Fiber and State Aid

Rudolf van der Berg's twitter feed referred me to an article about multinational cable company Liberty Global in what would be the Dutch equivalent of the Financial Times. Liberty, which owns Chellonet, Telenet and UPC in Europe, is apparently considering expanding into Eastern Europe. At the same time, its chairman denies rumors that Liberty would be interested to take over (parts of) the competing cable operator in the Netherlands, which allegedly is for sale.

What struck me in the article however is Liberty's stance on public/private partnerships to invest in fiber architecture. Freely translated, chairman Fries states:

I am worried about the intentions of governments investing in fiber. When it involves government subsidies, this will negatively affect the level playing field. When subsidies are conform a market economy investment standard this is less of an issue, but I have doubts whether this is feasible.

This comment echoes Liberty's official comments during the European Commission's consultation period concerning state aid for broadband. However, the eventual Commission guidelines on the application of state aid laws on investment in broadband that were published a few months ago, have in fact set the bar rather high for public investment into broadband to pass. The Commission has designated white areas (rural and under-served localities); black areas (two or more broadband providers already present) and grey areas (everything in between). Naturally, state aid to foster the roll-out of broadband is allowed in white areas, prohibited in black areas, and debatable in grey areas. This distinction is a bit looser concerning next generation access networks such as fiber, depending on the substitutability of existing broadband architecture. In short, if cable and DSL start lagging behind too much compared to fiber, this might justify state (market conform) investment into fiber.

Now, understandably Libery is upset about this, given that the city of Amsterdam has already successfully applied this exemption for fiber. In the Citynet case of 2008 before the Commision, Amsterdam's investment into fiber-to-the-home architecture was not deemed to concern state aid. Liberty's subsidiary UPC was one of the complainants in this case, and apparently is still sour over the Commission's decision.

So what does this tell about Liberty's incentives? Not upgrading its cable network to match fiber speeds might lead to public investment into fiber—and it shows Liberty is not too keen on that. At the same time, rolling out fiber itself carries great sunk costs. To solve this dilemma—as Rudolf (again) has accurately pointed out before—Liberty is very comfortable on markets with (DSL) incumbents averse to innovation into fiber. This allows Liberty to go sit above DSL and just below fiber speeds, which both increases its market share and keeps public investment into fiber at bay. The question is however how sustainable such a strategy is in the long run. The gap between fiber and 'old broadband' will widen eventually, and demand for fiber speeds will rise inevitably. Ergo, there will be public initiatives to roll-out fiber at some point, backed by European state aid laws. The living proof of this is Amsterdam's Citynet.