An article from Phone+ Magazine over the weekend heralds a big change in the way Level 3 Communications (NYSE:LVLT, news, filings) sees itself. The company is not only looking to increase sales via the indirect channels, it is looking to do so off-net. For over a decade now, Level 3 has beat the drum about on-net services, driving higher margins by seeking sales that can be served mostly over their own facilities. Now they are looking to embrace their inner CLEC, as it were, and compete for the mid-sized enterprise market via other people’s facilities as well.
What has changed? First, management changed – the new President and COO Jeff Storey and the new Business Markets president Jeff Tench are obviously making their mark. But more important is the ‘why’ behind the move. As everyone who follows the sector knows, capex is under pressure and this is true at Level 3 even more than for the industry at large. Level 3 needs to grow, but it doesn’t want to spend up front at the moment. It costs money to bring hundreds of buildings online each quarter. The solution? Lease now, then perhaps build out later when money is cheap again (sssh, let me dream).
Now, it’s a substantial philosophical shift for a long term fiber-centric company but in terms of financials and operations it is not THAT huge a change. Level 3 still sells the same stuff it has always sold to pretty much the same customers. They have always gone off-net when needed, nobody has 100% gross margins. But in the past, the company wouldn’t price off-net access very competitively, which both restricted growth and boosted margins and stability. Now those offers will be more competitive, which means many more deals will be open to them – but at lower margins. The balance will shift a bit, nothing more – the deals they win will still be the ones their assets give them advantages on. The new revenues won may be less sticky, but clearly the company wants to increase its foothold in the enterprise space and is willing to become more aggressive to do so.
They wouldn’t do this if they were having trouble provisioning, clearly they are gaining confidence with their back office systems and the rollout of Unity. They need stuff to provision, and with the economy sagging they need to seek new sources. Level 3’s new stance is good news for alternative operators who have fiber assets in the right places – after all, one has to lease from someone and where there is competition to the ILEC the alternatives should do well. And of course it is good news for the company’s partners and master agents, who will have more options available to them.
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