Challenging the oligopoly

For some time now, the major Internet backbones have been in the hands of the major interexchange carriers, and for good reason. In a world where traffic doubles as often as most people get an oil change, ongoing bandwidth upgrades are a way of life. Companies that own the actual fiber have had a tremendous advantage because they can upgrade more quickly.

Cable & Wireless' purchase of MCI's backbone business-one of the three largest-has been a test of just how important it is to own one's own fiber. C&W bought MCI's customer contracts, peering agreements, routers and switches. But it leased the underlying fiber with the understanding that it could get more where that came from. That wasn't good enough. Frustrated by how long it was taking MCI WorldCom to deliver circuits, C&W recently announced it would upgrade its backbone network to OC-192 using dark fiber from Level 3 (Telephony, April 12, page 12).

That announcement was interesting for two reasons. It reminded us that Internet backbone operators without their own fiber no longer have to go to the parent companies of their largest competitors to get connected. Also, by using dark fiber, a service provider is not at the mercy of the underlying carrier for bandwidth upgrades. It will be interesting to see if a long-term lease on dark fiber proves to be a viable substitute for dropping one's own fiber in the ground.

One development that's poised to shake up the Internet backbone market is the rise of data center operators and application service providers.

Both types of companies are betting that businesses increasingly will want to outsource electronic commerce and information technology. Data center operators target companies that operate popular portals and e-commerce sites, providing a home on the Internet where business customers can put server farms and obtain better throughput and reliability. Application service providers offer similar facilities but may own and manage the servers, renting equipment to corporate users that want to outsource SAP applications and the like.

Just a few weeks after the C&W announcement, application service provider Conxion-which until now has leased fiber links primarily from MCI WorldCom-said it would upgrade its Internet backbone to OC-192 using fiber from Williams. Conxion expects to connect at least 15 cities at OC-192 before the end of the year and 125 cities by the end of 2000.

What's interesting about this announcement is that the dominant Internet backbone providers-including Sprint and MCI WorldCom's UUNet unit-still operate at OC-48, at least throughout much of their networks. We can expect those companies to upgrade soon, but Conxion certainly seems to be nipping at their heels.

Undoubtedly, the dominant backbone providers have many more customers than Conxion.

But by focusing on delivering software downloads and other bandwidth-intensive applications for customers like Microsoft and Fox Interactive, Conxion generates much more traffic per customer. In the Internet backbone market especially, traffic is what gives a provider clout.

One way the dominant backbone companies have maintained their oligopoly is by controlling peering agreements, forcing companies to pay for transit to reach the major backbone networks if their traffic levels are not high enough. But because so many Internet users want fast and reliable access to popular Web sites, Conxion isn't required to buy transit from anyone, says Rod Scott, Conxion's director of network technology.

Of course, we shouldn't expect the dominant backbone providers to cede the data center and application service provider markets to their new rivals. UUNet already has entered both markets-and once players like it get rolling, we may find ourselves asking if companies with their own fiber have an advantage there, too. A logical step could be for the dominant IXCs to buy out companies like Conxion just like they bought out the major backbone providers.

In the mean time, various Bell companies have aligned with various fiber network operators and are poised to enter the Internet backbone market once they're allowed to offer long-distance. What better way for them to jump-start the business than buying up a data center operator or application service provider of their own.