Level 3 Caught in Market Bind

By eweek  |  Posted 2001-06-18

Another big round of layoffs is expected at Level 3 Communications as early as today, because the network builder has failed so far to sign up enough major customers to fill $10 billion worth of newly constructed pipes.

Level 3 is expected to lay off 20 percent of its work force, or 1,100 out of 5,500 employees, executives said last week. The move, observers suggested, is a direct result of the companys inability so far to sign BellSouth, SBC Communications, Verizon Communications or a big long-distance carrier. Level 3s business model has counted on leasing bandwidth on its new fiber network to other companies.

"We know that quite a number of the companies who have business services, residential services and wireless services are now thinking of outsourcing some part or all of their network," Jim Crowe, Level 3s CEO, told Interactive Week in April.

Some market watchers noted that Level 3 has been caught in the recent telecom tumble, as major carriers look at buying the assets of failing network companies for pennies on the dollar, rather than signing big lease deals.

"360 Networks is out of the game because people are pretty confident they are done," said Cary Robinson, senior research analyst at U.S. Bancorp Piper Jaffray. "The question then becomes: If you are an incumbent, do you buy 360s assets, or do you outsource?"

A 360 Networks spokeswoman said the company is looking for $300 million in additional capital and is evaluating options to resolve the funding issue.

Level 3 promised to double its revenue to $2.5 billion this year, then lowered its revenue estimate. Though the Broomfield, Colo., company announced major undersea transport agreements with France Telecom and NTL Group last week, shares in Level 3 continued to slide, trading in the $8 range, down from the 52-week high of $95.25.

Among Level 3s potential customers, observers said Verizon is the most eligible for a Level 3 hookup because it doesnt have any long-distance alliances. A Verizon spokesman declined to comment.

Whatever choice U.S. carriers make, analysts like Robinson are still bullish on Level 3s business model of outsourcing, believing that bandwidth demand will rebound.

"It may not materialize this or next year, but longer term it is going to be cheaper to outsource," Robinson said.

Other market watchers said it depends on how the market develops.

If you believe a bandwidth glut exists and prices will keep falling, leasing capacity makes sense, said Hilary Mine, vice president of research at Probe Research. "On the other hand, if you believe that network consolidation is rapidly returning the world to oligopoly status, and this is your chance to become an oligopolist or be shut out, then it may be better to buy."

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