On Monday, 11 April 2011, Level 3 announced they had entered a definitive agreement to acquire Global Crossing. According to the Renesys Market Intelligence rankings, this merger would bring together the world’s #1 and #2 global providers, with over half the Internet market on earth dependent on the combined entity. If the deal gained regulatory approval in the US and elsewhere today, how would the Internet provider landscape change? We’ll answer that question in this blog, giving the proposed union a fictional name of Level Crossing for the purposes of our discussion.

It’s become a tradition at Renesys to provide a periodic review of how the Internet providers at the top of our Market Intelligence global rankings are faring. We took our most recent look at the end of 2010, at which point Sprint had just been overtaken by Global Crossing for the #2 position and was on the verge of being passed again by NTT. Note that our rankings are a rather crude measure of size, as they are based entirely on the quantity of IP space ultimately transited by each provider. However, it’s the ranking trends that are more revealing than any absolute number. Who is adding customers? Who is losing them or just standing still? Changes in IP transit answer these questions and provide an objective measure by which to rate providers.

Looking at the top five global providers today, we have the following breakdown by global market share. The percentages add up to more than 100%, since any organization serious about its Internet presence is multi-homed, i.e., has more than one service provider for redundancy. By our metric, Level 3 has just over 40% of the market and Global Crossing just over 30%.

If Level 3 and Global Crossing merged today, the top global rankings would change as shown below. Note that the combined entity, Level Crossing, would have a 55% market share, marking the first time we’ve seen one company in such a dominant global position. However, this is lower than what the sum of the two parts might suggest, due to the fact that some businesses buy from both providers already. That is, Level 3 already has some of the same customers as Global Crossing.

Regardless of the overlap, Level Crossing would certainly be a global colossus. Another way to see this is to consider all of the currently routed IPv4 address space. Using a Hilbert curve representation and software from The Measurement Factory, we next show how pervasive and critical the two merging entities are to the operation of the Internet. Networks transited by Level 3 and not by Global Crossing are shown in yellow, those by Global Crossing and not Level 3 in blue, and by both in green. All other routed networks are displayed in gray, while unrouted networks are in black.

All IPv4 address space, showing the impact of the proposed merger (Click to Enlarge)

By our measure, Level Crossing would tower above well-known national incumbents. The larger the entity, the more on-net (“internal”) traffic they have and the more revenue they garner from customer-to-customer communications.

In fact, the next five global providers would have to merge to rival Level Crossing’s score!

Conclusions

Internet transit remains a very tough business as prices continue to erode while demand only escalates. As with any commodity, customers are fickle and often base decisions solely on price and availability. For anyone in this business, it makes sense to acquire the largest possible global footprint and the greatest pricing power. In fact, we suggested that Level 3 acquire Global Crossing back in 2006, as it certainly made sense from an engineering perspective.

From a customer’s point of view, there will be one fewer choice in the market—probably not a big deal unless you reside in an already poorly served area. The customers that will be the most impacted are those that now suddenly find themselves single-homed behind Level Crossing. If they want to maintain provider diversity, they’ll have to go shopping. By our reckoning, almost 3,500 networks (prefixes) could soon find themselves in this position, including those from Thomson Financial, Bank of America, CBS, Reuters, and even Major League Baseball. The list includes both global and regional entities, such as Vodafone Italy and Turk Telekom. Ukraine is one of the most impacted countries, with 7% of their prefixes suddenly becoming single-homed.

This isn’t necessarily a bad thing and the industry has certainly had its share of consolidation in the past, an inevitable feature of a maturing market. It’s the size and scope of this deal that makes it truly noteworthy.