Soon, Qwest Communications will start selling advanced wavelength services in conjunction with its archrival Level 3 Communications.
Its a tangled tale that has industry analysts scratching their heads in wonderment. Central to the plan is an unknown startup called Calpoint, with whom Qwest has struck a five-year deal to resell individual wavelengths of connectivity through a new technology that allows IP traffic to flow down different gradients of light on a fiber optic cable.
Calpoint apparently has no corporate offices, published telephone number or Web site.
What is known is that Calpoint sold $515 million in debt last month to purchase unlit dark fiber from Level 3, according to a report prepared by Merrill Lynch. The business plan presented to bankers said the company plans to buy dark fiber from Level 3, develop a managed wavelength service with Level 3s help, and use Qwest to resell it to enterprise customers.
The deal puts Qwest and Level 3 in an odd situation and one that could make Qwest indirectly one of L3s biggest customers. The two companies share a good deal of bad blood and Qwest has been publicly critical of L3s network.
"Calpoint will light the Level fiber to facilitate a new managed wavelength product marketed to national enterprises," wrote Merrill Lynch analysts Adam Quinton and Craig Irvine in a research note released Sept. 28. "At the same time, Qwest will resell Calpoints managed wavelengths (with a "take or pay" clause) to its own customers on a retail basis."
Said Qwest Spokesman Tyler Gronbach: "It was a Calpoint business decision to select Level3. We could develop and offer the service, but we decided to let Calpoint to do it because we could get to market faster by having them build it."
Qwest also stands to benefit as a hardware wholesaler in the deal. J.P. Morgans Qwest analyst Marc Crossman estimates in a research note that Qwest is selling Calpoint $200 million worth of Ciena equipment in the third quarter and $100 million worth of gear in the fourth quarter.
Analysts tracking shares of both Qwest and Level 3 are not sure what to make of the news.
"What we dont know is what kind of equipment Calpoint is buying – long haul or metro," said Cary Robinson, Senior Research Analyst for Communication Services at U.S. Bancorp Piper Jaffray. "If Calpoint is using Level 3 dark fiber in the metro it makes sense for Qwest. If Calpoint is using Level 3 dark fiber in the long haul, and Qwest is outsourcing to that, thats nuts."
Qwest doesnt own much dark fiber in metropolitan areas, so it would be logical to tap a third party, Robinson said. But if Qwest is outsourcing service creation for the long haul, the only plausible explanation is that even for dark fiber owners it is cheaper to outsource provisioning of advance types of data services than develop them in house.
A Level 3 spokesman declined comment on all Calpoint-related questions.