Sigh. I had been meaning to write this for a long time. Where did the summer go? Anyway, since you are reading this, you’ve probably heard something along these lines before: “Oh, you work on the Internet?! You must be rich. The Internet is paved with gold!” Right? The fact is that the Internet can be paved with gold for the content providers (e.g., Google, gambling and porn sites), but for the rest of us, it isn’t. Not even close. The truth of this is no more evident than in the Internet transit business, namely, those folks who move all the bits around that ultimately build fortunes for the content providers. It’s a commodity business with ferocious competition, whose quality of service is difficult for the average person to gauge. When was the last time you volunteered to pay more for electrical service to your house? Or sewer service for that matter? Or even gave it a second thought? In this environment, the transit providers are under tremendous pricing pressure and have only two options: grow or die. To grow, they can enter new markets and/or buy up the competition. Sometimes they purchase licenses to Renesys’ Market Intelligence to help them explore the marketplace. To die, all they need to do is stand still.
This blog entry is motivated by France Telecom’s recent failed bid to purchase TeliaSonera, and explores the characteristics of both companies and what they would have looked like as a combined entity. Mergers in the industry are never good for Renesys (fewer potential customers), but we do have the data to consider some of the implications. Let’s get started.
One thing Reneys does with all the routing data it collects is use it to rank all the service providers in the world in various ways: globally, by geography, and by market segment. The rankings are a rather crude measure of size, as they are based entirely on the quantity of IP space ultimately transited by each provider. Although there are obvious shortcomings in this approach, rankings do provide useful information, especially when mined for the reasons behind any changes. However, figuring out who transits which IP space is a non-trivial task, as we currently observe on the order of 9 million AS paths and need to determine the business relationships between 100,000 unique AS pairs that make up these paths. Once you figure that out and combine it with geo-location information about IP prefixes, it is possible to determine transit and peering relationships in different geographies. Rankings are then based on the scores we assign to the relevant prefixes, scores which depend on prefix size and date of assignment. You can read about some of the details here. With all of this machinery in place, it’s a simple matter to compute rankings for any proposed merger, under the assumption that all existing customers stay put.
We can now take these data for France Telecom and TeliaSonera and tease out the implications on the transit market. (See the following tables.) This merger would have catapulted the combined entity to number 5 in our global rankings, within easy striking range of Verizon at number 4, creating a new global powerhouse in the rarefied air of the top-5 global providers.
|20||Cable & Wireless||1273|
|5||France Telecom + TeliaSonera||5511 1299|
|19||Cable & Wireless||1273|
What this says indirectly is that France Telecom and TeliaSonera do not have a significantly overlapping customer base. To understand this, suppose for a moment that all of France Telecom’s customers also bought from TeliaSonera, then the combined company would have had exactly TeliaSonera’s pre-merger ranking. France Telecom would have simply repurchased all of its existing customers (not a good investment) and some new ones from TeliaSonera. That didn’t happen here; had the merger actually taken place, the combined company would have been almost the sum of its parts. More precisely, on July 1st, France Telecom transited 13,989 prefixes and TeliaSonera 40,182 prefixes. Of these two sets of prefixes, only 2,846 were in common and so the associated scores assigned to them would have only counted once toward the ranking of the merged company. Using these scores, the combined company would have been 96% of the sum of its parts.
Another way to see that these companies don’t overlap much is to look at their countries of operation. For this we can consider the country geo-location of each prefix they ultimately transit and the percentage of their overall score that these prefixes contribute. This breakdown is found in the following two tables for July 1st. While France and South Korea might not be an obvious pairing in your mind, until recently, France Telecom provided transit for Hanaro Telecom, a major South Korean provider. So France Telecom got credit for all of Hanaro’s IP space. From these tables, it’s obvious that the countries in which France Telecom and TeliaSonera operate do not overlap very much, and not surprisingly, the overlap that does exist is largely in Europe.
Finally, let’s consider the top customers of TeliaSonera and France Telecom on July 1st, relative to Renesys’ rankings. Those are listed below, by decreasing score. Here we see no overlap for the top 15 customers of both organizations. (Note that Hanaro dropped France Telecom on July 22nd and Telesc dropped them on July 4th.)
|Telkom South Africa||5713|
In any buyout, motivations can vary from acquiring needed technology to acquiring new customers. In the Internet transit business, it would probably be very difficult to corner a market, due to regulatory restrictions in developed countries, so the best you can usually hope for in an acquisition is very different (and growing) regions and a diverse customer base. On that score, and especially with TeliaSonera’s presence in emerging markets of Russia and China, this proposed merger appears to have been a match made in Internet heaven — if only the price had been right. Maybe TeliaSonera should buy France Telecom instead, or at least their IP business.