September 11, 2010 – The Internet Core: We Can Rebuild It – We Have the Technology

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The major paradigm shifts in the TMT landscape – e.g. the rise of mobile devices, streaming media, cloud applications and telepresence – are driving 50% annual growth in Internet traffic, but also revealing the unacceptable latency and reliability of traditional internet architecture.  While once the “last mile” was considered the bottleneck to high performance Internet service, multi-megabit wired broadband speeds are now commonplace and the advent of 4G portends the same performance for mobile connections.  The explosive growth of new applications that require nearly instantaneous response time has catalyzed a massive traffic shift away from traditional Internet core networks, toward content delivery networks (CDN) that distribute servers and storage to networked data centers located as close as possible to users.  We believe that this shift will accelerate, rewarding network operators and technology vendors with scale and expertise in the new approach

Traditional Internet architecture is hierarchical – passing data from router to router over many hops between a user and the server.  These hops create delays (latency) and errors that are unacceptable for users of cloud applications or streaming media – the fastest growing categories of traffic on the Internet.  One possible response is to add capacity – e.g. investing in more, bigger and faster routers to connect more and faster optical pipes.  This alleviates congestion at high traffic bottlenecks, where data packets can stall in electronic queues to await processing or dropped as buffers occasionally overflow.  While the US is still absorbing over-investment in fiber during the Internet bubble, carriers are approaching an upgrade to 100Gbps optical transmission, replacing or augmenting 40Gbps gear now going in to replace 10Gbps equipment.  In turn, router vendors – primarily Cisco and Juniper – are following with 100Gbps products of their own.   However, while this is a necessary part of the solution, the fast growth in traffic has made unsnarling bottlenecks akin to a game of whack-a-mole – fix one and another pops up

While traditional carriers chase their bottlenecks, CDNs have emerged as a real solution.  Internet latency and error increase with the number of hops that data packets must make on their way from server to user. Thus, geographically distributing server and storage resources, optimizing private links between distributed data centers and duplicating commonly accessed content in multiple locations, and delivering data from servers as near as possible to the user, can dramatically improve network response times.  Applications served via CDNs have considerable competitive advantage over those that are not.  Similarly, CDN operators with superior scale and skill, such as Google and Amazon, can generate further advantage.   These advantages can be seen in the extraordinary increase in the concentration of Internet traffic.  Today, fewer than 150 companies carry more than half of the world’s Internet traffic, down from more than 10,000 companies in 2007

Building faster core networks and CDNs to improve the performance of next generation Internet applications should drive double digit annual growth for 40/100Gbps optical equipment, high speed core routers, content delivery technologies (layer 4-7 switching, application delivery controllers, etc.), high capacity storage systems, and blade servers.  Companies with a disproportionate exposure to these markets include Ciena, Cisco, Juniper, F5, Riverbed, Blue Coat Systems, Citrix, Radware, Brocade, EMC, Network Appliance, JDS Uniphase, Finisar, PMC-Sierra, AMCC, Broadcom, and Marvell.  Second, companies that are successful in gaining critical mass with a CDN for both their own and commercial traffic will benefit as new performance sensitive applications gain further hold.  These companies include Google, Amazon, Yahoo, Akamai, Limelight, Microsoft, IBM, Rackspace, Terremark, and Internap

The losers in this scenario are the operators of traditional IP backbones and regional networks.  The extraordinary growth of CDNs and cloud hosting siphons traffic off of carrier networks and squeezes pricing for plain vanilla transit.  These companies include Verizon, AT&T, Level 3, Global Crossing, and Sprint, amongst others.  While carriers have belatedly pressed into cloud hosting and CDNs, their flatfooted start makes the threat more acute than the opportunity

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