HOW THE INTERNET WORKS: ALL YOU NEED TO KNOW

To see how big carriers could control the online world, you must understand its structure

Finally. After nine months of nasty public sparring with competitors and intense regulatory scrutiny, WorldCom Inc. (WCOM) is on the verge of clearing the highest hurdles to its proposed $37 billion merger with MCI Communications Corp. (MCIC). On July 8, the European Commission gave its tentative blessing to the deal--only after forcing MCI to sell off its entire Internet business and making the company agree not to solicit its existing Net customers in the future. The U.S. Justice Dept. and the Federal Communications Commission will probably give the green light in the next several weeks.

What's occurring is nothing less than the first antitrust debate over the Internet. The issues now being decided are likely to set precedents that will affect how quickly the Net grows and which companies will play leading roles in its evolution.

Still, many of the key issues in the debate are not well understood. For one, people find the idea of Internet dominance baffling. The Net's growth has been so explosive--in the number of users, Web sites, and even carriers of Net traffic--that it's difficult to understand how one company or a handful of companies could dominate it. To understand why there are concerns, you need to understand how the Internet backbone functions. What follows is an examination by Washington Correspondent Catherine Yang on how the backbone works and why large carriers have the potential to control the Net.

How does E-mail travel on the Internet to reach someone far away?

When Jennifer, who lives in Pasadena, Calif., wants to send an E-mail message from her home computer to her mother in Washington, D.C., she uses a local Internet service provider (ISP) such as EarthLink Network Inc. (ELNK). EarthLink gives Jennifer access to the Internet, much in the way that an on-ramp puts a driver on the national highway system.

After Jennifer's computer makes a local telephone call to EarthLink's local bank of modems, Jennifer types in her E-mail message and hits ''send.'' Based on Mom's E-mail address, EarthLink will recognize that Mom is a customer of an ISP in Washington called Erols Internet Inc. (RCNC). EarthLink will then send the E-mail to an Internet ''backbone provider,'' such as GTE Corp. (GTE), to route it along its way.

What is a backbone provider and why is it important on the Internet?

Backbone providers are the Internet players that typically own and lease long-haul fiber-optic cables spanning a large region. They also own the communications gear that directs traffic over the Internet. There are only a handful of major backbone providers, including MCI, WorldCom, Sprint Corp. (FON), GTE, and PSINet Inc. (PSIX).

Backbone providers connect to each other to exchange data between their customers. They also pick up and deliver traffic for a fee from the 7,000 or so smaller ISPs, who give residential and small-business users access to the Internet. Backbone carriers are like the highway system over which most of the freight of the Internet travels to reach its destination.

How did the current backbone providers come to be?

When the Internet was still a government-run system, there was only a single Internet backbone: the NSFNET, operated by the National Science Foundation, which connected the regional government-funded Internet networks that were run by various research universities. When the government privatized the NSFNET in 1995, companies such as MCI, UUNET Technologies (now owned by WorldCom), BBN (now owned by GTE), and PSINet stepped into the breach by setting up commercial Internet backbone services. Now, instead of one NSFNET backbone, there are many of them that link together to provide the global connectivity that is the Internet.

Why is one company's dominance of the Internet backbone potentially anticompetitive?

MCI and WorldCom handle the traffic for many of the Internet's most popular Web site destinations, as well as the Web sites of many large companies. Customers of other Internet carriers--both backbone providers, such as GTE and Sprint, and ISPs, such as Erols or MindSpring (MSPG)--will want to reach the popular Web site destinations and customers served by MCI-WorldCom. That could give MCI-WorldCom leverage to charge unfairly high prices for linkups. And those high costs of interconnection could make it harder for new entrants to survive. There are exceptions, however, including America Online (AOL) and Microsoft Network, which use multiple backbone providers--so there are alternative routes to their customers.

Do MCI and WorldCom have a large enough share of the Internet to squeeze competitors?

Probably. The EC says the two companies together would dominate 45% to 65% of the revenues and traffic of the Internet backbone. Trustbusters believe that's enough for MCI-WorldCom to impose unfair prices and to thwart competition. MCI and WorldCom vehemently disagree with the EC's market-share figures, saying that they jointly account for a mere 20% of all revenues on the Internet.

In truth, little reliable market-share data is available because the amount of traffic transported by various carriers is proprietary information under private contracts. The Justice Dept. sent out civil subpoenas to major Internet carriers earlier this year to determine these numbers. However, it has not yet released its findings. The EC developed its market-share data with the help of industry players.

How do Internet companies connect to each other?

When the NSFNET was privatized, the government set up three locations in the U.S. where various Internet backbone companies could place their communications gear side by side and connect to each other. These so-called ''public peering points'' are in Chicago, Palo Alto, Calif., and Pennsauken, N.J. Later, the government sanctioned two industry-run public peering points called Metropolitan Access Exchange East and West--MAE-East, in Vienna, Va., and MAE-West in San Jose, Calif.

The problem was, as the Internet grew, the public points became overburdened and traffic slowed at these bottlenecks. So backbone providers started making arrangements with each other, called ''private peering.'' These are direct, bilateral connections between two carriers in which no fees are charged.

How does a backbone company get to become a ''peer''?

Large backbone companies, such as MCI, WorldCom, Sprint, and GTE, all have their own separate criteria for which companies they will accept as peers--that is, the carriers with which they'll exchange traffic without any payment. Backbone carriers, such as GTE and Sprint, often do not make these criteria publicly available--but others do. WorldCom's UUNET Internet unit, for instance, requires peers to have a national network that will connect with UUNET at four or more locations with superfast DS-3 lines, which transmit information at 45 million bits of data per second.

Big backbone companies are getting pickier about their peer selection because they feel that they can't afford to share the huge investments they have made in their networks with all comers. ''Physically, we cannot possibly peer with all 7,000 ISPs,'' says John W. Sidgmore, vice-chairman of WorldCom. The companies that don't meet their criteria have to become paying customers, much like ISPs, or look around for other backbone providers who will peer with them.

Can new entrants in the backbone business compete successfully?

It's more difficult now to become a peer. Carriers building high-capacity networks, such as Omaha-based Level 3 Communications Inc., are frustrated that they haven't been able to strike peering agreements with major backbone providers. They fear that the established backbone companies have an incentive to keep them out of the game, since the new players could overtake the old-timers with their well-capitalized, next-generation networks. ''The very people Level 3 has to interconnect with are the very people who have the most to lose,'' says Ron Vidal, senior vice-president at Level 3.

Smaller backbone providers say they often don't know why they're rejected as peers. They're afraid the big companies use secret and arbitrary criteria to deny them peering relationships, thus raising their costs and harming their service. The old-guard companies say they are turning them down because these newcomers often don't have many customers. They say they will accept the newbies as peers once they build up significant traffic to exchange. There are no industry or government standards for peering criteria.

Do the largest backbone providers charge each other?

Backbone providers aren't charging peers now, but there is a lot of discussion about whether they should. Most industry experts say the Internet needs to develop some payment scheme. After all, it is now a commercial, profit-making business, not a government freebie.

But the industry has not figured out how to calculate who owes what to whom. Without an industry standard or government regulation, smaller companies fear that larger ones will set these charges in an arbitrary and discriminatory fashion. There could be a lot of ''cockamamie measurements,'' says Leonard Kleinrock, an Internet founder and computer science professor at the University of California at Los Angeles.

What is the solution to safeguarding competition on the Internet?

Since the Internet was privatized, it has grown by leaps and bounds into a remarkably successful communications medium without government regulation--and most want it to stay that way.

But the Internet has matured to a point that more uniform rules are needed to safeguard competition. As a first step, experts argue that backbone providers should have to disclose the criteria for becoming a peer. This would allow companies to see whether they are being discriminated against.

An industry group called the Global Internet Project--whose members include such major backbone providers as MCI, GTE, and AT&T (T)--is developing a longer-term solution. The group advocates a fair and public system under which all backbone providers would pay each other for carrying Net traffic.

''We need a market mechanism to ensure peering for all,'' says Daniel Schulman, president of AT&T WorldNet Service, a project member. Many issues need to be worked out, including who would do the policing. Still, with a clear payment system, those who can afford to pay the price can become peers. Peering would be determined by the market rather than by a private company with its own competitive interests.

http://www.businessweek.com/1998/29/b3587123.htm