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Internet Core a Tech Success but Economic Disaster

Why the Best Effort Network Can't Make Money

Group of Experts Looks at Business Issues - Finds Massive Consolidation that, in US Has Yet to Happen, to Be the Only Way to Staunch a Collapse in Prices that Are Now Less Than OpEx Expenses

Investigating How to Build a QoS Alternative to Best Effort in Long Haul Networks

No Lasting Telecom Recovery Without Answers to these Issues

This two month issue explains 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 http://netparadox.com/ - 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. 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, with fiber optic technology, links could be over provisioned, to sustain the best effort commons, everyone would ultimately have to over provision every link. With best effort paradigm of just keep on trying until you eventually deliver the bits, everyone could plug 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 OC768, 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 that were put in place without a business model that could sustain their cost.

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 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 USA where the official ideology is now do it on credit and pay no taxes because government by definition is incompetent.

What Farooq Hussain in his discussion with me on April 4 did was to detail all the ways that providers of best effort service have found to drive prices through the floor. While home users and small business may have to make do with cheap best effort service, large business enterprises need something better than best effort service. This has been clearly understood since the mid 1990s. However the technology to give it then wasn't ready, and the idea that it might be really needed for the further progress of the industry drowned among the waves of dot com speculation that ended the decade.

Plain and simple in the best effort universe there was and still is no incentive to deliver any defined quality of service to someone on a competitor's network because with no settlements there were no means of getting PAID for such a delivery. With David Isenberg's famous stupid network paper of June 1997 it was becoming much more clear to most people that a digital end-to-end based IP network would be an orders of magnitude more cost effective way of delivering telecommunication services. What never became clear even after a trillion dollars were lost in the resulting clash is that seven years after Isenberg's paper no one has squarely dealt with the problem that without settlements there is no incentive for anyone to treat the customer of a competitor fairly.

Because inter provider settlements aren't practicable every carrier in the game (well at least those in the American side of the game) is still caught up in the fantasy of trying to sell enterprises on the idea that their infrastructure is big enough that they can have all the global connectivity they will ever need without ever having to traverse someone else's infrastructure.

The Foundations are Broken.

For the last few years most industry discussion has focused on killer APs to use lots of bandwidth and some how bring in new revenue. However, If the fundamental economic structure on which the best effort network today works is broken, finding new applications to use new bandwidth will only be like adding new rooms to a termite infested and collapsing castle, sucking in more wealth to be inexorably chewed up without payback.

We see three groups on the best effort playing field. The Local Exchange Carriers in the US and National Carriers in Europe and Asia. Others who though various technology platforms and business models sell end user services. And third, the long haul fiber players (Level 3 Global Crossing, Sprint ATT, MCI) that look to be the ones without any real value.

It can be argued that they have inadvertently set themselves up in the new optical backbone IP packet arena in such a way that they can be continuously by-passed. They are the interstate highways over which companies with business customers send packets. Companies with local customers will need to pay them tolls to get traffic to other local customers. But their fiber is a perfect commodity that can be gotten access to at carrier end points or to ensure that they can always be undersold at a neutral internet business exchange.

For enterprise customers the network acts as an enabler of topology bypass. But such customers also have a second form of by passing a direct business relationship with the owners of the core networks. This bypass operates at the protocol stack level and is driven by companies who buy bandwidth at layer two and deliver VPN services to the end user edges at layer 3. Topology by pass - Don't get a low enough price at a carrier pop/ Go to a neutral Exchange and you can shop from carrier racks that will undercut each other with vigor to get your business. Protocol bypass - price still not low enough? Then by VLAN service or VPN service from a party set up at exchanges that operates as a carrier to deliver your traffic even more cheaply to what ever set of destinations you need.

In the 1980s deregulated phone network the carrier in the center was assumed to have the valued business proposition and had to share fees for call origination and termination. Twenty years later enabled by the IP protocol, the edges have effectively done the by pass of the center. The center has been left without a value proposition while ironically it is still expected to pay termination fees to the edge.

A key future question may well be whether the center can ever deliver a value proposition to the edge. Best effort has no value beyond that of an ever deflating commodity. In this context a critical future question may be wrapped up in the issue of whether QoS services can ever be constructed in such a way that they return a monetary value proposition to the center.

In our extended discussion Dave Siegel who runs Global Crossing's backbone says: "At $25/meg, I'm already below what I believe my cost is to add additional bandwidth." Here is the COOK Report's translation of the general import of what Dave is saying: it would seem that income from long haul IP Networks may be sinking below the cost of operations let alone the cost of capital equipment and the amortization of same. Current best effort operations are devouring capital derived from sales of existing bonds or efforts to float new ones. Creative accounting may use income from other operations (depending on the business) to mask the flow of red ink. The ability to buy up assets for less than their cash value enables the deflationary spiral to continue. Level 3 - not yet bankrupt - has a business plan to be the last greenfield player standing. Yet a look at its from 10 Q for January through March of 2004 shows a continued down hill slide in current assets from $1.946 billion a year ago to 1.747 billion now.

http://www.sec.gov/Archives/edgar/data/794323/000110465904013578/a04-5515_110q.htm
In our opinion, even Level 3 will eventually run out of cash.

Given current circumstances as dominated by a best effort operational mind set, bandwidth will be paid for in one of two ways: either by devouring investor's remaining equity or by public funds through government purchase of services or taxpayer funded-bailouts at some point in the future.

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. 8

Some of the Business Model Issues of Peering and Interconnection Or Why the Government Could Eventually Be Forced to Take Over p. 21

We Are Now a Decade into IP Based Optical telecom without a Viable Business Model -- An IP and Optical Network Architect Looks at the Collective Insanity of the Bubble and Calls for Fresh Assessment p. 25

Symposium Discussion

We Built it But They Did Not Come - Now What?

Broken Model of Peering and Interconnection and Fiber Over Supply Not Being Solved In Absence of Viable Business Model - Global Foundation of Digital Telecom Still Termite Ridden p. 28

Houston: We Have a Problem Editor's Introduction, p. 28
The Problems of a Capital Repellant Business Model for Internet and Telecom. p. 29

Chapter One -Transition Problems Inevitable: p. 30

Larry Roberts: The Packets Do Not Say Who's Responsible p. 33
US May Take Another Five Years to Dig Out of FCC & Boom Created Problems p. 34

Chapter Two - Best Effort Paradox & Need for Initiatives Other than Best Effort Editor's Introduction: p. 36

Problem Solving Options: (a) UN, (b) MPLS, (c) Internet IXs? p. 38
MPLS and Global Crossing - Problems and Prospects, p.39
Dynamics of Disappearance of Settlement Free Peering, p. 42
Price Collapse Makes Avoidance of OpEx More Important p. 44

Chapter 3: Is There a Point of Price Stability? p. 46

R and E Owned Fiber User Controlled Light Paths and IPv6, p. 47
Where Things are with VoIP, p. 48
Searching for a VoIP Revenue Model p.49
Summary: Don't Look for Quick Fixes from IPv6, UCLP or MPLS p. 52
MPLS VPNs and MPLS IXs p. 53
Lambda Switching and OpEx Costs, p. 54
Exchange Point Alliance? p. 56
A Challenge From Melissa Davis - Enable Applications that Generate User Demand and Higher Revenues p. 58
Market for Faster-than-Real-time File Transfers? p. 59

Chapter 4: Some Possible Economic Impacts of Not having QoS p. 60

Chapter 5: A QoS Business Model: p. 78

Exploring the State of Long Haul Packet Networks

A Survey of Global Business Conditions in a QoS Context of IPv6, MPLS and Flow Routing -- A Conversation with Caspian's Larry Roberts, p. 90

"Bookend" to Network Economics - A Summary and an Anticipation -
by Melissa Davis P. 97

Dave Hughes Explains Sip, VoIP and FW Dialup in Voice Communication with Nepal over the Internet p. 98

Digital Photography Comes of Age -- Two New O'Reilly Books Reviewed in the Context of New Tools p. 101

Side bars:

Over Provisioning Dilemma: Why Adding Bandwidth at One Link Just Shoves Congestion Elsewhere p. 37
Technology and Investment Have Out Run Demand, p. 62
Transatlantic Virtual Peering, p. 68

Contributors to this Issue

Affiliation given for purposes of identification - views expressed are those of the contributors alone

John Curran, former CTO XO, now a consultant
Peter Cohen, Peering Director Telia-sonera
Frank Coluccio, designer of optical networks in New York City
Melissa Davis, optical network architect formerly with Cisco- now with RS Information Systems - and valuable Editor for this issue
Alex Goldman, Reporter editor www.isp-planet.com for Jupitermedia, covering ISP issues
Dan Golding, Senior Analyst Network and Telecommunications Strategies Burton Group
Roxane Googin, financial analyst Editor Hi Tech Observer
Steve Heap, CTO of Arbinet a bandwidth broker and VoIP Traffic terminator,
Farooq Hussain, Network Architect Sprint, MCI, now Principal Network Conceptions
Peter Juffernholz, former Peering Director Teleglobe, currently developer of Business Alliances DT
Pete Kruckenberg, Architect Utah Education Network
Martin Levy, former VP engineering Concentric, independent consultant
Tony Li, Router Architect at Cisco, Juniper and Procket, currently Consultant
Francois Menard, Canadian policy expert and municipal fiber network architect
Don Mitchell, former Program Manager National Science Foundation currently retired
Andrew Odlyzko, Director Digital Technology Center University of Minnesota
Taylor Reynolds, Policy Analyst, Strategy and Policy Unit, International Telecommunication Union
Jere Retzer Sr Mgr, Next Generation Networks, Oregon Health & Science University
Larry Roberts, Arpanet pioneer and CEO Caspian Networks
Dave Siegel, VP Backbone Engineering, Global Crossing
Max Smetannikov, Director Business Development Global Analysis Services in NYC
Jim Southworth, former chair DSL forum, VP Concentric, now Secure Pathways CEO
Bill St Arnaud, Director CA*Net4
Darin Wayrynen, Fouder Goodnet, former CTO Winstar, current WISP operator