A childhood friend of Warren Buffett is engaged in a power play that could raise your Internet bills.
NOTE: I have been informed by commenters, and confirmed, that Buffett's Berkshire Hathaway sold its Level 3 stake in November 2003. Level 3 founder Walter Scott, however, is a childhood friend of Buffett's, and a member of the Berkshire-Hathaway board. The correct headline should thus be "Walter Scott's Internet Power Play." I deeply regret the error.
He's doing it through Level 3. Buffett
owns bought a big, quiet stake in Level 3, through secured notes bought by Berkshire- I Hathaway in 2002. Also, Level 3 chairman Walter Scott is on the Berkshire-Hathaway board.
Level 3, one of the largest Internet backbone operators not owned by a Bell company, is losing money. It's trying to change this by getting tough on peering, the linking of its network to other ISPs.
Specifically it cut connectons with Cogent Communications, a smaller backbone provider, early this month, and plans to do it again next month. The effect is to render 15% of the Internet invisible to Cogent customers, and vice versa.
The Internet is based on the idea that companies will exchange previous bodily fluids of information and worry about the money later. If there's an imbalance in flows between carriers, money changes hands, later. Level 3 and Cogent disagree on how much money should flow.
It all goes back to Cogent's purchase of PSINet, which didn't have an agreement on money flows, and Level 3's efforts to force such an agreement on its smaller rival. But the real issue is that Level 3 is highly leveraged
(with Buffett's Berkshire Hathaway holding many notes) while Cogent has already gone through restructuring. As a result Cogent can undercut Level 3 prices.
The real danger is not whether Level 3 can force Cogent to knuckle-under. It is whether Bell companies might copy the move.
Verizon owns MCI. SBC owns AT&T. Verizon is buying MCI, and SBC is buying AT&T. Those deals should close before the end of the year. Between them, MCI and AT&T own more than half the Internet backbone capacity in the U.S. They are high-cost operators, highly leveraged, with owners who demand profits.
If Level 3's power play isn't put down, I guarantee SBC and Verizon are going to start playing the same game, turning backhaul capacity from cheap to expensive, destroying many folks' ability to linik to the entire Internet, and throwing the whole system into the crapper.
Buffett Warren Buffett's childhood friend Walter Scott for it.