bezeq's move to commercialisation of FTTH is particularly significant after years of disagreement with the Ministry of Communications (MoC) over coverage terms.

Implications: Bezeq becomes the latest operator in Israel to offer FTTH services: rival operators began deploying fibre networks in order to compete with the incumbent’s monopoly on traditional fixed line infrastructure, but seem to have made little progress while their mobile broadband services remain competitively priced. However, Bezeq is responding to strengthening competition in the fibre market from the Israel Broadband Company (IBC) and Partner. In January 2021, the MoC approved Hot Telecom's investment in the IBC, in which it joined Cellcom with a 23.3% stake in the consortium.

Partner took the opportunity of Bezeq's announcement to report it was already providing FTTH services to 150,000 customers. This is the first time it has disclosed actual customer numbers and this reinforces our view that the pace of its rollout has been slow, hence its decision to seek an investor to buy a 20% stake in its fibre business.

As of Q320, Bezeq supplied 1.5mn customers with broadband services over its traditional copper network, meaning that it has a sizeable user base to persuade to upgrade to faster fibre. However, Bezeq notes that its FTTH prices would be higher than those of its competitors and that it would charge installation fees, in contrast to Partner and Cellcom. This could lead to Bezeq’s offering being disregarded by many customers, but may also drive up average revenue per-user (ARPU) levels as the other operators may take the opportunity to increase their prices.

Bezeq's Monopoly Still Evident Wireline Market Shares, Q220 (%)

Regulator, Operators, Fitch Solutions

Israel’s adoption of high-speed internet access has been very slow, so far, largely hindered by Bezeq's monopoly on the sector stalling development and competition, but not helped by the low cost of mobile data and broadband services. Disagreements

between Bezeq and the MoC over the scale of fibre rollout have also hampered progress; as the incumbent, Bezeq has coverage and service quality obligations that its mobile-first rivals do not.

On the upside, the Covid-19 pandemic has added urgency to the deployment of high-speed internet capability after a massive surge in demand precipitated by remote work and education. Thus, Israel’s MoC has made fibre development a priority. We suspect that that Bezeq's offering, as well as HOT's acquisition of a stake in IBC will provide much-needed competition to Israel's fibre segment, finally providing a catalyst for mass uptake.

What’s Next: As a result of growing momentum in Israel's fibre broadband market, we have revised upwards our forecast for the fixed broadband market over the medium term. However, we believe that Israel will continue to lag behind its neighbours in terms of fibre offering, particularly due to the advent of 5G offering even faster mobile broadband connectivity whilst still being cheaper than a fibre internet package. Deployment of fibre is massively capital intensive, and incumbent operator Bezeq has already been in disagreement with the government over its ability to meet the rollout demands of the MoC, claiming it is not financially suitable ot do so. Opening up to external investors - as its rivals have done - is an option, but there are no other independent players in the market at present and the closed nature of that market will deter foreign investors.

Wireline Forecasts Israel - Wireline Voice & Broadband Subscriptions (2020-2030)

e/f = Fitch Solutions estimate/forecast. Source: Operators, Fitch Solutions

Middle East Quick View: Israel FTTH Market Gains Momentum With Bezeq Launch

Bezeq's Monopoly Still Evident Wireline Market Shares, Q220 (%)

Regulator, Operators, Fitch Solutions

between Bezeq and the MoC over the scale of fibre rollout have also hampered progress; as the incumbent, Bezeq has coverage and service quality obligations that its mobile-first rivals do not.

Wireline Forecasts Israel - Wireline Voice & Broadband Subscriptions (2020-2030)

e/f = Fitch Solutions estimate/forecast. Source: Operators, Fitch Solutions

Quick View: Connected Car Project To Boost STC's 4IR Momentum

The Latest: Saudi Telecommunications Company (STC) has announced a partnership with Cubic Telecom, a leading provider of connected vehicle software.

Implications: STC and Cubic Telecom aim to make connected cars a mass-market proposition in Saudi Arabia. Cubic Telecom’s software can be installed at the point of manufacture and can be pre-configured to meet the regulatory requirements of the region, reducing time-to-market for any car manufacturer aiming to extract additional value from the country's massive autos market. The project aligns with the Saudi Vision 2030, which aims to digitalise and diversify the economy away from the hydrocarbon sector and pioneer emerging Industry 4.0 technologies.

Notably, the Saudi Vision 2030 focuses on ‘people safety’, intending to reduce the number of road traffic cidentsac in the Kingdom. One of the services being worked on by the partnership is an ‘emergency call’ button, which would automatically call emergency services in the event of an accident. Artificial intelligence (AI) technology and advanced data analytics provided by STC can be used to assess driver behaviour, alerting the driver to potential dangers.

The venture also meets the requirements of STC's own digitalisation strategy, DARE, particularly its second phase directed towards facilitating digital transformation in sectors other than telecommunications.

Connected cars would become part of a wider Internet of Things (IoT) ecosystem by leveraging STC’s extensive mobile network, as well as its new digital operations control centre, opened in March 2021 and tasked with supporting STC's growing digital projects business. As Saudi Arabia plans to create the Middle East’s largest 5G network - utilising around 10,000 base stations to give 5G access to 71 cities - the partnership has commercial as well as societal upsides.

5G Capabilities Drive Capex Spending Capex By Operator (SARbn) 2017-2020

Source: Operators, Fitch Solutions

Investing in projects such as this serves to diversify STC’s revenues, meaning the operator can rely less on low-margin traditional mobile services and tap into greater revenue streams such as advanced data services.

What’s Next: Continual deployment of telecoms infrastructure and projects such as this one with Cubic Telecom are capital

intensive and require sustained proficiency, particularly in providing efficient security. The IoT poses significant cybersecurity risks: at the heart of our long-term view for digital ecosystems is the notable risk that anything connected can be hacked. Therefore, operators will need to invest in robust cybersecurity infrastructure that promises business continuity and user safety.

STC has demonstrated early commitment and success in offering cybersecurity, both with the creation of the 'Advanced Technology and Cybersecurity Company' under the STC Solutions arm of the business and in providing cybersecurity protection during the G20 Riyadh Summit in 2020. STC is considering an Initial Public Offering (IPO) that would list shares of its Solutions arm on the Saudi Stock Exchange. An IPO would give Solutions access to a large pool of investment capital to continue enhancing its Industry 4.0 offerings, while increased transparency and regulatory oversight from a listing would encourage more partners to work with the company.

Growing IT Market Drives Demand For Cybersecurity Solutions Saudi Arabia IT Market Forecast (2019-2025)

e/f = Fitch Solutions estimate/forecast. Source: Fitch Solutions

North America Quick View: Rogers-Shaw Merger A Boon For 5G/IoT But Costly For Consumers

The Latest: Rogers Communications has agreed to buy Shaw Communications in a deal valued at CAD26bn (USD20.8bn).

Implications: Concentration of power in the fixed broadband and mobile services markets, plus the loss of a distinctive budget mobile brand will be the main regulatory arguments against the transaction, but faster 5G/IoT rollout, increased rural commitments and lower costs to consumers could secure approval.

Rogers would invest CAD2.5bn to deploy 5G infrastructure across Western Canada over a five-year period, targeting more cities and rural areas than it or Shaw would have been able to commit to servicing independently, and sooner. A further CAD1bn would be spent on improving Internet connectivity in rural areas and locations hosting indigenous communities, a key target for regulators, while CAD3bn would be spent on 'additional networks, services and technology' needs of consumers and businesses, such as IoT. There is also a commitment to preserving jobs, upskilling some segments of the workforce and creating new jobs.

Industry and competition regulators would, however, need to weigh the promises made by Rogers against the impact of increased market power the enlarged Rogers would enjoy. The main issue would be in the mobile arena, where Shaw's Freedom Mobile and Shaw Mobile businesses would become part of the Rogers Mobile portfolio. Freedom would add 5% of the national market to give Rogers a clear lead with a 36% share, leaving Telus and BCE with just under 30% apiece, so the arguments against the deal would not necessarily focus on market share, but rather the impact on pricing and consumer choice.

Significantly, the move would draw a line under long-standing efforts to improve consumer choice and drive down prices: in its previous incarnation as WIND, Freedom had succeeded in forcing Rogers, Telus and BCE to become more price competitive and innovative. Some impetus was lost after WIND - the sole survivor of a quartet of new players - was sold to Shaw, and despite Rogers' insistence that it will not alter pricing plans for three years, it is likely that the brand would eventually be de-emphasised, given Rogers' focus on premium TV- and broadband-centric service packages.

Spectrum ownership could also be an issue, as Freedom's rights in the 700MHz, 1700MHz and 2600MHz band would complement Rogers' holdings in those same bands, potentially giving it greater capacity than its rivals. Excess spectrum could be clawed back and given to a new entrant, but that seems unlikely given the failure of the mobile market expansion drive; giving excess spectrum to Telus and BCE is another possibility, but the overall impact would merely concentrate all three players' power.

Shaw's fixed broadband business leverages its cable TV infrastructure in British Columbia and Alberta, where it trails slightly behind market leader Telus. As Rogers has a limited presence in Western Canada, market positions would not alter significantly, but merger costs and infrastructure upgrades could drive up basic costs to consumers, while a more aggressive multi-play drive by Rogers could see prices increase over the longer term.

ARPUs Still Rising, Driven By Data Usage Canada Mobile Usage Metrics, 2014-2019

Source: CRTC

What's Next: The deal will need to be scrutinised by several regulatory agencies, including the Canadian Radio-Television Commission (CRTC), the Competition Bureau and Innovation, Science & Economic Development Canada (ISED). Rogers has set a mid-2022 completion date for the merger.

While we believe the merger will go through, strict conditions will be set on coverage, quality of service, price freezes/reductions and asset redistribution, as outlined above. In the medium term, we believe duplicated passive infrastructure carve-outs (towers, data centres, wireline networks) will be attempted, creating some investment opportunities for niche players, while longer-term possibilities include the creation of dedicated IoT connectivity and services businesses that could go on to become standalone entities. That said, the Canadian telecoms sector lags Europe and Asia with regards to the industry's ongoing transition to an Operator-as-a-Service business paradigm, so those opportunities are likely to remain distant for the foreseeable future.