IBD article. Start-Up Buys, Sells To Craft Phone Network [Level 3]
Date: 5/20/98
Author: Reinhardt Krause
James Crowe jumped on the Internet
bandwagon at the right time at MFS
Communications Inc. Now he's trying to hit
pay dirt again by putting Level 3
Communications Inc. on the fast track.
Backed with $3 billion in start-up capital from
construction company Peter Kiewit Sons Inc.
of Omaha, Neb., Level 3 is building a
national phone network based on the
Internet's data transmission scheme. It's
expected to be completed in late '99.
Crowe turned MFS into a major player in the
phone industry by acquiring Internet pioneer
UUNet Technologies Inc. Then WorldCom
Inc. made Crowe a rich man by buying MFS
for $14.3 billion in '96.
Level 3 became a public company in April.
Soon after, it sold $2 billion in junk bonds.
Then, the Denver-based company acquired
XCom Technologies Inc. of Cambridge,
Mass., for about $165 million.
Crowe recently talked with IBD about the
Internet and Level 3's plans.
IBD:
Level 3 plans to build a 20,000-mile
fiber-optic network. Some industry analysts
say too many fiber networks are being built.
Do you disagree?
Crowe:
We're dealing with a service that's price
elastic in the extreme. If prices go down,
demand is going to go up even faster. You
can see evidence not of glut, but of shortage
of key services in the U.S. and across the
globe.
IBD:
Is there room for Level 3 as well as other
players such as Qwest Communications
International Inc. and IXC Communications
Inc.?
Crowe:
We're all going to compete with the dominant
former monopolies and traditional suppliers.
Level 3 is the only company that has
announced plans to use Internet technology
only. The others are using a combination of
Internet technology and old, legacy circuit
switching. We're also the only carrier that
wants to bundle local and long-distance
service.
IBD:
Don't Qwest and IXC have a head start?
Crowe:
That's true, but we've taken some action.
Two months ago, we signed an agreement
with Frontier Corp. to lease a national
network.
IBD:
Level 3 plans to offer services for making
voice calls over the Internet's backbone
instead of over regular phone networks. How
did buying XCom fit into those plans?
Crowe:
We bought XCom because they had
completed certain key components of a
bridge (faster connection) between IP
(Internet protocol) networks and the public
telephone network. So customers that chose
us can simply pick up the phone and dial a
number like they do today.
IBD:
Level 3 has about $4 billion in cash available.
Do you plan to emulate the acquisition
strategy of WorldCom and Qwest?
Crowe:
I don't think you'll see us purchasing large
providers of traditional phone service that use
(old) circuit switches. Our view is that we're
watching a historic change in technology that's
akin to (the change from) mainframes to
personal computers. It's got the same kind of
economics associated with it.
IBD:
Level 3 owns an equity stake in RCN Corp.,
an alternative phone carrier operating on the
East Coast. How does that fit into your
strategy?
Crowe:
RCN is a good example of a company that
(would buy our) unbundled network services,
unbundled access to our software and
automation systems. They would combine it
with their own marketing and customer
service expertise and sell to residential
customers. We don't have any kind of deal
yet with them, but it's a great fit.
IBD:
Phone equipment suppliers such as Lucent
Technologies Inc. are squaring off with the
likes of Cisco Systems Inc. to sell networking
gear. Who will win?
Crowe:
The data communications providers (like
Cisco) understand technology cycle times that
are measured in months. They understand
how to attract and keep the entrepreneurial
talent needed to succeed today. They
understand market-based standards: A
corporation develops a new technology, and
the standards process catches up.
However, they have some major issues to
deal with. One big one is the necessity to
move from best-effort quality - meaning, ''We
do as best as we can, but you get what you
get'' -to the kind of quality- of-service
guarantees that are essential to commercial
communications systems.
The traditional suppliers uch as Lucent) have
almost the opposite set of pros and cons.
What we're interested in is seeing the pace of
technical improvement speed up and pushing
the cost of communications down rapidly.
This kind of competitive environment is good
for that.
IBD:
What's Level 3's strategy for ''last mile''
connections to customers in local phone
markets?
Crowe:
Fortunately, in almost every U.S. city, there
are a number of high-speed choices for large
businesses. We'll use a combination. The real
issue is medium and small businesses and
residential users, who for the foreseeable
future must use copper to connect to
high-speed IP networks.
Those copper wires are owned by the
regional Bells, and there's no incentive for the
Bells to open up those copper loops. Until
that problem is solved, providing high-speed
IP-based services into homes still has to be
done through the equivalent of a soda straw.
(C) Copyright 1998 Investors Business Daily,
Inc.
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