Backbone IP network Economics - peering and transit

Tue Apr 20 01:17:43 UTC 2004

Peering?  Who needs peering if transit can be had 
for $20 per megabit per second?

I last had a detailed look at peering and transit 
economics in the summer of 2002.  It is pretty 
amazing to see what has happened to prices since 
then.  I have a private mail list underway on 
this subject and published the first part of a 
two part study on Saturday.

Details available at http://cookreport.com/13.03.shtml

Any opinions here on what MCI coming out of 
bankruptcy will mean?  How will once mighty ATT 
compete?  How can it possibly compete if it 
actually tries to pay the interest on its bonds?

June 2004 COOK Report page one:

Economic Pressure on Long Haul Fiber

Five Years After Bubble Burst Prices Have Plunged 
Yet Nothing Fundamental Has Been Fixed

Examination of Data Network Woes Shows 
Termite-Riddled Foundation Leading to More 
Bankruptcies in Absence of Broader Understanding

Tech-Telcom Recovery, or just a pause before the next round of bankruptcies?

In this issue we explain why we believe that 
competitive fiber backbones have a failing 
business model that has driven prices below the 
cost of maintenance and replacement. We point out 
that the carriers are making up the difference 
with cost cutting in every way imaginable and by 
subsidizing the loosing backbones with what 
profits remain from voice. As the voice profits 
disappear via government (GIG BE), corporate, and 
municipal networks that are buying and lighting 
their own strands of fiber, and hence leaving the 
PSTN, another round of bankruptcies looks to be 
inevitable.

As Eli Noam has warned, when the dominoes start 
to fall again, the US government, rather than let 
the telecommunications system collapse, will have 
no choice but to step in and start regulating IP 
networks. The kind of regulation that is coming 
will have little to do with encouraging common 
carriage or wide spread access to broadband. 
Instead it will have everything to do with 
consolidating a few remaining survivors and 
enabling them to pay their bondholders. The scene 
is not a pretty one and the miserable policy is 
being made exacerbated by American bankruptcy law 
that permits bankrupt fiber carrier to reorganize 
through Chapter 11 rather than insisting on 
disbandment via Chapter 7.

What is especially pernicious about this 
situation is that permitting bankrupt carriers 
such as MCI to reorganize makes a bad situation 
worse. It does nothing to get rid of the 
company's massive glut of fiber. Instead, by 
wiping out its debt, it ensures a cost cutting 
advantage to the reorganized company. Still, 
blessed with the same massive amount of fiber it 
had before, it can gain income by again cutting 
prices below what its not-yet-bankrupt cousins 
like ATT and Sprint can afford to sell, if they 
are to every pay off their bonds. Roxanne Googin, 
in an interview to be published next month, was 
scathing in her comments on MCI being allowed by 
the Bush Justice Department to file Chapter 11 
rather than 7 - given the company's acknowledged 
massive fraud. She added that, given the MCI 
example, in her opinion any carrier that makes a 
good faith effort to pay back its bond holders is 
just plain foolish.

With this issue we turn to the badly broken 
economics of peering and the attendant backbone 
business models. After three hours conversation 
with Farooq Hussain and ninety minutes with 
Farooq and Roxane Googin we have a clearer 
picture of where things went wrong beginning with 
the privatization of the NSF Net backbone in 
April 1995. The plan when implemented was a 
reasonable one, but it is fascinating to look 
back and understand how all the dominoes fell the 
wrong way. The result made a bad situation 
steadily worse until the Cable and Wireless 
bankruptcy of 2002 ripped a major hole in the 
Tier One hierarchical façade and pointed the way 
to the technology topology business case issues 
pointed out by Farooq during our conversation of 
April 4, 2004.

This fairly short issue lays the foundations for 
the mail list discussion that began on March 18 
and will be published in the next issue in about 
mid May. In focusing on the woes of the LECs 
during the past two years, we have overlooked the 
fact that the carriers are in worse shape and 
that the telcos are again speeding toward the 
precipice. Most everything is broken and, one of 
the frustrating issues, is that it is difficult 
to get agreement on just where. The phone 
companies do need to die and be replaced. But a 
huge problem that remains is that, unlike Japan, 
and many other countries, the US is in gridlock. 
For, in the US, the ILECS and IXCs "own" the FCC. 
There is still enough money left in the industry 
that government is hobbled by a political 
unwillingness to let the bond and equity holders 
take the consequences and get on with life.

Looking for the Big Picture and By Passing the Carrier

Let's look more closely at what is going on. One 
consequence of the fiber glut has been the 
emergence of a large number of ways to send one's 
"bits."

By this we mean that there are:

(a) At least three distinct technologies used in 
sending bits over glass - each with its own 
economics. Layer one technology: OBGP and User 
Controlled Light Paths technologies from Canarie 
that are just beginning to be used commercially. 
Layer two technology - namely Gigabit Ethernet 
and 10 Gig Ethernet over fiber, sometimes using 
Sonet. But more often not. Layer three: IP often 
over ATM using MPLS rather than point-to-point 
links.

(b) At least two different ways of 
interconnecting to (carrier pops and at IX's) and 
that these can be used by customers to ratchet 
prices down further and further

(c) That high speed Ethernet VLAN and routed VPN 
services can be bought from carriers, they can 
also be used as ways to bypass carriers. One by 
pass business model is to set up a high speed 
VLAN transport service at numerous exchanges and 
then sell customers routes over that service.

(d) That outright purchase of dark fiber is also 
among the ways to by pass carriers - ie 
corporate, research and education and municipal 
nets are all doing this.

(e) That for municipal nets there is a new 
wrinkle being used by Terry McGarty of The Merton 
Group. Here anyone who puts 20% of the cost down 
and goes through the proper application 
procedures can borrow 80% from the Rural Utility 
Service (RUS) of the United States Department of 
Agriculture. The RUS fund has 1.2 billion dollars 
still unspoken for. Describing this business 
model at David Isenburg's WTF meeting on Saturday 
April 3, Terry explained how he is moving 
town-by-town through southern New Hampshire. He 
is applying a new and potentially powerful model 
of economic-broker-middleman in taking his 
consultancy's funds (20%) and getting the US 
government to match the remaining 80 percent. He 
shows town management (Hannover for example 
http://www.hanovernh.org/twn_minbos1-19-04.html ) 
what is possible. He then applies for the funds 
with the cooperation of the town. When the 
application is approved, both parties then 
jointly hire the contractor to build the network. 
I recorded his talk but stating that he is 
operating in stealth mode, he so far refuses 
permission to publish it. I assured him that I am 
a friend of what he is doing. However, it remains 
to be seen whether he will come to that 
conclusion. The essence of what he is doing is 
certainly clearly on the public record.

Meanwhile 
http://www.townsfoum.com/HollisNHforum/viewtopic.php?p=583 
describes Terry in Merrimac new Hampshire in 
January 2003 and www.mertongroup.com/ 
Municipal%20Broadband%20Networks.pdf is a 2002 
paper laying out the Merton Group concept for 
building municipal networks. Think about this and 
hear the "great sucking sound." A question 
occurs. Once you do (d) and (e) have you doomed 
LECs as well as carriers?

(f) That we can expect to hear an announcement 
before the end of the summer of a venture that 
will begin the role out of broadband wireless 
connectivity for video, audio, and data

(g) That another carrier PSTN by pass is the 
global GIG BE net being paid for by the US DoD.

(h) That all owners of fiber are so eager to sell 
access and get some income that they will do darn 
near anything to enable attachment, and that 
Level 3 and Global Crossing may find their 
infrastructure superfluous in parts of Europe and 
Asia when they run up against the national PTTs. 
As will Sprint, MCI and ATT

(i) That profits from voice propping up the Swiss 
cheese edifice of fiber data nets are fast 
disappearing - that the center of the PSTN is 
being hollowed out every which way with wireless 
and cable waiting in the wings. As the wireline 
PSTN collapses perhaps cellular will be what 
remains? It would seem that only in this context 
could Verizon's amazing offer on April 12, to the 
FCC of five billion dollars for ten kilohertz of 
PCS spectrum make any sense. See 
http://www.broadbandreports.com/shownews/42022

(j) That the USA is in far worse shape than the rest of the world.

  ~ ~ ~ ~ ~ ~ ~ ~
Contents

Economic Pressure on Long Haul Fiber

Five Years After Bubble Burst Prices Have Plunged 
Yet Nothing Fundamental Has Been Fixed

Examination of Data Network Woes Shows 
Termite-Riddled Foundation Leading to More 
Bankruptcies in Absence of Broader Understanding 
p. 1

Backbone IP Networks: Why the Hierarchical Peering Model Is Broken

Like Electric Grid - No One Wants to Pay for Connecting
as Fiber Glut Overturns Dominant Position of Tier Ones p. 6

Some of the Business Model Issues of Peering and 
Interconnection Or Why the Government Could 
Eventually Be Forced to Take Over p. 19

We Are Now a Decade into IP Based Optical telecom 
without a Viable Business Model -- An Optical 
Network Designer Looks at the Collective Insanity 
of the Bubble and Calls for Fresh Assessment p. 23

Dave Hughes Explains Sip, VoIP and FW Dialup in 
Voice Communication with Nepal over the Internet 
p. 26

Digital Photography Comes of Age -- Two New 
O'Reilly Books Reviewed in the Context of New 
Tools p. 29

-- 
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