These days, corporations aren't the only customers worried about service continuity and prices in the wake of KPNQwest NV's network shutdown and the possible breakup of WorldCom Inc.
Carriers buying or selling capacity among themselves in Europe have every reason in the world to be nervous as well: Their wholesale business is under siege after two of the region's largest suppliers encountered financial problems.
KPNQwest was -- and WorldCom remains -- a major provider of bandwidth capacity to other operators in Europe. Over the past few years, both companies built extensive long-distance, cross-border networks and numerous metropolitan rings, using that infrastructure to sell bandwidth services to rival operators, in addition to their corporate clients.
Around 60 percent of the Dutch operator's business was wholesale, the rest retail. Verizon Communications Inc. in New York, for instance, used capacity on KPNQwest's 25,000-kilometer IP (Internet Protocol) network to offer services in Europe.
Although WorldCom has a much larger corporate client base than KPNQwest, it too has a sizable business selling excess capacity to rivals, the likes of British Telecommunications PLC (BT) and France Télécom SA.
The downfall of KPNQwest and the imminent bankruptcy of WorldCom add fuel to a fire that has already wiped out a chunk of the so-called carriers' carrier market for wholesale services. The list of casualties includes Global Crossing Holdings Ltd., Viatel Inc., Carrier1 International SA and now KPNQwest.
All have been forced into bankruptcy after spending billions of dollars to build high-speed fiber optic networks and then trying unsuccessfully to sell huge amounts of their capacity to other fixed-line and mobile carriers, Internet service providers and value-added service providers.
The question many in the industry are now asking is: How could so many clever minds goof so badly?
Opinions vary but most experts agree that too many players built far too much infrastructure -- and then the Internet bubble burst.
"Europe had over 20 companies building pan-European networks -- way too many," said Brian Powell, president of telecommunication consulting company Arran Associates Ltd. "On top of that, the data tidal wave that everyone expected never happened because of the bottleneck in the local loop."
Stephen Young, an analyst with Ovum Ltd., claims the wholesale market was irrational, with companies swapping fiber on each other's networks without paying for it in so called hollow swaps. The industry "became obsessed with mutual relationships, with hollow swaps behind closed doors and nobody on the outside knowing who owned what," he said.
It wasn't the one or the other factor, said Richard Elliot, chairman of London bandwidth exchange Band-X Ltd., but a unique mix of multiple factors that has brought the carrier wholesale market on its knees.
The newly deregulated market, coupled with an unprecedented availability of low-cost capital, attracted numerous new players to invest in building high-speed fiber optic networks, Elliot said. Then, after engaging in the capital-intensive practice of digging up streets and fields to lay fiber-optic cable, many were overwhelmed by the emergence of new technologies such as WDM (wavelength-division multiplexing), enabling huge amounts of capacity to be carried over a single fiber strand.
Prices went through the floor at the same time venture capitalists and other investors began pulling the plug on dot-com startups, which were supposed to buy the new bandwidth services, according to Elliot.
As a result, Europe today has fewer suppliers of wholesale bandwidth and fewer customers willing to buy from any of the new companies.
"We've steered clear of most new players, except for WorldCom and KPNQwest, which have carried a very small portion of our business, because we didn't understand their business models," said Allen Timpany, chief executive of Vanco PLC in London, a company that operates a global virtual network based on other companies' network infrastructure. "We work with many incumbents, especially for local coverage," he said.
For sure, smaller carrier customers totally dependent on KPNQwest's network services have been stung the hardest.
Late last month, Fibernet Group PLC in London decided to fold its long-distance networks in France and Germany after its major supplier of fiber-optic cable, KPNQwest, sought protection from creditors. The Dutch company supplied about 80 percent of the 7,000-kilometer fiber-optic network operated by Fibernet in France and Germany. Fibernet signed a 24 million (US$23.5 million) 20-year lease, known in the industry as an IRU (indefeasible right of use), for dark fiber with KPNQwest. In addition to dark fiber, Fibernet leased space to colocate equipment such as optical repeaters.
When KPNQwest went into bankruptcy protection, Fibernet's investment had zero commercial value, said Nigel Pitcher, marketing director at Fibernet. A new owner, he said, could have sold Fibernet a new IRU or the company could have bought capacity from an alternative carrier. "But the net effect is that we would have to invest in building another network," Pitcher said. "Going back to the banks and shareholders is not an option in the current climate."
Dante, a nonprofit organization in Cambridge, England, that operates a backbone connecting national data networks of universities across Europe, is another KPNQwest victim. The organization leased transatlantic capacity and IP (Internet Protocol) bandwidth from the Dutch company.
The international link is still operating, but Dante has meanwhile signed contracts with Level 3 and Deutsche Telekom AG (DT) to supply transatlantic connectivity, according to its president Dai Davies.
Telia International Carrier, a unit of national carrier Telia AB in Stockholm, is supplying transit IP services to Dante, alongside existing supplier Global Crossing Holdings Ltd. Although Global Crossing has filed for Chapter 11 bankruptcy protection, "the carrier is still operating and providing remarkably good service," Davies said.
While smaller ISPs have been similarly affected by the KPNQwest shutdown, larger ISPs have encountered few problems, according to Cormac Callanan, general secretary of the European ISP Association (EuroISPA) in Brussels, Belgium. The larger service providers have "several points of access to the Internet via direct links to exchanges," he said. "Nevertheless, when a big provider of IP bandwidth like KPNQwest goes down, it's a bit like the Year 2000 switch-over: You need to measure everyone in the chain."
That process, Callanan said, has resulted in "everyone running around at the moment, trying to find where links are going and ensuring redundancy." Although the switch from one carrier to another is a disruptive process, it won't kill the Internet, he said. "No one player owns the Internet, and that has always been its strength."
The Net's redundancy was put to the test on Wednesday when engineers unplugged the Ebone network, owned by KPNQwest.
The shutdown had no noticeable effect on European Internet traffic, despite gloom and doom predictions from experts and Ebone employees, according to Dax Streater, a senior Internet analyst at Matrix NetSystems Inc. in Austin, Texas. [See "No Internet delays after partial KPNQwest shutdown," July 3.] Traffic was neatly routed onto the networks of other service providers, which slowed down slightly response times, but overall Internet connectivity across the Atlantic and in Europe remained and still is stable, he said.
Other groups monitoring the Internet beg to differ.
Band-X, whose customers include many large carriers, ISPs and corporations, has detected a "tripling of latency" on the Internet since late June when KPNQwest customers started looking for alternatives, Elliot said. "We have noticed a very visible deterioration in quality, with packets being queued and other connections causing delays."
Romeo Zwart, an engineer at the Amsterdam Internet Exchange (AMS-IX), warns of substantial congestion if the UUNet Internet backbone, owned by WorldCom, should face a similar fate to Ebone's.
"A passing away of WorldCom can have an enormous impact, depending on the way it happens," he said. "It is significantly bigger than KPNQwest."
Keeping an eye on developments at WorldCom, value-added service provider Electronic Data Services Corp. (EDS), a customer, said in a statement that it is closely monitoring the situation and "will act to ensure the interests of its clients are met."
Many carrier customers of KPNQwest, including global IP and data service provider Equant NV, which is majority-owned by FT, say they had sufficient time to look around for alternatives.
Within two weeks of KPNQwest's bankruptcy statement, Jack Norris, president of customer service and networks at Equant, said the operator had implemented a contingency plan, adding capacity to reroute all customer traffic running on the Dutch operator's network. The service provider added 24 STM-1 (synchronous transfer module) links with a capacity of 155M bps (bits per second) each, and three STM-4 cables each with a capacity of 622M bps.
BT Ignite, the international data communication subsidiary of BT, "quickly replicated circuits leased from KPNQwest and WorldCom and moved fiber leased from KPNQwest to other suppliers," said Steve Andrews, president of carrier services. BT Ignite operates a 64,000 kilometer fiber optic network connecting 300 cities in Europe, with an additional 14 city rings.
But some customers say the collapse of KPNQwest was unpredictable and way too sudden.
"The end of KPNQwest, from the time we first heard of the company's financial problems to the shutdown of the Ebone network, came incredibly fast," Davies said. "There was no way for us to predict this."
For the most part, KPNQwest's carrier customers have been quick to connect with other suppliers.
The switch from one carrier to another is easier today than in the past, thanks to the many colocation facilities, sometimes called carrier hotels, that have sprouted up across Europe. All major players have connections to their networks at these shared sites and, in most cases, are able to get new links by running cable to other colocated gear only meters away.
Even if carriers are able to move more easily from one to another, prospects for their wholesale business aren't rosy. "The carriers' carrier business is a real challenge," said Andrews. "Companies that focus solely on wholesale are vulnerable. Those able to achieve a balance between retail and wholesale have a better chance of surviving."
The trick, he said, is to win enough lucrative corporate clients to achieve the margins and sell off access capacity to other carriers to optimize the network.
As for the thousands of kilometers of fiber in the ground, "this infrastructure won't disappear," said EuroISPA's Callanan. "The links will remain, only the billing organization at the other end will change."
(Joris Evers, in Amsterdam, contributed to this report.)