A day after the CenturyLink/Level 3 deal was hatched, it’s time to start to count a few chickens. Fair warning: I’m going to ramble a bit.
Growth has been elusive. This deal wouldn’t have happened if either company could have solved the organic enterprise/wholesale growth problem. After the acquisition of tw telecom, Level 3 thought it had the answers. They had a few nice moments with enterprise growth, and if they had sustained it you can be sure they wouldn’t be doing a deal at this price. CenturyLink has its own issues, in that it’s never really developed the metro fiber depth outside its ILEC reach to make its network sing, its ILEC/RLEC pieces have limited scope for growth, its cloud/datacenter division hasn’t turned into the future growth engine the way they planned, and there’s no wireless angle to turn their attention to. Had the cloud move panned out, they never would have made this deal either. But neither company found the key to the growth they sought, and that’s the driving force here. Both companies are therefore looking to reset the clock, and they hope to find the means to do it in a place they know very well that can be done.
Synergies have not. Without prospect of sustained organic growth in the areas they see as strategic, both companies are instead switching to the tried and true method of growing EBITDA and cash flow via consolidation. The synergies between two national fiber, data, and voice networks are real and they are by now well understood. CenturyLink has done its share — albeit more of the ILEC and colo variety. And of course everyone at Level 3 has been through the process at least once if not multiple times. The prospect of combining the Qwest longhaul network with that of Level 3 is not a new idea, but an old one considered over and over in parallel to those that actually happened over a decade at Genuity, WilTel, Broadwing, Global Crossing, and others. Both sides know those synergies are there, and so they are going to use them while they try to get the growth thing right again.
Data Centers, Cloud, etc. What do they do with the cloud/colo piece? Level 3 and CenturyLink had different approaches to this side of things. Level 3 never really bought the idea that network operators could dominate the cloud, in that they never put real money behind it and saw their colo footprint as an important piece of the infrastructure puzzle even while accepting its limitations as part of a network operator. But the idea they might sell their data centers at some point has recurred since the dot com crash. CenturyLink, on the other hand, took the plunge when it acquired Savvis. But since then, the ardor has cooled and they’ve been linked to possible sales of the segment several times. I don’t see conflict between these two pieces of the puzzle, but I’m not seeing any magic either. Yet selling the whole bundle doesn’t seem like much of a plan. Maybe there’s a new angle here somewhere? Some way to make cloud and network sing in more productive harmony?
Making it all work. Let’s leave aside whether they can, and think about how they could. Is there a way to combine these assets together into a business that really can take on the industry and generate sustained growth beyond its churn? It’s a really complicated question that I think cannot be solved via a top-down approach. From colo to cloud to voice to lit services to infrastructure to legacy copper, what you have is a diverse spectrum of businesses that operate best under completely different structures. Perhaps the best way would be to take a page from Zayo and radically bifurcate the business model internally. Of course, it’s a lot easier to do that on a smaller revenue base than on what Level 3 and CenturyLink will be starting with.
How much fiber in one pile is too much? The regulatory puzzle is an interesting one that has different answers depending on whether you look at through the lense of the competitive landscape or of the underlying assets. Competitively, there is little problem. The combined company isn’t too big by any measure, and any local problems in the ILEC footprint can be solved with a strategic divestment or two. In terms of assets, I don’t think the market’s memory fully comprehends just how much of the modern national intercity and core metro physical infrastructure of conduit and dark fiber this deal will put under one roof. Level 3 + Qwest + Wiltel + Broadwing + Genuity + Global Crossing + Telcove + tw telecom + the rest amounts to just about everything that went into the ground in the late 90s that can still be resold via IRU. Zayo has pieces of it yet and is building more, AT&T has the Velocita pieces and did invest some in finishing those, and Verizon is buying XO’s sliver I guess, but the rest is of rather older vintages. And this is happening at a time when DWDM equipment is approaching the Shannon limit, and having more fiber or the conduit to add it may actually start to mean something when you can’t stuff everything down a single fiber pair.
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