The Cogent-Level 3 Dispute — continued

Culture clash
Schaeffer said he is not spoiling for a fight with Level 3. "I don't want a fight. I want to provide a high quality of service to customers. My first preference would be to turn the connections back on. We're sitting here, ready at any point to turn them on. The connections are still in place. I don't want war; I want peace."

Cogent's offer to Level 3 can be found in its October 7 press release here.

Although Level 3 did not contact us, Internet News' Kuchinskas spoke to a Level 3 spokesperson who made it clear that a return to the status quo was not an option. "We're committed to the business decision. Cogent will need to either enter into commercial agreement, or they'll need to reroute. If they don't, their customers will need to find an alternative."

So Schaeffer has a second option, and it is quite aggressive. "If Level 3 says they'll never do it, never turn the connections back on, the only way I can give my customers access to their customers is to get their customers to switch."

Cogent is offering single homed Level 3 customers a year of free service at whatever bandwidth they currently use. Of course, Level 3 customers tend to use 2.5 Mbps connections, or 10 Mbps at the most. Cogent sells 100 Mbps for $1,000 per month (with higher rates for ISPs seeking transit).

"If they're buying upstream transit solely from Level 3, just show us a copy of that invoice and we'll give them service for one year for free. It benefits our existing customers and our belief is that they will grow their traffic," Schaeffer explained.

Level 3 could upgrade from a 10 Mbps or 20 Mbps backbone to 80 Mbps, but that would cost money. "Level 3 could buy equipment, but it's hard to do when you have a $6 billion debt load," noted Schaeffer.

Level 3, Schaeffer said, is not negotiating. "Level 3 has, I think, not responded, except to say, 'pay us.' We're not going to raise our prices. We made that clear to the industry. There are business models that couldn't exist except on our network, except at our price levels, but some people want a club deal where all the big guys have the same price."

"There's a word for that," we objected.

"Yes: collusion," Schaeffer confirmed.

Schaeffer said that Level 3 is scared of Cogent. "We're gaining significant market share at their expense. Their traffic grew from Q1 to Q2 by 13 percent, ours grew by 28 percent. We're growing by 250 percent at an annual rate, and they're growing by 75 percent. They're a bigger company financially, but we're the largest Ethernet provider in the world. In terms of lit bandwidth and bits carried we're bigger than them. In terms of lit bandwidth, we're bigger than Qwest, Level 3, and Williams combined."

The fiber glut
It's a tough time to be a backbone. There's more capacity available than there are customers. An IDC report on Level 3's website, U.S. IP Wholesale Trends [.pdf], stored there because it's flattering to Level 3, nevertheless reaches an ominous conclusion:

The large number of carriers going bankrupt but returning to the market without takingcapacity offline will lead to a renewed shakeout in the IP market in a few years. Wholesale will bear the brunt of pricing declines, and while companies with greatest exposure to wholesale IP have the greatest potential difficulties, it is likely to be carriers with both retail and wholesale operations, and hence a lack of focus onwholesale, that will suffer most from future market turmoil.

To offset shrinking revenue streams, placate investors, and demonstrate healthy financials, service providers will need to take market share from competitors or focus on other services.

Gordon Cook pointed out this issue last year, when he allowed us to publish a portion of his newsletter we called Journey to the Center of the Internet. He noted specifically:

Level 3—not yet bankrupt—has a business plan to be the last greenfield player standing. Yet a look at its 10-Q filing for the time period from January through March of 2004 shows a continued downhill slide in current assets from $1.946 billion a year ago to $1.747 billion now. In our opinion, even Level 3 will eventually run out of cash.

Farooq Houssain, principal analyst at NCir (a.k.a. Network Conceptions) summed it up more succinctly at Freedom To Connect earlier this year, when he said of the backbones' business model, "they're buggered."

The lessons to ISPs are clear. This may be just round one of a fight to the death among the backbones. ISPs need to have more than one connection to the internet.

ISPs need to pay attention to the potential problem. The folks on the NANOG list are certainly worried, as noted at Broadband Reports. To share your experience of the Cogent—Level 3 dispute, just click on the Feedback link below.

— End

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