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ONLINE DOCUMENT: ANALYSIS: THE BACKBONE OF MCI’S NET BATTLE

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MCI and British Telecommunications have been laying the groundwork for months for a pre-emptive strike on the Internet.

On Monday, the planning and investment paid off as markets applauded an ambitious move to capture a substantial share of traffic on the world's fastest growing computer network.Shares in both companies rose as analysts welcomed further signs of their willingness to take the lead aggressively in pursuing new and potentially lucrative service opportunities.

Senior BT and MCI executives, including Vint Cerf, an MCI vice-president credited with co-founding the Internet, claimed Monday that the two companies had developed the first integrated global superhighway, a high-speed, high-reliability Internet "backbone."

It's the first time large telecommunications operators have attempted to reclaim control and management of the Internet from its present somewhat anarchic state. The new backbone is expected to go live in July this year.

A network backbone can be likened to a highway capable of carrying large amounts of traffic over long distances. MCI's U.S. backbone already operates at 155 megabits (millions of electronic pulses) a second; the new Concert InternetPlus network is said to provide this speed and capacity globally. BT says it will increase the capacity of the network by about 30 percent.

The Internet population has been doubling each year since 1988, but now it's being driven by a new phenomenon - the intranet, intra-company networks which obey Internet rules.

According to Rupert Gavin, head of BT's multimedia activities, all the company's top 250 corporate customers are investigating the possibility of installing intranets, driven by the attraction of a company-wide electronic mail system which can also be used to communicate with groups outside.

With no end to the growth of the Internet and intranets in view, how long will the new backbone be able to meet the demand? "That is the challenge," Gavin says ruefully. "You have to watch developments on a daily basis."

MCI and BT will operate the new network through Concert, a joint venture established two years ago to compete for the business of large international customers. It is in direct competition with other international alliances, WorldPartners led by AT&T, the largest U.S. operator, and Global, One involving Deutsche Telekom, France Telecom and Sprint, the third largest U.S. long-distance operator.

How will BT and MCI make money from its new network? The economics of the Internet can be puzzling. Conventional wisdom that telephone calls cost a lot of money - even if charges are declining - seems to be turned on its head. Internet users stay on the line for hours for almost no cost. Clever software making it possible to transmit conversations over the Internet promises international voice calls for next to nothing.

But telecommunications experts explain that Internet economics depend on the statistical probability that only a small number of the potential Internet population will want to use the network at any one time - say, only one in 40.

In this model, transmission capacity can be divided into smaller and smaller chunks and sold on cheaply. These economics made sense when the Internet was used chiefly by a few thousand scientists, engineers and a few enthusiasts with access to computers. With the advent of the home and business computer, however, the volume of traffic is threatening to overwhelm the system.

The provision of Internet services is not at present particularly profitable for any telecommunications operator. MCI and BT argue the new network has the "industrial strength" to cope with the traffic while offering the partners the chance to charge premium prices for a professionally managed service.

In other words, customers will always be able to get on to the Internet and will not have to put up with congestion.

It will be up to their service providers - companies which manage access to the Internet - to decide what they are charged for this "first class" service. Gavin believes the new network will be substantially in profit by the turn of the century.

And the threat to international revenues from cheap Internet access? Experts point out you get what you pay for. A primitive service akin to Citizen's Band radio is possible over the existing Internet. Approach the quality of conventional voice calls, and the cost of providing the service rises accordingly.

BT and MCI's competitors Monday shrugged off the significance of the new network.

John Sidgmore, chief executive of UUNet, MCI's chief Internet rival in the U.S., said it had been long expected. "We are all growing as fast as we are able to install equipment," he said. "This is not a market that is limited by demand."

(Distributed by Scripps Howard News Service.)