Level 3's on-net, third-party fiber networks fuels Ethernet, hybrid services growth

For Level 3, installing more buildings onto its fiber network has it has made it a bigger threat to AT&T (NYSE: T) and Verizon (NYSE: VZ) in the Ethernet and cloud service segments.

Interestingly, Level 3's effort to build out its fiber network to more buildings, including its purchase of tw telecom, has also helped it surpass Verizon as the second largest U.S.-based service provider in terms of port share.

The service provider has set a goal to get more of its customers on-net, a process that affords it the ability to better control the customer experience and upsell higher speed services like IP-VPN and, increasingly, cloud and security services.

It currently has nearly 43,000 on-net buildings in North America, a number it plans to continue to ramp up throughout 2016 and beyond.

Jeff Storey, CEO of Level 3 Communications, told investors during a third quarter earnings call that building out fiber to meet enterprise customer demands remains a key priority.

"We want to get to our customers to provide on-net services," Storey said during the third quarter earnings call, according to a Seeking Alpha transcript. "Whether it's in the U.S., expanding fiber footprint in the U.S. or in EMEA or in Latin America, it's about reaching our customers with our fiber infrastructure."

While Level 3 has no plans to let up on its on-net fiber build out initiative anytime soon, the service provider's increasing focus on providing solutions for large customers means it has to have an arsenal of various access sources.

This means that in some cases it will continue to use third-party circuits from another competitive provider or the local ILEC as a way to fulfill a large business customer contract that may have locations outside of Level 3's fiber footprint.

It allows Level 3 to broaden the reach of its growing portfolio of not only Ethernet, but also cloud and managed security services.

"We now have a broader net to cast when it comes to providing solutions, particularly when it comes to product set legacy Level 3 larger customer had a robust third party access footprint," said Anthony Christie, CMO of Level 3, in an interview with FierceInstaller. "The idea of proactively putting buildings on net has not gone away, but because the product set of legacy Level 3 is geared toward larger enterprise customers we had a robust third-party access footprint, which is playing beautifully into our hybrid WAN strategy."

Having a combination of fiber installed into a large amount of North American buildings along with a large third-party wholesale partner base enables Level 3's sales force to address a larger set of customers.  

"If you talk to our sales leaders now, what they'll say is 'we have a bigger net to cast because we have more on-net than we had before. I still have my capital budget to put buildings on-net where it makes sense and I have a product set that's access agnostic as it relates to selling customers,'" Christie said. "We have actually stratified the market that way in North America so you have a local sales force that's selling to assets and a national sales force and a global sales force that's selling to customers, and those are two different things."

A general manager in Atlanta that oversees 500 buildings that are connected to its fiber network would be tasked with selling anchor tenants in those buildings, for example, according to Christie. In tandem with the local sales manager, a national sales force would also be selling services to customers that reside not only in those on-net buildings, but also others inside the market where Level 3 has not built out fiber to yet.

Level 3's on-net fiber installation and Ethernet services vision ties into its hybrid strategy that incorporates SDN to deliver two service sets: hybrid cloud and its emerging hybrid WAN product set.

In the first phase of its hybrid WAN offering, Level 3 plans to provide customers a combination of professional services, security services, Internet offload, and a national access aggregation service. It can then enable customers to get access to its growing list of third-party cloud partners like Amazon, Microsoft Azure and Equinix.

"There's actually customers we're acquiring now for the first phase of our hybrid WAN offer, which will consist of a professional services wrapper with security, Internet offload and an access component that's aggregated nationally so an enterprise IT person does not have to say, 'I need to buy from Comcast in this territory and use Level 3 for my VPN access,'" Christie said. "We're going to push all of that to the side and say, 'We'll engineer the network based on what the performance and the economic requirements are and where the Internet is good enough we'll use that as the access mechanism and we'll procure that for you.'"

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