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Will WorldCom own the backbone business?

Forget about AOL and CompuServe. The company giving those on the network side of the business the jitters is WorldCom.

    Forget about America Online (AOL) and CompuServe (CSRV). The company giving those on the network side of the business the jitters is WorldCom (WCOM).

    As reported, AOL, CompuServe, and WorldCom announced a three way deal Monday in which AOL would acquire CompuServe's consumer online service and WorldCom would acquire the corporate access businesses of both AOL and CompuServe.

    Ever since then, analysts and the The selling of CompuServe Internet community has been focusing on the anticompetitive implications involved with AOL, the world's largest online service, swallowing its biggest competitor, CompuServe. In fact, the Justice Department has said it is looking into the deal. Will one company with so many customers alter the online landscape? It depends on who you ask.

    But if one asks the same question about the flip side of the deal--involving WorldCom and the Internet backbone company it acquired last year, UUNet--the answer is more definitive. Most will tell you that the deal undoubtedly will change this lower-profile segment of the market by reducing the already small number of players that collectively serve as the backbone of the Internet.

    By most accounts, there are fewer than 50 Net backbone providers. If one defines a backbone company as one that does not have to buy Internet access from any other company, then there only are 9, according to Nathan Stratton, chief executive of NetRail, which is among them. Another is AOL's ANS Communications, which WorldCom is buying as part of the deal along with CompuServe Network Services.

    "It makes the numbers shrink from nine to eight, and that's a bad thing," Stratton said. "The reason providers should be wary is there are few people in the world who are backbone providers, and whenever you get rid of one of the players you are in trouble.

    "This is like saying, 'Let's get rid of one of the car [makers].' All this does is further the ISPs going out of business...There will be a small number of backbone providers that can charge whatever they want for business."

    If this kind of consolidation were happening in the telecommunications industry, regulators would be breathing down the necks of the companies involved. But on the Internet, the field is so new that there is hardly any regulation, experts said.

    WorldCom spokesman Steve Ingish said the acquisition "is going to improve the use of the Internet [and] the quality of service."

    But even if WorldCom and its UUNet subsidiary provide top-quality service, that doesn't change the numbers, which in this case speak pretty loudly. So does the fact that it's a lot easier for a customer of CompuServe or AOL to switch companies than for an ISP to get a new backbone provider.

    If online users become dissatisfied with their service, it's easy to jump ship to one of hundreds competitors. For the most part, all they would have to do is sign up with another ISP and sent out a mass email to their friends and family that they are changing their Internet address.

    But if an Internet access company is unhappy with its provider, be that WorldCom's UUNet, AGIS, PSINet, or one of the others, switching is much harder. Most companies sign contracts and install hardware and software in order to get access.

    There aren't many places to go, either. "There are nine transit-free companies and one has bought another," Stratton added. "That is much more monopolistic than AOL buying a few million members."

    The WorldCom deal could be the first of more to come, worried Scott Hazen Mueller, vice president of engineering for Whole Earth Networks, which had been involved in a dispute with UUNet earlier this year over interconnection fees.

    Other backbone providers could see the growth of UUNet, known as a hardball competitor, as a threat. In turn, they also may start consolidating, joining forces, and further decreasing the total pool of players.

    "Like a lot of people in the industry, I read all these folks talking about a big consolidation," Mueller said. "I think this is part of the first wave of this. If your competition gets bigger, you feel like you need to find some way to get bigger as well."

    He had a word of caution, however: "Obviously, it's hard to predict the future. But when you have few players, you have more opportunities for oligopolistic behavior."

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