5 reasons why AT&T, Verizon should see Level 3 as bigger business services threat

Sean Buckley, FierceTelecom

Level 3 Communications CEO Jeff Storey is confident that with the tw telecom acquisition firmly under the company's belt, it can now be a more formidable competitor against his main competitors--AT&T (NYSE: T) and Verizon (NYSE: VZ)--in the business services race.

Each quarter Level 3 has been making progress in growing its Core Network Services (CNS) revenues, with enterprise services being the key driver. This trend continued into the fourth quarter of 2014, where CNS and enterprise revenues rose to $1.46 billion and $1.01 billion, respectively.

And while AT&T and Verizon are still two of the largest enterprise service providers, Level 3 could become an even bigger threat to these carriers for these five reasons outlined below:

1. Broadening its on-net fiber footprint: By purchasing tw telecom, Level 3 immediately gained tw telecom's nearly 21,000 fiber-fed buildings, giving it 35,000 unique locations globally. According to Level 3's own estimates, there was less than 10 percent overlap with tw telecom's building reach when it bought the company. Storey said one of his first priorities in integrating tw telecom is to reduce interconnection costs by putting more buildings on its network. "I don't like to pay a dollar to one of our competitors that I can put on my own network so grooming customers from off-net circuits to on-net circuits is a key priority," Storey said. "Not only does it save us money, but it makes it possible for us to deliver a better experience when we own the facility."

Outside of the tw telecom acquisition, Level 3 has been expanding its own existing on-net footprint in areas like Atlanta, where it is building fiber into 300 buildings and nearly 265 metro route fiber miles. Having a broader on-net fiber footprint has a number of benefits for Level 3 and its customers: It can reduce off-net interconnection service costs and control the service quality for new and existing customers that come onto its network.

2. New cross-selling capabilities: By purchasing tw telecom, Level 3 can sell both existing tw telecom and Level 3 customers services and reach locations that both companies did not reach before. As Level 3 brings more tw telecom customers onto its network, the immediate benefit is twofold: gaining a broader network to connect their diverse locations in both the U.S. and internationally and enhanced services like cloud and the new denial of service (DDoS) Mitigation Service, which it says can help enterprises safeguard their critical data and systems. Likewise, existing and new Level 3 customers will be able to get access to a broader portfolio of VPN services that tw telecom offered and a broader set of fiber-enabled buildings inside the U.S.

3. Ethernet growth: Ethernet continues to be a priority for Level 3 and was one of tw telecom's biggest selling products before the deal was closed. One of the interesting phenomena that took place is that Level 3's purchase of tw telecom enabled it to knock off Verizon from the No. 2 spot on Vertical Systems Group's year-end 2014 Leaderboard, which measures Ethernet port shares sold by the largest U.S.-based service providers.

4. Domestic and international footprint: Level 3 will be able to enable tw telecom's existing customers to get access to Level 3's "local-to-global" footprint. Today, Level 3 operates network and data centers in more than 60 countries, including Europe and Latin America, in addition to various submarine cable networks. Having that reach means that Level 3 can address the needs of multinational enterprise customers that would have required former tw telecom customers to work with a separate provider if they had international needs, for example.

5. Expanding its cloud, managed security portfolio: Cloud services have been a growing priority for Level. Since many of its customers are in various stages of cloud adoption, the service provider has complemented its own cloud services efforts by offering direct connections to Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT). Being one of the largest Internet transit service providers, Level 3 is also well-placed to drive influence in the managed market. It can also extend its new DDoS Mitigation service to an even broader audience that now includes tw telecom's customers. 

Despite Level 3's efforts to become a bigger enterprise services player, that's not to say that AT&T and Verizon are standing pat in the wireline business services side.

AT&T, for one, continues to make progress with its fiber-to-the-building (FTTB) initiative as part of Project VIP, one that will bring fiber to 1 million business locations. In addition, the service provider announced it is expanding the availability of its Switched Ethernet Service via Network on Demand to five new markets.

Likewise, Verizon added HP's Helion Managed Cloud Service and the Salesforce Customer Success platform to its cloud interconnect portfolio and has been enhancing its international capabilities, including implementing 100G technology on its network in Japan, Singapore and Hong Kong.

Level 3 may not be the size of AT&T and Verizon, but it's clear that the company is ready to shake up the market and is not afraid to go head-to-head with incumbent players that have always enjoyed a near monopoly on business services.--Sean