Financial Times on MCI/WorldCom merger and Internet sale to C&W:
<<<
FRIDAY MAY 29 1998ÿÿComputingÿ
WORLDCOM/MCI: Big business logs on
The WorldCom-MCI deal opens the way for a dominant few to make money from superhighway tolls, says Richard Waters
A skirmish over the future of the internet between the European Commission and America's pushiest telecoms company seems, on the surface, to have been resolved to everyone's satisfaction.
WorldCom, in order to win approval for its $37bn (œ22.1bn) acquisition of MCI Communications, will ask MCI to sell one of the main arteries that carry internet traffic in the US - still the main hub of the global network. That will make Cable & Wireless, its buyer, the first non-US carrier to own a piece of the core infrastructure on which the informal network rests.
Karel Van Miert, the European Union competition commissioner who is not above a little grandstanding on such matters, may now choose to declare victory and move on. His very public wrangling with WorldCom over that company's potential dominance of the internet has had a tangible result, opening a chink in the American control of the system. "Politically, it's an extremely adroit move for MCI to sell to a European carrier," says Greg Staple, president of Telegeography, an industry research firm.
To let matters rest there, though, would leave many of the underlying issues unresolved. WorldCom, with MCI, will still wield considerable power over the internet. And even if that does not amount to a stranglehold, C&W could still find itself relegated to a second tier of internet players, potentially leaving a smaller oligopoly of core carriers with potential - and increasing - pricing power over the network.
The problem for antitrust regulators, whether in Europe or the US, is that the internet is no longer the cosy co-operative it once was, yet still exists outside the jurisdiction of much traditional telecoms regulation.
The handful of carriers whose networks form the core US "backbone" of the system - WorldCom, MCI, Sprint, GTE and PsiNet - once linked their networks with little thought to individual commercial advantage. That has made it easy for a customer entering the superhighway through, say, a Sprint access point to find his way to a web site maintained by MCI. Through the packet-switching technology of the internet, information has flowed back through the least congested channels.
The interconnections between the rival networks that have supported this sort of open interchange are already being subjected to new commercial realities. Unlike Microsoft's dominance of personal computing, no-one owns the standards that underlie the internet. But by limiting access to their networks - and giving preferential treatment to their own customers - telecoms companies have always been in a position to squeeze smaller rivals. Carriers that are not part of the charmed circle of "backbone" companies already complain that their traditional links to the internet have deteriorated.
Fred Briggs, chief engineer at MCI, denies that a pecking order is developing. The talk of a core group of "tier one" carriers "is an artificial distinction that doesn't exist on the internet", he says. Instead, all carriers are able to connect their networks - known as "peering" - on equal terms, provided they meet certain basic systems requirements. "I can't imagine those peering relationships will change," he adds.
That is not the way that smaller carriers - and some regulators - see things. They think of it as a series of airport hubs with a handful of dominant airlines carrying passengers between the main centres and many smaller carriers feeding in their own traffic. By controlling the best landing slots, the big carriers are in a position to squeeze out the small fry.
Owning a large fleet of airplanes is not enough, on its own, to create a new competitor. This is effectively what C&W has achieved with its purchase of the MCI "backbone", according to rival carriers. The agreement will leave MCI with its base of commercial and residential internet customers, and it is these customers - and the traffic they provide - that represent the real strength of its internet business.
"Anyone can build a network, but it doesn't give you the traffic," said GTE, the rival carrier that has been the most vociferous opponent of the WorldCom/MCI merger - no doubt partly because it tried to buy MCI itself.
MCI has sold part of its traffic to C&W - the wholesale side of its operations, represented by the internet service providers who resell capacity on the MCI backbone. It has also guaranteed certain levels of traffic for the new C&W "backbone" for the next two years: replacing that with its own customers' business will be the big challenge, if C&W is not to slip inexorably into the ranks of second-tier carriers.
Ownership of network assets may become even less valuable in future. Two new national fibre optic networks in the US, being built by Qwest and Level 3, will leapfrog existing carriers with massive amounts of new capacity when they are completed. At that point, C&W's place at the top table of backbone providers will become even less assured.
As well as keeping its most valuable customers, meanwhile, MCI will hold on to many of the other things that underpin its internet business, including much of the engineering talent that made it one of the first big internet carriers. Tellingly, Vincent Cerf, head of internet architecture and engineering and a man who is widely seen as a one of the fathers of the internet, will remain at MCI.
And WorldCom, still with the biggest piece of the backbone under its control, will continue in effect to control some of the airport hubs that govern the exchange of traffic on the network. Two of the most important interconnection points in the US - known, quaintly, as Mae West and Mae East - are managed by WorldCom.
The need for interconnections between powerful telecoms networks is nothing new. The difference with the internet, however, is that they are not governed by the sort of heavy regulation that determines the terms on which public carriers traditionally switch traffic.
According to Mr Briggs at MCI, commercial interests, rather than regulators, are perfectly capable of handling these interconnection relationships as the internet develops. "I see no way we could create some sort of oligarchy, or a single supercarrier - there are just going to be too many competitors," he says, pointing to the imminent arrival of the Qwest and Level 3 networks. Until those competitors arrive, though, a merged WorldCom/MCI will clearly remain the biggest fish in the growing internet pond.>>>> |
