The people who opened the first competitive cracks in the local telecommunications market are swinging their hammers once again. Armed with nearly $3 billion in financing, former executives of carrier MFS Communications and its original holding company are reuniting to create the first business-focused, pure Internet Protocol (IP), local and long-distance carrier-ad to break the economic and technology mold.
This week, after months of top-secret work, James Crowe, the founding CEO of MFS, will announce Level 3 Communications, a local and long-distance fiber carrier that will deliver services at 1/27th the cost of today's traditional circuit-switched networks. Level 3 will be led by Crowe's top MFS colleagues and recruits from other communications companies. It will be funded by MFS's former holding company, Peter Kiewit Sons' Inc.
"This represents an economic as fundamental as the change from telegraph to telephone or the move from mainframe to the PC," says Crowe, now Level 3's president and CEO. Hyperhole, perhaps. "But Level 3 has people buzzing. This will drive the market participants nuts, and I like that," says George Mattingly, senior VP or IT capacity planning at First Union Corp., the holding company for First Union Bank, in Charlotte, N.C. "They'll force a price break because they can deliver bandwidth so much more cheaply."
Level 3's strategy is not without risk. While researchers are rapidly improving voice-over-IP technology, business quality may still be a long way off. But, says Crowe, "we're hotly working on that." Also, some competitors say Crowe has a long way to go. Level 3's strategy is not without risk. While researchers are rapidly improving voice-over-IP technology, business quality may still be a long way off.
"Level 3's network is still just a concept," says Joseph Nacchio, president and CEO of Qwest Communications International in Denver. Still, few doubt that Crowe & Co. can execute. Their previous company, MFS-originally a division of Kiewit in Omaha, Neb.-increases its market value more than any other company during a 33-month period. MFS went public in May 1993 and was acquired by WorldCom in 1996 for $14.3. Now Kiewit is ready to invest $2.5 billion to $3 billion initial funding for the new carrier.
"From a financial firepower analysis. Crowe's got what it takes," says Jeff Marshall, managing partner of VantagePoint Venture Partners of San Bruno, Calif., and a former communications executive at Bear, Stearns & Co., one of MFS's first and largest customers. If Level 3 succeeds, the carrier could spur new applications that converge voice, data, and video. Industry watchers expect data-traffic volume to exceed voice traffic with three to five years. Level 3's success could also lead to applications that help companies make many of their vital legacy apps available to employees and business partners at costs drastically lower than today's.
Analysts estimate that U.S. businesses have as much as $5 trillion worth of installed legacy applications. "If we can preserve any fraction of that and drive it over the Web, we're talking about a very large business opportunity." Says Raul Pupo, president and CEO of PKS Information Systems Inc., a unit of Kiewit that reengineers legacy applications. "Access to business-critical systems will be a boardroom issue instead of a technology issue." Kiewit, which made its money in construction, now hopes that, pending an Internal Revenue Service ruling, it can spin off its construction business and focus solely on telecom and systems integration.
Kiewit has other grand plans: this year, the beginnings of a nationwide long-distance network and more important, local networks in a half-dozen cities to compete with the regional Bells. Only a few companies have built local networks; none has built an IP-based local and long-distance network. Most local competitors buy part of their networks wholesale from the Bells, then resell the services as their own. Within three years.
Level 3 expects its long-distance IP fiber network to connect as many as 60 U.S. cities, injecting competition in a market where prices are already low, Kiewit also hopes to take on the international market by building and connecting to networks in Europe and Asia, where government and ex-government carriers still dominate. Also, a single IP-based networks that handles all kings of traffic will let customers and carriers develop applications that include both voice and data. For example, a customer-service agent for a retailer could transfer a customer's call a picture of the clothing the customer ordered, and the customer's billing information to another agent across the country over a single line.
Until recently, conventional carriers have built different networks for different types of technology. Older carriers including MCI and Sprint, are just starting to link their circuit-switched and IP networks. Level 3 hopes to sell high-quality IP-based data services and fax services by year's end, possibly sooner. Fax currently accounts for 10% of all traffic on traditional voice networks. The Level 3 network, kept under tight wraps until this week, promises to break the carrier mold because both the network and the critical systems that support the carriers mold because both the network and the critical systems that support the carrier business are being designed from the ground up for the purpose of upgrading.
"It's a wonderful thing to have a blank sheet of paper." "This is a dynamic idea." Agrees David Passmore, president of consulting firm Decisys Inc. "The IP future is going to happen to everybody but the most established carriers, if you're some poor older carrier that has to depreciate your network over many years, these guys are basically going to eat your lunch." That's because the traditional carriers thought fiber-network technology would be cutting-edge for 20 years or more, so when they buried the fiber, many carriers failed to build manholes that would later let them easily access the physical network.
The result: Traditional carriers are stuck with older technology, while fiber is "undergoing so many changes, it's throwing everybody in a tizzy," says Crowe. To be sure, others are building nationwide high-capacity fiber networks, but only Level 3 is also building a local network to compete with the Bells. Qwest is building a long-distance network aimed at business customers, yet it's implementing both IP and circuit-switched technology.
Crowe is an old believer in IP. In 1995, Walter Scott, Kiewit's chairman, returned from a billionaires' retreat in Scotland with investor Warren Buffet and Microsoft Bill Gates. At the time, Crowe recalls Gates told Scott that the Internet would displace traditional carriers Crowe's reaction: MFS plunked down $2 billion for Internet service provider UUNet Technologies Inc., [Crowe] was the first in the industry to get the IP game," says Marshall of VantagePoint Ventures. "Initially IP wasn't designed to handle voice and video Traditional circuit-switching handles those messages well because it reserves a path on the network IP packet switching is more efficient, only occupying the network as traffic requires bandwidth. But with that efficiency come echoes. More advanced router and switching technology, expected later this year should let carriers send delay sensitive voice and video traffic ahead of data traffic.
By comparison, Level 3's approach-running all traffic over a single network is easier, cheaper, and quicker to manage and upgrade. When we upgrade our architecture every service we offer will take advantage of that upgrade," says Rob Hagens, a Kiewit engineer. "You're future proofing the network. Level 3 has another big advantage. It can design an open systems, back office system to support customers operations that should make it easier to serve customers quickly and efficiently. Some carriers have a system for ordering services, another for deploying service another for billing, and so on. Many carriers have 30 plus billing systems for order entry alone," says Marshal. The complexity of managing those systems is then biggest challenge.
Another unusual feature of Level 3 is its executive ranks. Most of the carrier's leaders are former MFS executives. Though many cashed in after the WorldCom acquisition and "don't have to work another day in their lives." Says Crowe. "MFSers like to create things." Back when Crowe launched MFS a Washington newspaper called him "ludicrous." Nobody says that now. Crowe's got the vision, the experience, and most important, the money. Lots of it.
About Level 3 Communications
Level 3 Communications, Inc. (NASDAQ: LVLT), an international communications company, operates one of the largest Internet backbones in the world, connecting 180 markets in 18 countries. The company serves a broad range of wholesale, enterprise and content customers with a comprehensive suite of services including: Internet Protocol (IP) services, broadband transport and infrastructure services, colocation services, voice and voice over IP services, content delivery and media distribution services. These services provide the building blocks to enable Level 3’s customers to meet their growing demands for advanced communications solutions. The company’s Web address is www.Level3.com.
"Level 3 Communications,” "Level 3," the red 3D brackets and the Level 3 Communications logo are registered service marks of Level 3 Communications, LLC in the United States and/or other countries. Level 3 services are provided by wholly owned subsidiaries of Level 3 Communications, Inc. Any other service, product or company names recited herein may be trademarks or service marks of their respective owners.
Forward-Looking Statement
Some of the statements that we make in this press release are forward looking in nature. These statements are based on management’s current expectations or beliefs. These forward looking statements are not a guarantee of performance and are subject to a number of uncertainties and other factors, many of which are outside our control, which could cause actual events to differ materially from those expressed or implied by the statements. The most important factors that could prevent us from achieving our stated goals include, but are not limited to our ability to: successfully integrate acquisitions; increase the volume of traffic on our network; defend our intellectual property and proprietary rights; develop new products and services that meet customer demands and generate acceptable margins; successfully complete commercial testing of new technology and information systems to support new products and services; attract and retain qualified management and other personnel; and meet all of the terms and conditions of our debt obligations. Additional information concerning these and other important factors can be found within Level 3’s filings with the Securities and Exchange Commission. Statements in this press release should be evaluated in light of these important factors. Level 3 is under no obligation to, and expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.
