How Much Control Does Level 3 Have Over Spending?
is the key question here. First of all, Advalorem, I
personally would encourage you to keep posting. Debate
over facts and differences of opinion is healthy. Anger
merely shows you've hit a tender spot, and may also
show analysis by those long (including myself) may
not have it right. It is those who are trying to
shut you down who are contributing to an unhealthy
investment atmosphere. If there are negative facts,
certainly, let’s get them out into the open air and
talk about them. If this thread is merely to hype, then
I don't belong here either.
My main point is that Level 3 would never allow
their cash position to go to zero and so I disagree
with that conclusion by the street.com writer.
Much of the investment in dark fiber and conduits
cost very little to maintain and manage. The whole
point of dark fiber is that it's those companies
leasing it and putting their own electronics in
it that are burdened by the costs of building and
managing the network. Any problems in the fiber area
would come thru inadvertent dig-ins or catastrophe
like an earthquake or landslide where the conduit
would be broken and have to be replaced and fiber
respliced. Besides, Crowe says this phase of his
network buildout if pretty close to completion.
So, IMHO, additional spending would be for buildout
of co-location space (6.5 million sq ft) and lighting
up of the network. I do not know what the cost involved
is for building co-location buildings and floors, but
I do know it’s got to be incredibly lucrative. This can
be seen from the concern for example, Wash DC has
about turning their downtown area into a deserted
area because so many office buildings with tenants
are being converted to telecomm hotels and co-location
facilities. You get a better return for throwing at law
firms and lobbyists, and putting in telecomm equipment
and inter-connecting various carriers. Who’d of thunk that?
Also, Nacchio/Qwest has publicly admitted Level 3 is
ahead of it's competitors in this area. If true, this
would make Level 3's fiber/conduit network more valuable
as obviously some substantial portion of their carrier
tenants would be using Level 3 fiber - otherwise why use
their colocation facilities? A form of virtuous circle
exists here as the one reinforces the other, no?
The other cost would be in lighting up the network.
Here are two facts which seemingly conflict: One,
Crowe has stated he has accelerated spending which
would have occurred in 2001 into end of 2000, and
so cash burn rate will decrease in 2001 because some
of this spending occurred this year. However, industry
figures say the ratio of installing electronics to fiber
is at 19:1 ratio. Here, I took this figure from Gilder.
Because of this ratio, it is hard to see how spending
will significantly decrease over the next two years.
Even if it does cost less to put in new generation fiber
-optic equipment, IP routers, and softswitches, how
much less is this cost? 75% maybe? If so, that would
take the cost of lighting the network down to 15:1.
So what will the new burn rate be? While I haven’t read
Value Line’s analysis, it seems to be this area and cost
ratio, which Value Line might be targeting.
For Crowe, this must be a very problematic area, and
leads me back to my first point. To prevent cash from
dwindling to zero, Level 3 merely has to slow the rate
of lighting up their network to match the rate at which
new business is coming in. This would preserve cash
and slow cash burn – perhaps dramatically.
However the problem comes in, in that this is not an
option for Level 3. In order to get themselves away
from commodity dark fiber sales, and potentially
collapsing prices, they have to migrate to higher
margined business – ie, selling telecomm and data
services, which means they have to spend money
to light their network.
So how much control does Level 3 have over their spending?
Enough in my opinion so that cash would never go to zero.
Crowe knows they are in enough control over their cash
spending and can either slow it down or speed it up
according to his reading of marketplace demand. And if
someone as sharp, experienced, and as respected in the
industry like Crowe misreads the market, then there is
little hope for the whole telecomm sector.
Crowe is walking an incredibly fine line here. Unfortunately,
there's a lot of bets out there that he falls off.
I'm betting he doesn't.
Regards, Peter. |
