Internet Giants Prepare for WorldCom 'Storm'

swight1701 writes: "MSNBC has an article about how E-bay and others are enacting contingency plans in case WorldCom goes under and no one steps in to run UUNet right away. Also talks extensively about how this is happening already in Europe with KPNQwest, who is telling their customers, 'During this week you can already expect outages to happen that we cannot solve any more. At the end of this week we expect that larger parts of the network will be down.' Can telecommunications giants realistically keep up with the public's need for ever-growing bandwidth without going bankrupt?"

Comments

Demand and supply have not increased together

[pieterh]

WorldCom was principally responsibly for the myth that Internet demand was doubling every 100 days when in fact it was doubling every 12 months, from the period 1998-2001.
Capacity, OTOH, doubled about every 100 days thanks to lots of new cable, and much more efficient use of existing cable (up to 100 times gain).
As a result, there is massive overcapacity. The result? Lowering prices at a time of incredible debt thanks to stupid 'investments' in things like 3G.
When companies like WorldCom go bust, the capacity stays in place. Without the burden of servicing their debt (cause they generally go into chapter 11 or somesuch), the 'bankrupt' capacity gets sold at new low prices, forcing the rest of the market down, and so on and on.
Conclusion a: we can expect a new era of really low prices, as the survivors of this period (probably the Baby Bells in the US, and the old monopoly telcos in Europe) get control of huge amounts of cheap capacity. I predict this will fuel the next boom.
Conclusion b: whatever the next boom is, do not expect it to come from the telcos. They have failed to predict a single one of the successes (demand for fixed net links, text messaging, etc.) of the past. I predict the next boom will be based on commercialised P2P with links to portable phones for roaming control. E.g. I can rent a game or movie or TV programme during the day, pay with my mobile phone, then my PC will download the stuff through P2P.
Conclusion c: this is going to be the biggest test of the Internet's strength in tough times. Many of our customers host their e-commerce apps at UUnet. What happens next week if UUnet shuts down? How fast can we get their servers onto another ISP? All interesting questions that will set the tone for the architectures of tomorrow.

Re:Demand and supply have not increased together

[Zeinfeld]

While you are partly right in saying that the capacity grew faster than demand this was not the reason for the bankrupcy and not due to bad planning. The principal cause of the overcapacity is that when you lay fibre the cost of the fibre itself is pretty much lost in the noise. It costs little more to lay 10 strands than it does one. If you are going to dig up a street etc you might as well lay as much fibre as you think you might need.

The reason WorldCom is in the crapper is FRAUD. They basically borrowed money on the basis of false accounts. They were charging the amounts they spent renting bandwidth from other companies as a capital expense. At least at Harken and Enron they only deliberately produced misleading accounts, the Worldcom accounts were fraudulent. As a result of the fraud the banks and bondholders have the right to call in their debt immediately.

The failure of regulation in this case brings to mind George Sorros' book 'The Alchemy of Finance'. Essentially he puts forward a Hegelian theory of government regulation which leads to the prediction of a regulatory cycle. Regulations are gradually relaxed allowing greater and greater productivity until there is a msssive fraud that causes confidence in the markets to be lost and a reintroduction of regulation.

The US fetish for avoiding regulation is pretty odd to europeans. Most businessmen would much prefer to have EU style government regulation than the arbitrary jury awards that have substituted for regulation in the US. Equally regulations that require honest accounting can hardly be called 'anti-business', they are pro business. What it really comes down to is whether the Congress and the whitehouse going to be pro-Shareholder or pro-company insiders.

Re:The problem is the myth of cheap bandwidth

[grahammm]

The problem is the myth of cheap bandwidth. Although _local_ bandwidth is getting increasingly fast, the nonlocal bandwidth to support that just isn't there - it costs a lot of money to manage interstate lines.

I thought that the problem was the other way round, at least here in Europe. Every teleco and wannabe teleco has been laying fibre both nationally and internationally. The problem is that there is not enough traffic to use all the bandwidth, so the companies are not taking as much revenue as they had planned - so are going to the wall. Like the recent collapse of KPN QWest, whose network was international.

So much for "value-added" services

[dcavanaugh]

Last year, our pitiful ISP discontinued frame relay service in our area, along with our T1 (probably a violation of our contract). So we signed up with UUnet, thinking they were "too big to fail". Oops.

When we signed up for a T1, Worldcom/UUnet was also pitching all kinds of value-added services (managed VPN, website hosting, etc.) I'm generally paranoid about outsourcing, especially outsourced telecomm. services. As a result, we bought only raw bandwidth from them, just in case we had to switch carriers again. At the time, I was concerned about UUnet's attitude toward spam and the possibility of a massive blacklisting operation against them -- as you see against the Chinese ISPs today.

Well, here we are. I feel stupid about choosing Worldcom, but I feel like a genius when I kept the corporate website and corporate VPN "in house".

At this point, why would anyone buy "value-added" services from their ISP? For a long time, Worldcom/UUnet was really hyping this stuff, as if VPNs and website hosting was some kind of rocket science that only a big ISP can do properly. They have single-handedly destroyed the entire "ISP value added" service industry. Who would be crazy enough to depend on ISP-managed services now?

Re:Market forces

[cat_jesus]

Circuit switched networks are dying because the telcos are killing them. Standard LD telephony is still a cash cow but the telcos were spoiled with huge margins that no other business had. With such huge margins they got into the habit of wasting their money. Having worked at a major global telco I got to witness this insanity first hand. This telco was making a billion a year in ld in the US but decided to quit selling it and marketing it in order to pursue internet technology. So now they have lost billions of dollars in investment and let their main revenue stream atrophy mainly because "the internet is sexy". Yes, I actually had a marketing exec explain it to me in those terms.

Many of the customers that this telco has are small businesses who simply want detailed long distance bills in order to keep track of client calls for their own billing purposes. They don't care if their call is routed over IP or over a switched network. All they want is detailed billing and call completion and they are still willing to pay for it.

The telco executives bought into their own hype, failed to understand what a reasonable profit margin looked like and got a big bite in the ass from the reality of business.

Cat

So what's the alternative?

[Astin]

If the underlying network is controlled by a handful of large corporations, and they can't keep up with the bandwidth demands without losing money, what's the alternative? They can charge more as the requirements increase, but that will effect the consumer side of it in the end. Corporations and companies that use large amounts of bandwidth will have to pay more, and those costs will have to be passed on down the line, until Joe User is paying through the nose. Not to mention the effects on home users who could see their subscription prices skyrocket as the costs are passed on to them to connect.

There's only so much the consumer will bear before either switching methods (back to dial-up, less usage) or switching off. Problem is the power users out there (and I think most of /. falls under that category) will complain and demand their cheap, uncapped access.

So, if large corporations are vulnerable to bankruptcy and the network suffers because of this, there are only two options that I can see to provide a more stable situation. The first is government control of the networks. I know there's a collective cringe when that's suggested, but as the Internet grows, so does the need for support. Roads, public transit, electricity, hydro, sewage, etc, are all subsidised or controlled by government agencies and paid for through taxes. So does an Internet tax get added to all connections? There's a gas tax and a car tax that goes towards road maintenance after all. I know this is practically taboo to talk about, but in the end, the upkeep of the Internet's infrastructure is an enormous cost that has to be covered to maintain a quality of service.

The other option is of course the polar opposite to government control - community networks. Be it shared broadband, wireless networks, or some other situation, this too would be viable except for a small problem or two. I know how to set up a wireless access point, you know how to, and if we don't, we know where to find the HOW-TO and how to read it. We're the minority though. My 83 year-old neighbour who loves his computer and is always breaking it for the "upgrades" he tries to install would have no idea how get a wireless NIC installed let alone set up access to the neighbourhood. Are there enough geeks out there to make this viable in large urban centres? Outside of small pockets, I doubt it. On top of this there's no control over the points beyond the individual who has been gracious enough to permit access. If I decide to move and take my antenna with me, anyone who relies on that access is now without, and I don't care because I'm not about to leave a few hundred dollars worth of equipment lying around and then reinvest to set up again somewhere else. Add to this the fact that not everyone is gracious with access and there are a large number of leeches and script-kiddies out there who would abuse this sort of system, throwing the user-provider balance way out of whack. It's a nice thought, but still years, if not decades, away from being feasible.

It comes down to money in the end. Why should a corporation set up a redundant network in case another company goes kaput? Why should a company increase its capacity beyond what is absolutely necessary? This all costs far more than they're willing to spend, and they sure as hell aren't going to do it for the good of the public. In the end, SOMEBODY has to control and maintain the backbones and connections that we all take for granted.

Re:WorldCom Storm

[Restil]

You're partially correct. However, it isn't the amount of the exec salary that is the problem. Its the salary cap. Exec salaries over $1 million can't be deducted. Now you can debate until you're blue in the face what a proper exec salary is, but in the end, it comes down to, whatever the company is willing to pay and whatever the exec is willing to work for. The marketplace at work.

However, by implementing a cap on the salary, the corporations are forced to find alternative ways to make up the difference. They're not going to throw money away to the government, so they pay the execs with stock options instead. Now, stock options for the regular employee aren't always a bad thing. It builds company loyalty, and gives the employees an extra reason to go the extra mile. However, with execs, the situation is different. A lowly employee typically would be unable to cause a massive shift in the stock price by anything he/she is able to do. However, execs can. They have full control over the corporation, including what the public finds out about. And since they also have control over how the accounting system works, and their salaries depend on the stock price always going up, they're going to manipulate (to the razor's edge of legality if necessary) the accounting to maximize the value of their options.

There might be another reason why this happened, that didn't have much to do with executive greed. Worldcom screwed up, but its possible that they didn't actually do anything illegal. A lot of expenses CAN legitimately be expensed over 10 years, even labor in some cases. Ultimately, it wouldn't matter, they just pay the expenses over a longer period of time. In the dot com boom, they had a desparate need to expand quickly, so they depreciated the expenses, which is permitted, and wouldn't have had such a dramatic effect, except for one small problem. The bubble burst, and their steadily increasing revenue stream suddenly fell far short of where it should be.

Now, Worldcom isn't in bad shape, they're just deep in debt. Its still a viable corporation with a healthy revenue stream, and given enough time and some responsible financial management, it would recover from this without any problem. However, in the wake of Enron, there was a pressing need to find and disclose all potential problems, and with these new startling revelations, the creditors are suddenly panicing and pulling their lines of credit. Hence their
current situation.

What's potentially scary about this, as of yesterday, you could purchase a controlling share of Worldcom for about $10 million. Of course, the low price is due to the impending bankrupcy. However, as daunting as the billions of dollars of debt might seem, Worldcom is still a viable company for someone who might be able to refinance the debt. Know of any large software companies that have that much working cash available?? Who might want to own a significant percentage of the backbone? Think its too far fetched??

-Restil