Is Internet consolidation cutting your choices?

From...

March 21, 2000
Web posted at: 9:14 a.m. EST (1414 GMT)

by Nancy Weil

(IDG) -- That no one owns the Internet is taken as a truism. But the reality is that the infrastructure on which the global network runs is owned by a handful of powerful corporations that can, and often do, use this fact to their advantage in business negotiations.

Although this has been true since the earliest days of the Internet, it is a fact that is of increasing significance as more companies rely on the Internet as a mission-critical part of their IT infrastructures. Indeed, according to some industry insiders, the fact that a small number of corporations controls a large part of the Net's infrastructure has already had an effect on some Internet-based industries.

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"I can give you an example that shows that the Internet is owned by someone," says Jilani Zeribi, a senior analyst at Current Analysis, a market research company in Sterling, Va. "Look at old peering arrangements, which were basically 'I'll connect to your network, you carry my data, and I'll carry yours,' " Zeribi says. "The carriers started to realize that smaller ISPs were free-riding on their network, so they started charging for peering arrangements. Just the fact that someone wields that kind of power shows that someone owns the Internet."

A relatively small number of companies owns and operates the fiber and cables that form the Internet infrastructure, with most of the power centered in the United States, which has been the dominant nation in terms of Internet backbone deployment and usage. MCI WorldCom's UUNet division, AT&T, GTE's Internetworking, Global Crossing, Qwest Communications International, and PSINet are among the major U.S.-based players. Globally, Telstra, the Australian national telecommunications carrier; Global TeleSystems Group, which offers broadband in 20 European countries; and various Asian incumbent telecommunications companies have major ownership stakes.

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Although industry executives, analysts, and observers present the same general list of big infrastructure owners, they say there is no reliable way to measure exactly which company owns how much. One figure bandied about is that UUNet owns 30 percent of the backbone, with everyone else falling in line behind. AT&T claims the No. 2 spot.

Perhaps more important than placing numbers on ownership are the questions about what it means to have an ownership stake in the Internet -- to have invested millions in the infrastructure -- and to know how to keep it up and running. What kind of power is conferred on the main Net owners, and how might they wield that power either for good or for nefarious ends?

Analysts, including Zeribi, point to peering arrangements as perhaps the prime example of how companies exert control. There are also issues related to co-location -- where a number of ISPs have their servers and other hardware located in the same spot, typically owned by a major vendor like UUNet -- and to NAPs (network access points), which is where ISPs trade packets with other ISPs. NAPs are located globally, with some set up at college campuses and others in company buildings. Some NAPs are operated by organizations that charge no fees, whereas others are owned by telecommunications carriers that charge monthly fees that can soar into the thousands of dollars.

Working out co-location agreements can be tough because it involves "getting into the facilities of some of the big players," says Vince DiBiase, senior vice president and chief sales officer at ICG Communications, an integrated communications service provider in Englewood, Colo. "It's not necessarily their fault," he adds, "at least on the surface it's not. They only planned so much space for the Internet, and now it's so big."

The process can be "outrageously long and difficult and costly" to work through, DiBiase says.

Likewise, although NAPs are supposed to be neutral territory and not subject to the same squabbles that result from working out peering arrangements between vendors, that isn't always the case because "getting in and out of the NAPs is tricky," DiBiase says.

Many people contend that the Internet business is so competitive that new players will always emerge to take over if the big guns become too powerful and wield their influence unfairly. However, DiBiase and others suggest that it's also the case that large infrastructure players and large service providers bolster one another's positions.

DiBiase points to UUNet (whose parent company, MCI WorldCom, had not responded to requests for comment at time of publication) as an example. UUNet provides the Internet backbone for America Online, the world's largest ISP. Given AOL's millions of global Internet subscribers and its ever-growing presence, UUNet is not going to negotiate deals with AOL the same way it does with smaller ISPs.

Instead, UUNet offers AOL a much better deal on pricing because of the huge volume of traffic AOL brings to the UUNet backbone, DiBiase says, so "that's a cost advantage that a smaller ISP doesn't get."

Examples of power-wielding by the Internet infrastructure heavyweights reflect the influence of the phone companies, which were quick to jump into the Internet infrastructure business. After all, the telephone infrastructure was already in place, with dial-up being the first Internet access option. The extension of phone-company power into the Internet is a troublesome aspect of infrastructure ownership for some.

"You have the entire history of the big phone companies trying to avoid orders by regulatory commissions to open their networks to competition," says James Love, director at Consumer Project on Technology, a Washington, D.C.-based organization started in 1995 by U.S. consumer advocate Ralph Nader. "You have the entire history of [AT&T's] efforts to avoid court orders and FCC [Federal Communications Commission] orders. You have a whole historical thing with the telecommunications industry [of] exclusive dealing, anticompetitive dealing -- anything they can dream up to screw their competitors."

The effect, in Love's view, is "less competition in the ISP market, high barriers to entry, more consolidations and mergers, and eventually much more monopolistic control over the Internet."

In other words, it means fewer choices for users.

"There are clear dominant players in the Internet, and clear issues when one player comes to dominate too much," Zeribi says, mentioning UUNet and adding, "If they raise their prices on peering, for example, that will have immediate and direct consequences on other companies."

There is disagreement about how far those consequences might extend. Analysts, industry observers, and executives of companies that own the Internet's infrastructure contend that the market is so highly competitive that market forces would prevent any company from becoming too strong and throwing around its weight. And if any company did make a power play to block competition, the consequences would be short-term, insists J.B. Haller, a vice president at Current Analysis, who commented that "there are pricing elasticities in the market. ... They wouldn't do that anyway. It does not make market sense."

As might be expected, executives at the large companies that own Internet infrastructure adamantly agree, saying that people who fear market dominance by one company or a group of companies do not understand the nature of the Internet.

"There's a minor concern by a lot of people who don't understand the market power of the Internet, and that includes the U.S. Justice Department and the European Union," says David Kunkel, vice chairman and executive vice president at PSINet, in Herndon, Va.

Leonard Kleinrock, who played a central role in establishing data networking technology with early academic papers he wrote, says it this way: "The network is so flexible, and it's such an open network in terms of competition and architecture that if anyone began to flex some power, someone else would step in to compete with them."

A professor of computer science at the University of California at Los Angeles, as well as chairman and founder of Normadix, a network start-up in Santa Monica, Calif., Kleinrock was a key figure in the development of ARPAnet, the precursor to the Internet.

Although there is no doubt that large Internet infrastructure owners can and have taken advantage of their size in business negotiations, Kleinrock and many others agree that no coterie of big players has so much power that it can shut down competition.

For Kleinrock, the issue of wielding power over the Internet infrastructure and exerting undue pressures boils down to one thing: "I think the bottom line is that no one is in a position to close down the Internet."

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