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Whither WorldCom's Network?

Light Reading
News Analysis
Light Reading
7/29/2002

When the biggest Internet provider in the world files for the biggest bankruptcy in corporate history, you’ve gotta wonder what's going to happen to one of the largest data networks in the world.

First item: Experts say an outright shutdown of WorldCom Inc.'s (Nasdaq: WCOME) network is unlikely; and the company has secured funds to run the network through the bankruptcy process.

In an open letter last week, WorldCom president and CEO John Sidgmore wrote: “And we plan to emerge as quickly as possible [from bankruptcy] with our competitive spirit intact. In the meantime, I pledge that we will work every day to provide the industry's best service to our customers, and to operate WorldCom with the highest ethical standards.”

But that letter appears to have done little to soothe consumer fears. Alex Rubenstein, the chief operating officer of a traditional service provider, Net Access Corp., thinks that many of WorldCom’s customers are at least thinking about changing service providers. “Two hundred to 300 of our customers rely on WorldCom,” he says. “At least a quarter to half have said they’re nervous. There’s definitely a lot of concern.”

Meanwhile, WorldCom's competitors are wasting no time as they zero in on potential customer shifts. AT&T Corp. (NYSE: T), looks to be particularly aggressive and going after customers they believe are ready to shift (see AT&T's Dorman Weighs In on WorldCom).

Observers say customers are definitely looking around for the emergency exit. Andrew Odlyzko of the Digital Technology Center at the University of Minnesota says he’s certain many if not most of the company’s customers are shopping around for a more stable provider. “That doesn’t mean they’re telling WorldCom,” he says, pointing out that the customers will probably stay with WorldCom until their contracts run out, even while they sign up with another service provider as a backup solution.

There certainly seem to be enough service providers yearning for the possibility to relieve WorldCom of some of its customers. “AT&T, Sprint Corp. [NYSE: FON] and Cable & Wireless [NYSE: CWP]… are all vigorously approaching WorldCom customers,” says Bill Woodcock, the research director of Packet Clearing House, a non-profit devoted to helping Internet service providers. He says that most of the bankrupt carrier’s competitors are probably trying to build out parallel infrastructure so that they can inherit its customers when it goes under.

The bankruptcy proceedings restrict customers from bailing on ongoing contracts before they’re completed. The only way a customer can legally terminate a contract in a bankruptcy proceeding, according to Coleen Boothby, a partner at law firm Levine, Blaszak, Block & Boothby, is if they can convince the bankruptcy judge that the provider has breached the contract through degradation of service. And that, she says, just might happen. “There’s not going to be a network shutdown,” she says. “The thing to worry about is a gradual degradation of service.”

Is it possible for the network to shut down? Most experts say it's unlikely. Other observer seem to think that deterioration of services is more likely than a total meltdown. WorldCom is just too big and too important to go dark, they say.

“If WorldCom were to go dark, the Internet would be shut down -- short term at least,” says Jeff Kagan an independent analyst based in Georgia. “The other service providers would be so overwhelmed… There’d be a bottleneck of historic proportions. But I refuse to believe that that would happen. You won’t wake up one morning and find that you have no Internet connection and no working phone line.”

Way before services on the network could be turned off, Kagan says, both UUNet and MCI (Nasdaq: MCIT), WorldCom’s most valuable assets, would be acquired by companies that could keep them up and running. And even if the unimaginable does happen, he says, there will be plenty of notice for people to migrate to alternative providers. “There’d be plenty of warnings. If they have to shut down, we’ll see it months in advance. This is the most closely watched management team in history.”

Andrei J. Jezierski, an analyst with i2 Partners LLC, agrees. “[The company] will have to go through many layers before that ultra-worst scenario could happen,” he says. “We’re talking at least five to six improbable events before that would happen.”

So, just how big is WorldCom's network? According to the company, it has 31,000 data points of presence (POPs). A WorldCom spokeswoman says: "The only continent we don’t offer service in is Antarctica.”

Despite the monster claims made by WorldCom (see Did WorldCom Puff Up the Internet Too?), and commonly quoted statistics saying the network accounts for 40 to 50 percent of all Internet traffic, independent reports downplay its importance. Woodcock, of Packet Clearing House, co-authored a report on the WorldCom network conducted for CNN. That study concluded that only 8.8 percent of all hosts connected to the Internet would be disconnected by a complete WorldCom shutdown. Because almost all of those hosts have a direct business relationship with WorldCom, Woodcock says, they are probably already searching for a backup plan and won’t be caught off guard if the network were to shut down.

The hardest hit in the case of a network shutdown, the report concludes, would be a very small number of hosts (only about 0.5 percent) that may not know that they are dependent on UUNet. “These customers would probably be very surprised to find themselves cut off,” the report states.

Regardless of whose numbers are right, the fact remains that a network shutdown at WorldCom would affect a lot of consumers, and that the U.S. government is one customer that would be the most affected. And if the government doesn’t want the network shut down, it won’t be, observers agree.

An exemplar of the government’s dedication is Federal Communications Commission (FCC) chairman Michael Powell, who has gone out of his way to reassure consumers that the WorldCom network is not in immediate danger of being shut down. And even if the worst happens, he has pointed out, the company is required to give at least 30 days notice. “This Commission will act vigilantly, and to the full extent of its statutory authority, to protect the integrity of the telecommunications network and protect consumers against any abrupt termination of service,” he said in a statement on Sunday after WorldCom had filed for bankruptcy.

The government support of the WorldCom network is not carved in stone, however. For starters, a government bailout of the company is highly unlikely. “Unlike its support of the airline and steel industries, an outright bailout by Congress of WorldCom would be difficult due to the alleged fraud committed by the company's senior management,” Standard & Poor’s pointed out in a statement last Thursday (see S&P: What WorldCom Means for Telecoms).

The current telecom turmoil has already resulted in some prominent network shutdowns, however, so it's not out of the question. KPNQwest NV (Nasdaq/Amsterdam: KQIP), which used to carry about 40 percent of all Internet traffic in Europe, shut down a large part of its network a month after filing for bankruptcy (see KPNQwest for a Buyer and KPNQwest Breaks Its Ebone).

There are other examples of network shutdowns too. [email protected], the largest provider of high-speed Internet access via cable modem, shut down earlier this year. The bankruptcy judge in that case, Thomas Carlson, concluded that shutting down the network didn’t pose a risk to public health or safety, which, he said, was the only standard he could invoke to put consumers’ interests before creditors.

“I experienced disruption as a consumer for about a week,” says former @Home customer Dave Roberts, who is the founder and vice president of marketing at Inkra Networks, pointing out that many other consumers were only cut off from service for a day or two. “It was relatively quick and painless.”

Much more disruptive was the DSL network shutdown at Northpoint Communications early last year, Roberts says (see DSL D-Day). That company gave less than 72 hours notice of the shutdown, and Roberts says he has acquaintances who were left without service for more than two weeks.

As of yet, there have been no signs of Internet performance degradation following WorldCom’s bankruptcy filing, according to a report released today by Keynote Systems, a company that measures the pulse of the Internet 24 hours a day in 50 cities around the world. Many observers, however, worry about what might lie ahead. “If they continue getting rid of people, it could be a problem,” cautions Rubenstein of Net Access.

— Eugénie Larson, Reporter, Light Reading
http://www.lightreading.com

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erbiumfiber
erbiumfiber
12/4/2012 | 10:02:09 PM
re: Whither WorldCom's Network?
Can the creditors force the sale of UUNET to cover WCOM's debts? And would the sale of that asset be sufficient to cover the debts? Although the current potential buyers are strapped for cash, I could see a consortium of investors scraping up the cash/loans to buy it. It seems like the only piece of WCOM that everyone is positive about and the one that has any hope of producing meaningful revenue.

I know that they come up with some sort of "reorganization plan" that the judge must approve (and that they've picked their reorganization experts), I'm just not sure where it goes from here. But I can't see UUNET shutting down, not when there are enough interested buyers (or so it seems...).
StartUpGuy1
StartUpGuy1
12/4/2012 | 10:02:08 PM
re: Whither WorldCom's Network?
There is no one interested in buying either UUNet or Genuity because neither of them have shown that they can make money on their networks.

Even if WorldCOmm wanted to sell UUnet, the issue is the price would be so low that it would not even begin to cover the debt load.

As for Genuity, look at what happened when the "Verizon Security Blanket" was ripped off them by Verizon. Stock cratered and now they are looking a bankruptcy.

The Internet Backbone business is very difficult to make a profit in (if not impossible) in today's market. No product differentiation and low Gross Margins.

Not a formula for a successful buy-out or business.
jamesbond
jamesbond
12/4/2012 | 10:02:08 PM
re: Whither WorldCom's Network?
But I can't see UUNET shutting down, not when there are enough interested buyers (or so it seems...).

-----------------------------

How come nobody is interested in Genuity and
apparent interest in UUNET?
Paul Andrews
Paul Andrews
12/4/2012 | 10:02:07 PM
re: Whither WorldCom's Network?
O.K., so AT&T, Sprint, and Cable and Wireless are aggressively persuing UUNet's spooked customers. But when is the economics of the situation going to improve?

Are everybody's pipes still so empty, demand so low, and our engineer's ability to create more capacity on the same plant so unstopable that we may never be able to pay for the investment?
vapa
vapa
12/4/2012 | 10:02:07 PM
re: Whither WorldCom's Network?
There is no one interested in buying either UUNet or Genuity because neither of them have shown that they can make money on their networks.

Even if WorldCOmm wanted to sell UUnet, the issue is the price would be so low that it would not even begin to cover the debt load.


Umm... Do you know what in the world you are talking about? UUNET not making money? UUNET being sold cheap? I say you do your research again and thoroughly this time. You are completely wrong.
rjmcmahon
rjmcmahon
12/4/2012 | 10:02:06 PM
re: Whither WorldCom's Network?
But when is the economics of the situation going to improve?
_________________

Here are some things I believe need to occur.

o OPEX per bit delivered needs to be reduced by an order of magnitude. Many more layoffs will occur, including the ILECs.
o The number of knowledge worker commutes will need to be reduced and replaced by real VPNs (not the fraudband stuff)
o Consumers need to pay direct for content consumption.
o Entertainment producers and consumer electronic mfgs need to collect a tax to help pay for last mile FTTx. (Technology providers should only give them DRM if the DRM solutions also helps collect and pays for the last mile build out.)

Then the economics will make sense per old world business models and no JP Morgan or Citigroup charitable trusts faking independent market transactions will be necessary.

Unfortunately, solving the political side of the problem will make the economic problem look like a walk in the park.
digerato
digerato
12/4/2012 | 10:02:05 PM
re: Whither WorldCom's Network?
"How come nobody is interested in Genuity and
apparent interest in UUNET?"

I'll hazard a guess: UUNet owns 50+% of the Internet pipe marketplace in the US and is generally believed to be profitable (they certainly seem to run a top knotch operations staff).

Genuity owns a small fraction of the US Internet pipe market and reputedly owes $1.5Bn to Verizon alone. Much better to let it go bust and then buy the network for pennies.

Cheers,

Digerato
network
network
12/4/2012 | 10:02:04 PM
re: Whither WorldCom's Network?
If you look at the latest skitter plots it can be easily seen that AS's 701-3 are the biggest player in the internet reachability game. Someone will jump on UUNET's core network and the rest will use fear to win customers that were held close by the internet pioneer.

Let the shake up begin. The sooner it starts the better. Not necessarily for migratory customers but at least for the economy.
WizzKid
WizzKid
12/4/2012 | 10:02:04 PM
re: Whither WorldCom's Network?
The combination of Dot.com bust, September-11, and corporate failers in the Infra-structure industries - Power and Data/Tele Communications (Enron, Global Crossing, Worldcomm ...) - looks to me like a systematic and co-ordinated attack on the economy for a complete shutdown of the corporate machinery and world economies. Is this History repeating itself ?
Was Atlas Shrugged (by Ayn Rand) purely fiction ?
I am getting skeptical now ...

(BTW, Did you hear about a scientific break through - "Liquid Metal" ? Will it change the world of manufacturing (for the good) ? Some more similarities there :-) )














Elvis Doesn't Live
Elvis Doesn't Live
12/4/2012 | 10:02:03 PM
re: Whither WorldCom's Network?
(BTW, Did you hear about a scientific break through - "Liquid Metal" ? Will it change the world of manufacturing (for the good) ? Some more similarities there :-) )
_______________________________________

Been watching Terminator 2 a bit?

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