The Cogent-Level 3 Dispute

Even though peering has ended and links remain severed, the peering agreement was not violated by either side. The dispute pits a restructured, low-debt Ethernet provider against a more traditional, debt laden provider in a fight that's unlikely to end soon.

by Alex Goldman ISP-Planet Managing Editor [October 7, 2005]

According to CEO Dave Schaeffer, both Cogent Communications and Level 3 remain in compliance with the peering agreement. But as of several days ago, no traffic has been traded between the two networks, cutting off customers that rely on a direct connection between Level 3 and Cogent (Karl Bode of Broadband Reports points out that you can read Cogent's side of the story here, with regular updates).

In our opinion, peering agreements are handshake deals that stitch the Internet together, subject to the whim of the parties to each agreement. A broken peering agreement severs the internet, threatening the foundation of the Internet economy. These handshake deals show why lawyers are an important part of business—it's their job to plan ahead for problems when negotiating a deal. We believe that many peering agreements were not written by lawyers.

As long as the Internet is stitched together by agreements that are as personal as they are professional, the web itself can be damaged at any time as strands get disconnected without warning.

A peering agreement is a deal between two ISPs to allow customers to reach sites on each others' network. ISPs need to hand off traffic, to allow their customers to get the data they want. Some ISPs accept that they need to receive traffic, which carries a cost, as a necessary evil.

Many peering agreements, therefore, stipulate that if there is an imbalance in traffic flows, then the company that is sending more traffic than it is receiving pays a penalty based on the extent of the difference. The agreement between Cogent and Level 3 contains no such clause. In compensation, it also allows either side to terminate peering without notice.

Cogent purchased the peering agreement when it acquired PSINet, one of the oldest ISPs. Level 3 seems to wish that it had not renewed the agreement when Cogent made the acquisition.

Don't rely on one backbone
If your only connection to the Internet is through Level 3 or Cogent, you are not able to access 100 percent of the internet. For ISPs, this incident highlights the necessity of having more than one backbone provider.

Broadband Reports pointed out that some RoadRunner customers were complaining about lack of access to certain sites (AOL uses Level 3 for its AOL Transit Data Network in the U.S. and Europe). Contacted on October 7, Time Warner Cable spokesperson Keith Cocozza explained, "As of 11 PM last night we had established new Internet routes to the affected sites. Our Road Runner customers are no longer affected by the disagreement between Level 3 and Cogent. Level 3 carries some of our internet traffic, therefore some of our customers had been prevented from visiting sites hosted by Cogent."

The aspect of this story that we do not cover today is the effect of the dispute on third party ISPs. To share your story, click on the feedback link below.

Follow the money
Many ISPs hate Cogent. Internet News' Susan Kuchinskas, in her article on this topic, Peer Dispute Leaves Some 'Net Users in the Dark, spoke to Daniel Berninger, senior analyst with Tier 1 Research, who explained that the confrontation is about two completely different business models.

While in the early days, all ISPs peered, eventually things shook out to where the tier 1 players peered with each other but charged everyone else to carry their traffic. From time to time, a tier 1 company steps forward and tries to charge its fellows. "It destroys the whole efficiencies of the Internet when, all of a sudden, you start counting packets and charge by the pound," Berninger said.

...

"My feeling is this is more of a competitive attack on Cogent," Berninger said. "These are two companies that have opposite business models. Cogent is a low-cost player that essentially undercuts the price of the market. Level 3 is an elite player that charges a premium to connect to them." Level 3 has been hoping that pricing pressures would diminish, but that hasn't happened. Said Berninger, "My view is, this is an act of desperation."

Of course, Schaeffer also argued that Level 3 was desperate. "I think it's a sign of desperation at Level 3," he told us. "50 percent of their revenue goes to paying interest payments."

We reminded Schaeffer that we knew how Cogent had escaped its debt (see Cisco, VCs Take Over as Cogent Restructures). "You're right," he admitted. "We got rid of our debt and it wasn't pleasant. We exchanged debt for equity and bought out some creditors, but the result is that we're ready to drive down costs for our customers."

At the time, Cisco could have driven Cogent into bankruptcy as several hundred million dollars' worth of vendor financing came due, but chose to accept a significant stake in the company instead.

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