Journey to the Center of the Internet

While the edge is profitable, this journey to the center of the Internet finds a large money pit. The core is a technological success, but a business failure.

by Gordon Cook [May 24, 2004]

Gordon Cook is the founder and principal of The Cook Report on Internet. Since 1992, the paid-subsciption report has covered economic, political, and technological aspects of the Internet (essentially, everything Internet). Cook brings a combined economic and technological background to his work. With archived indexes and excerpts dating back almost to the beginning of the Internet, the Cook Report website is a valuable resource for all.

[Alex Goldman:] On April 21, 2004, Gordon Cook opened his discussion list on the economics and architecture of the backbone with an interview with Roxane Googin (editor of the High Tech Observer). For background on this descussion, see the summary of issue 13.03: Economic Pressure on Long Haul Fiber.

She said in part, "There's another round of bankruptcies coming. No one ever plans to go bankrupt. They always plan to raise another round of money. Or to become profitable. Or to cut costs. But sometimes you can't raise money right on schedule. Look at what happened to WorldCom. They went broke on a Tuesday. The cash just ran out. They couldn't pay their bills. Someone was going to call them on it. That is one way to go bankrupt and it is quite a bad one. The other way is say you are an RBOC and you have a total debt of $50 billion. This comes due in tranches. Say you are in 2005. $20 billion comes due. You suddenly find you can't roll it over. You are bankrupt."

Cook's question was this: what can be done to avert the problem? One month later, we have some answers, presented here, but the discussion continues:

This report shows why the prospects are dim for a full fledged recovery for telecom as long as the best effort paradigm remains as the only way of doing business.

The Internet became a capital repellant best-network paradox—see The Paradox of the Best Network—because it was assumed by the implementers that a best effort network would be good enough as a foundation on which to build the new digital foundations of telecom (and also see the related letter to FCC Chairman Powell asking that the FCC allow the BOCs to fail fast, not to bail them out).

They were wrong. What resulted was a tragedy of the commons. There was every incentive for spam and for building peer-to-peer applications because resources were there that could be taken with being paid for. While fiber optic technology provided massive amounts of bandwidth, enabling the over provisioning that sustained the best effort commons, everyone would ultimately have to over provision every link. With that best effort paradigm of "just keep on trying until you eventually deliver the bits," everyone could plug in and use the highway without having to worry about paying with any kind of proportionality for one's use.

But an ugly problem raised its head. The prices of the big Cisco and Juniper routers did not come down. A line card for OC-192 in a big Cisco router was very expensive. And line cards for OC-768, as they become available, are becoming even more so. Gigabit Ethernet and fiber could blast incredible numbers of bits incredibly cheaply. But to make best effort work, more and more links would have to be over provisioned at the IP layer with very expensive routers—routers so expensive that no business model could sustain their cost.

My market share is killing me
What we have seen in this discussion so far is that there is little incentive to over provision anything except to preserve one's market share. But we have seen through my long interviews of March 12 and April 4 with Farooq Hussain (of Network Conceptions) that preserving market share requires pouring more money in than one gets back. Eventually the carrier runs out of money and declares bankruptcy. Therefore we reach the unpleasant conclusion that the best effort Internet is sustainable only as an "entitlement"—in other words as government-funded network.

But can governments do it? Unlikely. Governments are running out of funds. Especially in the U.S., where the official ideology is currently to do it on credit and pay no taxes because government by definition is incompetent.

Go to page two: Last one standing foots the bill >