InformationWeek article on L3
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Breaking The Mold
A startup called Level 3 is pumping billions of dollars into a new IP network. It could change the way you do business.
By Mary E. Thyfault
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-and 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 change 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.
Hyperbole? Perhaps. But Level 3 has people buzzing. "This will drive the market participants nuts, and I like that," says George Mattingly, senior VP of 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 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.-increased 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 billion. Now Kiewit is ready to invest $2.5 billion to $3 billion in 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 in 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 within 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 dramatically 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."
New Focus
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 network that handles all kinds 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 40% of all traffic on traditional voice networks.
'Blank Sheet'
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 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," says Crowe.
"This is a dynamite idea," agrees David Passmore, president of con- sulting 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 atbusiness 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's 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. (later sold to WorldCom). "Jim [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 Marshall. "The complexity of managing those systems is their 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. |
