Internet’s backbone fuses: Level 3 buys Global Crossing

April 11, 2011, 9:14 PM UTC
Image representing Level 3 as depicted in Crun...
Image via CrunchBase

Level 3 already runs the single most important part of the Internet. Of the 36,878 autonomous networks that collectively make up the global Internet, Level 3 (LVLT) is by far the largest and most interconnected.  Buying Global Crossing (GLBC), which by most measures is now the global Internet’s third largest part, in a $3 billion deal will only cement that position.

The question is, with 36,876 competitors still around, is the consolidation at the top of the Internet going to affect how it’s run, or how much its users pay?

Moving digital bits over long distances has proven to be a naturally competitive business in the 21st century.  Make that hyper-competitive. Thick fiber optic cables, each packed with dozens of fibers that are often leased by different companies, now link the world’s major cities.  The result is a market for inter-city data transit that operates much like the airline business, though far more competitive and cutthroat.

The hyper-capacious cables mean that dozens of companies can move bits from L.A. to Denver, and will bid against each other to carry the traffic.  In the rare instance where LA-to-Denver capacity might be tight, in a blink customers can route their data through Phoenix, with no layover.  In most cases the networks’ marginal cost of moving a bit between two cities is essentially zero, and so as textbook economics would predict, the customers’ marginal cost is usually zero too.

The minimal profit to be wrung out of the hyper-competitive global bit-hauling business is evident in market-leader Level Three’s $2.7 billion market value.  By contrast, in the profitable wireless business, even a number four player like T-mobile is worth $39 billion.

The merger seems certain to pay off for Level 3 in lower costs. The two giant networks can reduce costs by sharing their networks and access to settlement-free peering deals.  Changing the pricing dynamic in the hyper-competitive global bit-moving business will be much trickier.

More from Fortune: