M&A activity among service providers continues to reshape the North American market, where network consolidation is creating ripple effects across the wholesale and retail sectors.

In a new market report provided exclusively to Light Reading, Internet intelligence firm Renesys Corp. offers two examples: Level 3 Communications Inc. (NYSE: LVLT) losing Verizon Communications Inc. (NYSE: VZ) as a customer following the purchase of MCI, and Sprint Corp. (NYSE: S) losing SBC's business due to its integration with AT&T Inc. (NYSE: T) -- both of which Renesys says caused significant shifts in the competitive landscape. (See Verizon Closes MCI Buy and New AT&T Launches.)

Renesys gathers information from service provider routing tables to create an Internet Index showing which service providers are "most critically important for reaching customer networks in each of the geographic markets that make up the global Internet," and a Customer Base Index that compares the number and size of networks reached by each provider's transit services in the retail, wholesale, and backbone segments. The report covers the top 10 service providers for the month to July 26.

According to the report, when Verizon Internet Services switched its thousand-plus North American customers to MCI in late June, "Verizon's defection reduced Level 3's North American Wholesale Customer Base Score by roughly six percent overnight -- not enough to endanger their standing as the number 1 Wholesale provider in North America, but temporarily dropping [Level 3] to the bottom of the regional Customer Growth Rankings."

Table 1: North American Wholesale Customer Base

Renesys notes Level 3 has been busy selling into new markets since then, adding high-volume retail customers including video sharing site YouTube Inc. .

Table 2: North American Retail Customer Base

Renesys says the fallout from the AT&T/SBC integration will primarily be felt at Sprint. The carrier, which provided backbone transit services to SBC's 2,700 globally routed customer networks, "suffered significant losses in their North American Backbone and Wholesale Customer Base scores as a result of SBC's move onto the AT&T backbone. As a result, MCI actually managed to move decisively past Sprint into the number 2 position in the North American Backbone Customer Base Index for the first time."

Table 3: North American Backbone Customer Base

Consolidation also has its perils for the providers switching their networks. Renesys reports that on July 26 "the AT&T reengineering resulted in a temporary 'leak' of roughly 20,000 AT&T customer networks through SBC, reportedly tripping maximum-prefix limits on SBC's backbone peering sessions throughout the Internet. As those sessions shut down and awaited manual reconfiguration at affected service providers, the result was sporadic route instability lasting for several hours."

Level 3 had similar problems with network instability and downtime in April when it integrated WilTel's network. (See WilTel Sale Completed .)

AT&T's upcoming integration with BellSouth Corp. (NYSE: BLS) could have an even larger impact when it hits the Internet, since BellSouth will bring with it more than 5,000 networks. (See AT&T, BellSouth to Merge.) BellSouth's transit providers, Level 3 and MCI, both stand to lose ground in the wholesale and backbone Customer Index, while an integrated AT&T/BellSouth could beat MCI to second place on the wholesale index and threaten number one provider Level 3.

Plus, "if AT&T's rocky start to reintegration is any guide, there's the potential for more severe backbone instability," says the report.

Despite the technical challenges, Renesys reckons acquisition and integration as a growth strategy is a worth the risk: "These short-term operational headaches still seem like a reasonable investment, given the strategic and competitive benefits of attaining dominant positions atop the regional and global markets for IP transit."

Renesys does say the Verizon and AT&T deals have been less significant on the global front. Verizon's integration with MCI primarily affects Internet customers in the northeastern U.S., and the integration of SBC and BellSouth will only cement AT&T's position as the top retail provider in the world ahead of China Telecom. "But at the end of the day, AT&T is only number 5 and number 7 in global wholesale and backbone provider rankings, respectively, categories where Sprint, Level3, and MCI fight for worldwide bragging rights."

— Nicole Willing, Reporter, Light Reading