Reading time: 13 minutes
Switzerland’s “Fiber Optic Dispute”
The “fiber optic dispute” is an important antitrust case that happened in Switzerland – a case of enormous economic significance. In a nutshell, Swisscom, the largest telecommunications provider in Switzerland, attempted to monopolize fiber optic infrastructure in the country, but it was prevented from doing so by the “Cartel Act”, the Swiss Antitrust Law. In this blog, we’ll summarize how this case came to be and where fiber optic technology is headed.
Liberalization of the telecommunications market
In 1998, the telecommunications market underwent a liberalization process in Switzerland. The former agency PTT (Postal Telegraph and Telephone) split to become Swiss Post and Swisscom; the latter company was later listed on the stock exchange in Switzerland and the USA. However, legislators at the time liberalized the industry relatively half-heartedly, as the Swiss Federal Government retained and still retains a majority shareholding in Swisscom (2/3 back then and 51% today). Instead of completely separating telecommunications infrastructure (copper networks and switchboards), which should have remained 100% controlled by the federal government, and the business-to-customer entity, which should have been completely privatized, the government decided to maintain the status quo; consequently, the conflict of interest as legislator, telecommunications’ regulator, and majority shareholder remained. This conflict of interest has persisted to this day and is largely responsible for the fact that numerous political issues in the telecommunications industry are still unresolved. These issues pop up on the Swiss political agenda from time to time – most recently with Swiss National Councilor Balthasar Glättli’s postulate in 2017.
ADSL gets popular
Around 2001, ADSL (Asymmetric DSL) telephone networks were rolled out on a large scale in Switzerland, mainly for private end customers, alongside conventional DSL (Digital Subscriber Line) networks. However, only ex-monopolist Swisscom had access to copper cable networks, often referred to as local loops. All competitors – referred to in technical terminology as TSPs (telecommunications service providers) – had to try to assert themselves on the market, purely as wholesale product BBCS (Broadband Connectivity Service) resellers, which some of them failed to do. Companies like Callino, Riodata, Econophone, Tele2 and Telefonica were active at the time, but have all since disappeared as independent brands. They either went bankrupt or were taken over by other providers.
A particular problem with DSL reselling was the fact that the market leader used what’s known as the “margin squeeze” method in their sales. There wasn’t enough of a margin offered between its own “Bluewin” brand retail prices and the BBCS wholesale prices to allow competitors to operate cost-effectively. Margin squeeze is illegal under antitrust law. Sunrise, a telecommunications competitor, subsequently reported Swisscom to the Swiss Competition Commission; however, the proceedings were very lengthy, as Swisscom appealed against every decision. This legal process led all the way up to The Federal Supreme Court in Switzerland, which only reached its final verdict in 2020; Swisscom was ultimately sentenced to pay an antitrust fine of CHF 186 million. In addition, Swisscom reached an out-of-court agreement with Sunrise to pay several hundred million francs in damages; however, the exact amount was not disclosed.
The Telecommunications Act’s first revision
In the mid-2000s, the Swiss Government realized that there was no way around further restricting Swisscom’s privileges in order to ensure functioning telecommunications competition in Switzerland. The revised Telecommunications Act (TCA) then came into force in 2007. In particular, the law stipulated regulating the local loops, i.e., the copper lines, from the switchboards to the end customer. This made it possible for Swisscom’s competitors to install their own DSL infrastructure in the switchboards and, therefore, bring ADSL services to the market independently of Swisscom. However, Swisscom did everything possible to put a stop to this new form of competition. Excessive prices, complicated processes, and lengthy delivery times: the regulator ComCom (Federal Communications Commission) and the OFCOM (Federal Office of Communications) had their hands full trying to force Swisscom to be reasonably cooperative.
The infrastructure competition doctrine
The doctrine that telecommunications competition has to be based on infrastructure competition still prevails in Bern today. In the 2000s, this idea was somewhat plausible because, in addition to the conventional copper networks for telephony, many regions had a co-axial (co-ax) cable network for distributing TV signals. This network was equipped with a return channel and increasingly used for the delivery of Internet connections. Co-ax cables are technically superior to copper cables; with the latest DOCSIS version 4.0, a downstream speed of up to 10 gigabits/s is possible with a co-ax cable. The best-known co-ax network provider was the former company Cablecom, which later operated under the name UPC and merged with Sunrise in 2020 to become the largest alternative telecommunications provider in Switzerland. Fun Fact: Swisscom held a third of Cablecom’s shares over 20 years ago, but it had to sell them due to antitrust concerns.
Although infrastructure competition was justified in the 2000s, it has become pretty outdated from today’s perspective. This is because both the cable and telephone companies are currently only building FTTH fiber optics (fiber to the home) to replace co-ax and telephone networks. So, the two network infrastructure systems merged into one. However, the Swiss National Council and the Council of States often still dream of the bygone era of infrastructure competition, justifying their political decisions as a result.
Fiber optic roll-out begins
Starting around 2006, various Swiss cities began to roll out fiber optic networks, as it became clear that FTTH would mean significant benefits for municipalities. Municipal energy suppliers were the perfect means of laying fiber optic cables due to their existing pipeline infrastructure for supplying electricity, as fiber optics are more resistant to interference from magnetic fields in comparison to copper cables. Fiber optic cables can therefore be installed in the same ducts and pipes as electrical cables.
A few of these major projects were approved in Swiss federal referendums (called “popular votes” in Switzerland) over the last approximately 15 years. In Zurich, the city’s population first approved a loan of CHF 200 million for a fiber optic project in 2007, followed by another one totaling CHF 400 million five years later. A similar popular vote in Winterthur was held comparatively late in November 2012. However, this delay didn’t end up being a bad thing: A quick roll-out made up for the wait. Winterthur currently has one of the densest FTTH networks in Switzerland, covering 99% of the population.
Needless to say, Swisscom didn’t want to be left behind, and it began building FTTH infrastructure throughout the country. In order to avoid buildings being connected twice – by the local electricity supply company (ESC) and by Swisscom – an agreement was quickly reached to establish “fiber optic cooperation.” City districts were usually divided up between Swisscom and the respective ESC, depending on the existing pipeline infrastructure, in order to carry out the network expansion as efficiently and cost-effectively as possible. However, the Competition Commission had to intervene because the first version of these cooperation agreements violated antitrust law. The two cooperating parties had agreed upon clauses that would have created a monopoly or duopoly. The problem still hasn’t been completely resolved to this day – even after the COMCO’s ruling. ESCs always claim that they’re in fierce FTTH competition with Swisscom in their respective market areas; in reality, however, they enjoy a comfortable collective market dominance situation in which both players move in unison and hardly get in each other’s hair.
The Roundtable – technical standards and the 4-fiber model
The OFCOM followed these developments closely and anxiously, as there was a risk that every fiber optic provider could be left to their own devices. Zurich’s ESC , “ewz”, in particular felt justified in rapidly expanding the grid to its liking following the positive outcome of the first popular vote. The OFCOM therefore invited all fiber optic stakeholders to a Roundtable in Biel for the first time in 2008. Subsequently, several teams developed technical standards and rules on how fiber optic infrastructure should be built. Under “gentle” pressure, everybody involved finally agreed “voluntarily” to stick to these self-regulation rules, which essentially comprised the 4-fiber model (each residence is connected with 4 optical fibers), a uniform numbering scheme, and P2P point-to-point network topology. In most areas, the cooperating partners each received different optical fiber strands: fiber strand 1 for the ESC and fiber strand 2 for Swisscom; fiber strands 3 and 4 were used almost everywhere as a reserve, and they were only built from the OTO (Optical Termination Outlet) socket to the BEP (Building Entry Point) or drop cable. The cable to the switchboard (feeder) was therefore only created for fiber strands 1 and 2. This is referred to as a 4-4-2 (in-house – drop cable – feeder) expansion; in some places, only a 4-4-1 expansion was set up.
The Roundtable’s success
In retrospect, this self-regulation method has turned out to be very successful, which the OFCOM mentions on its website. Each TSP, i.e., each provider, managed to install their own electronics in the switchboards and, therefore, gained access to the optical fiber going straight to the end customer. This model, commonly referred to as open access, enables increased levels of innovation and competition. Technically, bandwidths of 100 gigabits per second are already possible today; whether this makes commercial sense is, of course, open to debate. The fastest offer currently available for private customers is 25 gigabits per second – this is our Fiber7 product.
The Telecommunications Act’s second revision
As the decade went on, it became clear that the TCA would have to be revised again, in particular because services linked to local loops were becoming increasingly uncompetitive, as the length of copper cables determines their bandwidth. In other words, the longer the cable, the slower the speed – with an exponential decrease. Swisscom therefore opted for fiber optic feeds to street cabinets in residential areas in order to shorten the copper cables and achieve adequate bandwidths (VDSL, G.fast) – even in areas that were far away from the switchboards. Competitors weren’t able to cover the costs of this investment due to their low market share, so they switched to the BBCS wholesale product. Swisscom was happy with this outcome, as it allowed the company to predetermine broadband competition in terms of both technology and price. An industry insider once mockingly referred to the phenomenon as “competition by Swisscom’s good graces.”
The number of unbundled local loop connections has fallen rapidly since reaching a peak in 2012. The need for high bandwidth and advances in technology resulted in concerns about regulation. FTTH fiber optics were still completely unregulated, although well over one million households and businesses were connected to FTTH by 2018. This is why the Federal Council called for technology-neutral regulation in its report on the TCA’s latest revision. Doris Leuthard, the former Head of the Federal Department of Environment, Transport, Energy, and Communications (DETEC), said the following during a debate in the Council of States:
“Over the past few years, the Federal Council has refrained from legislating because we have reached an agreement with the industry not to slow down fiber optic investments […]. We have established rules at a Roundtable with various stakeholders, for example, the rule […] that four-fiber optic cables should be installed so that various providers have access to these technologies while keeping costs down.”
However, the Swisscom lobbyists managed to persuade the Council of States to remove the article on technology-neutral regulation from the proposed legislation. The revised TCA, now in force since 2021, is a somewhat pointless initiative from a competition perspective; it’s essentially based on the assumption that Swisscom will behave in a compliant manner and not get in the way of its competitors. Federal Councilor Leuthard believed the assertions that the Roundtable’s fiber optic rules would continue to apply.
Swisscom misleads the Federal Government
As soon as the technology-neutral regulation had been completely removed from the agenda in parliament, Swisscom announced it would be constructing FTTH for a further 1.5 million households by 2025 in February 2020, albeit with a modified network topology. Instead of using the P2P network topology agreed upon at the Roundtable, the company decided to use P2MP Point-to-Multipoint networks (see our blog entry ‘The difference between P2P and P2MP’). Swisscom wanted to monopolize fiber optics by using the network topology it had built to determine which electronics were suitable for competitors. In addition, P2MP is only profitable if a provider achieves a mid-double-digit market share. This would have forced smaller competitors to resell their pre-assembled BBCS products or leave the market altogether. From an antitrust perspective, it was clear that Swisscom was abusing its dominant market position, as the agreed upon “open access” concept would have been blocked by the P2MP network topology. Therefore, just three weeks after Swisscom’s announcement in February 2020, the COMCO (Competition Commission) launched an initial preliminary investigation.
Init7 files a complaint
After more and more FTTH connections using the new network topology came onto the market, which no longer supported Init7’s preferred products, Init7 filed a complaint against Swisscom with the COMCO in September 2020. The Swiss German television program “10 vor 10” gave a report on the problem shortly before it happened.