Level 3 Communications (NYSE:LVLT, news, filings) gained another network operator's support for the bit-mile peering concept, announcing a new agreement with xo this morning. The long-term, settlement-free pact fits with the peering paradigm that Level 3 has been promoting while giving XO the settlement-free position with Level 3 that it has long sought.
XO briefly objected to the Global Crossing deal a year and a half ago on the grounds that it would give Level 3 too much power in traffic exchange negotiations, but withdrew that after settling the dispute privately. We don't know what their peering/transit relationship has been since then, but today's agreement can probably be viewed as its endpoint for now.
Level 3 began publicly pushing for the bit-mile peering paradigm when Comcast took offense to that influx of Netflix traffic two years ago. They seem to be gaining some traction at least with network operators that don't focus on the consumer last mile. Just last month they signed a similar agreement with TW Telecom (NASDAQ:TWTC, news, filings).
The idea behind bit-mile peering is to balance the actual costs of carriage for traffic exchanged between two networks, counting both the volume of traffic and the distance carried by each. It seems like an obvious improvement to older peering paradigms, but it's not clear that they're going to have much luck with the last mile operators. All miles are equal, but some are more equal than others - especially those with less competition.
In the past, the economics behind peering have taken a backseat to some rather unsubtle power plays, with the Tier 1 transit carriers representing something of an elite club with somewhat arbitrary criteria. It still is, perhaps, but the reality of the IP transit market is that it's not nearly as important a club as everyone saw it a decade ago. The balance of power is shifting away from them, and as it does the need to squabble over who is settlement-free with whom is shifting to the border with the last mile.
XO and Level 3 haven't seen eye to eye on various issues since the dot com bubble, including a legal action over whether XO could light its fiber a few years back. But lately things have been relatively peaceful. Level 3 is often mentioned in the context of M&A when it comes to XO, given that XO's backbone is built on fiber from the original Level 3 build and Level 3 would surely like it back if it can get it. Icahn doesn't seem ready for the endgame yet, but when he does I doubt we will get much warning.
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