AOL DEAL PROVIDES LIFELINE FOR LEVEL 3’s WHOLESALE PLAN; Carrier’s viability bolstered by debt restructuring, contract wins

AOL DEAL PROVIDES LIFELINE FOR LEVEL 3’s WHOLESALE PLAN; Carrier’s viability bolstered by debt restructuring, contract wins

Level 3 Communications’ service deal with AOL that was announced last week provides hope that the debt-laden carrier will survive despite the depressed wholesale market.

“This is a vote of confidence in a market looking for confidence,” said Ron Vidal, Level 3’s group vice president of new ventures and investor relations. “Traffic continues to grow, and AOL [is] certainly evidence that the demand is continuing to grow.”

AOL will purchase wavelength services in North America, as well as co-location and private-line services – a validation for Level 3, which has been providing the ISP dial-up modem access for the past two years. Terms were not disclosed, but given AOL’s leverage with suppliers and how much capacity is on the market, Level 3 may have been forced to offer fire-sale prices.

The deal with AOL was a hard-fought victory for Level 3, but pricing pressures have eased with the disappearance of some competitors, according to Tony Palma, vice president of broadband product management for wholesale competitor Global Crossing.

“It’s a good win,” Palma said. “Companies like 360networks were fueling that [price] erosion. It’s not the insanity that it once was. Prices are much more stable now than they have been in the past.”

Level 3’s network is designed for wholesaling large amounts of bandwidth rather than granular capacity and is new enough that it should be cheaper to operate than competitor networks – a tenet established by President and CEO James Crowe. The entire network was built to operate at optical speeds, so it is much more economical to maintain, according to Vidal.

“People that say price doesn’t matter are lying,” Vidal said. “We are pricing aggressively, and we are maintaining high gross margins” – about 60%.

Level 3’s network was designed specifically for this type of deal, so the AOL contract is not surprising, said Blaik Kirby, vice president for Adventis.

Furthermore, AOL is the anchor tenant Level 3 needed, similar to the role SBC Communications fills for Williams Communications, according to Rod Woodward, analyst for Frost & Sullivan. “And it’s coming in at the most opportune time,” he said.

Indeed, two months ago, Level 3’s once high-flying stock had fallen to less than $2 per share amid questions of its viability. But debt restructuring and high-profile wins with AT & T Wireless and AOL generally have quelled those fears. News of the AOL deal sent Level 3’s stock price soaring above $7 per share for the first time in more than five months, although much of those gains were lost later in the week.

Vidal maintains that Level 3’s wholesale-only strategy is what draws customers. Yet some argue the wholesale-only strategy is a killer.

“We aren’t married to a single business concept,” said John Mullan, director of private data networking for XO Communications. “When you are, you are doomed to fail.”

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