Level 3 Communications (NYSE:LVLT, news, filings) announced today that it has been selected to provide wavelengths on a national scale for the international wholesale arm of European telecom giant Telefonica (NYSE:TEF, news, filings). The contract, which expands on an existing relationship, is for 10 years and represents the single largest capacity commitment in Level 3's history. They will provide triverse routes between major PoPs, diverse routes elsewhere, and have dedicated capacity available for expansion on each route. Essentially, Telefonica has chosen to outsource the bulk of its US transport network for the long term.
For Level 3, this is an important deal that brings the spotlight back onto its flagship wholesale division. Much of media coverage of late has been on the future prospects of its youthful CDN or on the struggles of its Business Markets division. Yet it is the wholesale arm which remains the core of the company, and that is where the company's health is still ultimately determined. They have been rather quiet lately, so it is good to see a solid win. Theoretically, a cutback in carrier spending is a good thing for a wholesale bandwidth business - it implies others are building less of their own facilities and leasing more. In practice though, who really knows this year.
Many European incumbents were driven out of the US market when the last bubble burst, and they have been tentative to return in force. Certainly none have bought large amounts of fiber again, preferring to lease at the wavelength and private line level. Telefonica has been growing in stature outside its home turf over the last few years, but was never very active here even back then. With this move, they seem ready to increase their US profile alongside BT, FT, and DT for the first time. I am curious to see what they do with their new US footprint.
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