Level 3's Starbucks Wi-Fi deal could spell new enterprise revenue opportunities

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Sean Buckley, FierceTelecomLevel 3 Communications (NYSE: LVLT) recently struck a major coup by unseating AT&T (NYSE: T) as Starbucks' preferred Wi-Fi backbone provider via a partnership with Google (Nasdaq: GOOG).

As part of the agreement, the Wi-Fi service will be delivered under the Google brand, while Level 3 will handle network connectivity and equipment installation in each of the 7,000-plus U.S.-based stores. Having the Wi-Fi service being delivered by Google makes sense as they already have a strong connection with Internet users as a dominant search engine site.

Financial terms of the contract were not revealed. However, Donna Jaegers, vice president and senior research analyst for D.A. Davidson & Co., said in a Denver Post article that the deal could be worth almost $50 million for Level 3.

Jaegers added that Level 3 could use the Starbucks relationship to upsell their growing base of enterprise solutions to other nearby potential clients that reside in the same buildings.

Given the challenges of proving out a business case to extend facilities to any building, Jaegers' theory makes sense. 

Level 3 will immediately gain access to an even broader array of multi-tenant dwellings. As it begins the installation process, the provider could pose itself as an alternative to the incumbent telco or cable operator and cite the coffee chain as a customer success story to other nearby businesses.

Driving enterprise service sales has been a priority for Level 3 and was a major highlight of the service provider's second quarter earnings report.

In the second quarter, Level 3 reported that the 2.4 percent growth in its Core Network Services (CNS) segment was due to the increase in Enterprise services in all three of its regions--North America, EMEA and Latin America. In North America, CNS Enterprise revenues, particularly colocation and IP-based VPN and CDN services, grew 5 percent to $603 million.

These data services leverage a metro fiber network that now reaches over 13,300 buildings. Inside this set of on-net buildings, it offers a host of IP-based cloud, voice (e.g., SIP trunking), managed services, and Ethernet.

Ethernet has become one of the competitive provider's flagship business products. In 2011, the provider expanded its Ethernet and VPN service presence by acquiring Global Crossing.

For at least the past six years, Level 3 has been cited every quarter as a major Ethernet player on Vertical Systems Group's U.S. Business Ethernet Leaderboard where it competes with a host of incumbent telcos and competitive providers such as AT&T (NYSE: T), Verizon (NYSE: VZ) and tw telecom (Nasdaq: TWTC). In VSG's Competitive Provider Business Ethernet Leaderboard issued in May, Level 3 was number two on the list trailing only tw telecom, but close in terms of port share with XO Communications.

While it's easy to assume Level 3 will connect many of the stores with its own on-net fiber-based facilities, the sheer size of the deployment means they will have to work with other off-net providers to reach into each Starbucks' store.  

When asked about the Starbucks' relationship during its Q2 2013 earnings call on Wednesday, Jeff Storey, Level 3's CEO and president, confirmed it would use a number of connectivity methods, including fiber and possibly Ethernet over Copper via other service provider partners. 

"We're going to upgrade more than 7,000 of the company-owned stores in the U.S. and we'll look at a variety of distribution technologies that make sense for each store," he said.

Level 3 may be not be offering many details yet, but at a time when it is seeing its traditional wholesale business decline it's clear the service provider has laid the foundation for future business service revenue growth.--Sean