Level 3 Veers Off Net

February 23rd, 2009 by · 2 Comments

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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Categories: CLEC · Internet Backbones · Metro fiber

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2 Comments So Far

  • jeremy drane says:

    rob; here’s a post i wrote on the IV board that’s directly related to your blog post.

    “as others have said this is a very large shift. speaking just from an enterprise point of view it’s important to understand why we have not been successful so far. here are a couple off the top of my head…..

    1. wholesale vs enterprise models: as an overarching issue, LVLT has always been a wholesales provider first. which meant they would go to their “100 biggest users of bandwidth” hook up a big pipe and then sell incrementally more and more to them. cost of sales and installation was min as a majority of it was paid for in the initial deals. so they could keep selling more and more at 80% gm’s.

    2. centralized vs decentralized models: of course a natural outcome of such a structure was and is that you had the central brain of LVLT, CO, really control everything. there was no need to empower local staff as the accounts were/are really managed in one place.

    3. on-net vs. off-net models: Another natural outcome was the desire to push more and more of client’s spend on-net. since you could handle it all why not if you could get a better deal from LVLT.

    4. strict vs. flexible ROI models: LVLT historically has been very strict in their pricing as they need to make a certain ROI on their deals in order to keep those interest payments flowing.

    5. pre and post unity models: let’s face it when you are a wholesale provider you don’t have the same level of complexity as you have when you are trying to hook up thousands of small connections vs. hundreds of big connections. consequently not having a unity system in place makes doing enterprise not nearly as smooth as having one.

    when you look at enterprise all of these models many things start to work against you.

    1. you need to be able to hook up lots of small pipes vs. a large pipe across many different locations.
    2. you need to empower local sales staff and allow them to make business calls about investing in “small” clients so they become “big clients” one day.
    3. you need to be able to sell a small deal that might lose you money to establish credibility before you can get a majority of the traffic.
    4. you need to have smooth operational processes that empower and give visibility to local staff so they can communicate with the client, rather than having to call Colorado to get all the answers.
    5. you have to accept lower ROI’s as some deals are investments that just have to be made.
    6. you have to let clients have off-net relationships as they might have a provider that they really want to do business with for some reason (like they have done a good job for 15 years and one or two sales presentations isn’t going to undermine that).
    7. you cannot expect wholesale economics to translate into enterprise consequently you cannot expect wholesale leadership to translate into enterprise leadership.

    I could go on and on. I was told once that the difference between wholesale and enterprise is like global banking and retail branch banking. the cost, people, expectations, economics – essentially everything – is different. trying to retread wholesale execs and make them enterprise, like they did with the previous leader of enterprise, is destined to fail. you need enterprise people running the enterprise business. i have re-bought the equity because i FINALLY thing that we understand that point. at one point i thought that we would spin out enterprise and again try and focus on wholesale, i think with the T and VZ rollup that model won’t work as the power is now too focused in too few hands. if you’re LVLT you need both to be successful. we’re simply not strong enough to pick just wholesale and let it ride. im not sure what others think but we are historically cheap from a valuation perspective and it seems like we are making, and have made, some good moves recently. good luck.”

  • MBW says:

    Get the Broadwing off net provisioning band back together!!!

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