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The Cogent-Level 3 Dispute

Posted in the database on Sunday, October 09th, 2005 @ 17:31:12 MST (2141 views)
by Alex Goldman    ISP - Planet  

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According to CEO Dave Schaeffer, both Cogent Communications and Level 3 remain in compliance with the peering agreement. But as of several days ago, no traffic has been traded between the two networks, cutting off customers that rely on a direct connection between Level 3 and Cogent (Karl Bode of Broadband Reports points out that you can read Cogent's side of the story here, with regular updates).

In our opinion, peering agreements are handshake deals that stitch the Internet together, subject to them whim the of parties to each agreement. A broken peering agreement severs the internet, threatening the foundation of the Internet economy. These handshake deals show why lawyers are an important part of business—it's their job to plan ahead for problems when negotiating a deal. We believe that many peering agreements were not written by lawyers.

As long as the Internet is stitched together by agreements that are as personal as they are professional, the web itself can be damaged at any time as strands get disconnected without warning.

A peering agreement is a deal between two ISPs to allow customers to reach sites on each others' network. ISPs need to hand off traffic, to allow their customers to get the data they want. Some ISPs accept that they need to receive traffic, which carries a cost, as a necessary evil.

Many peering agreements, therefore, stipulate that if there is an imbalance in traffic flows, then the company that is sending more traffic than it is receiving pays a penalty based on the extent of the difference. The agreement between Cogent and Level 3 contains no such clause. In compensation, it also allows either side to terminate peering without notice.

Cogent purchased the peering agreement when it acquired PSINet, one of the oldest ISPs. Level 3 seems to wish that it had not renewed the agreement when Cogent made the acquisition.

Don't rely on one backbone

If your only connection to the Internet is through Level 3 or Cogent, you are not able to access 100 percent of the internet. For ISPs, this incident highlights the necessity of having more than one backbone provider.

Broadband Reports pointed out that some RoadRunner customers were complaining about lack of access to certain sites (AOL uses Level 3 for its AOL Transit Data Network in the U.S. and Europe). Contacted on October 7, Time Warner Cable spokesperson Keith Cocozza explained, "As of 11 PM last night we had established new Internet routes to the affected sites. Our Road Runner customers are no longer affected by the disagreement between Level 3 and Cogent. Level 3 carries some of our internet traffic, therefore some of our customers had been prevented from visiting sites hosted by Cogent."

The aspect of this story that we do not cover today is the effect of the dispute on third party ISPs. To share your story, click on the feedback link below.

Follow the money

Many ISPs hate Cogent. Internet News' Susan Kuchinskas, in her article on this topic, Peer Dispute Leaves Some 'Net Users in the Dark, spoke to Daniel Berninger, senior analyst with Tier 1 Research, who explained that the confrontation is about two completely different business models.

While in the early days, all ISPs peered, eventually things shook out to where the tier 1 players peered with each other but charged everyone else to carry their traffic. From time to time, a tier 1 company steps forward and tries to charge its fellows. "It destroys the whole efficiencies of the Internet when, all of a sudden, you start counting packets and charge by the pound," Berninger said.

...

"My feeling is this is more of a competitive attack on Cogent," Berninger said. "These are two companies that have opposite business models. Cogent is a low-cost player that essentially undercuts the price of the market. Level 3 is an elite player that charges a premium to connect to them." Level 3 has been hoping that pricing pressures would diminish, but that hasn't happened. Said Berninger, "My view is, this is an act of desperation."

Of course, Schaeffer also argued that Level 3 was desperate. "I think it's a sign of desperation at Level 3," he told us. "50 percent of their revenue goes to paying interest payments."

We reminded Schaeffer that we knew how Cogent had escaped its debt (see Cisco, VCs Take Over as Cogent Restructures). "You're right," he admitted. "We got rid of our debt and it wasn't pleasant. We exchanged debt for equity and bought out some creditors, but the result is that we're ready to drive down costs for our customers."

At the time, Cisco could have driven Cogent into bankruptcy as several hundred million dollars' worth of vendor financing came due, but chose to accept a significant stake in the company instead.

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.

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