CenturyLink's Ethernet service power rise reflects changing market dynamics

Sean Buckley, FierceTelecomCenturyLink (NYSE: CTL) recently gained the fourth spot on Vertical Systems Group (VSG) Mid-Year 2011 U.S. Business Ethernet Leaderboard--the first time the ILEC has ever been on the top 10 list. CenturyLink achieved  this feat mainly through its recent acquisition of Qwest Communications.

Although CenturyLink--and the former EMBARQ, which was folded into the former CenturyTel to form CenturyLink in 2008--was already providing Ethernet services to regional businesses and even wholesale Ethernet services to wireless operators, its presence was mainly limited to local markets.

"CenturyLink has dabbled in Ethernet and had Metro service infrastructure, but weren't as proactive outside of its regional local markets," said Rosemary Cochran, Principal and co-founder of Vertical Systems Group in an interview with FierceTelecom. "Now that they have the Qwest assets and you add Savvis on top of they are in that position with a very good national footprint."

Cochran added that "they also have some international reach" which while not as extensive as "AT&T and Verizon have outside the U.S., but they do have connectivity in both Europe and Asia Pac, which enables them to up their game on the Ethernet side."   

By acquiring Qwest, CenturyLink instantly gained a new mix of traditional TDM-based Ethernet offerings (EoTDM, EoT1, EoSONET, and EoCopper) in addition to a growing base of IP-based Ethernet over fiber offerings. What Qwest also brought to the table obviously was a well established set of mid-sized and large enterprise customers, including various government agencies it serves via the GSA Networx contract.

CenturyLink also gained Qwest's Ethernet revenue and customer base, and it can now cross-sell both Qwest Ethernet and Savvis services, offerings it didn't have before, to its existing customer base.

During the Morgan Stanley Technology, Media and Telecom Conference in April, CenturyLink CFO Stuart Ewing said prior to the competition of the deal, it established an agreement to "pick up some MPLS customers (financial companies) that we weren't able to pick up in the past because we weren't able to serve them."

On top of this larger Ethernet footprint, CenturyLink will be able to layer on emerging cloud-based services and managed security services from both Qwest and Savvis.

While the initial focus for CenturyLink will be on the national U.S. market, the ILEC also has the potential to play on the international front, competing with larger international-centric players including AT&T (NYSE: T), France Telecom (Orange) (NYSE: FTE) and Verizon (NYSE: VZ) for MNC business with Ethernet access to VPNs.

Still, CenturyLink's ascendancy into the U.S. top five retail Ethernet service space will challenged by a number of factors, including ongoing ILEC and CLEC market consolidation and, of course, the cable operators.

Notable examples of the consolidation trend include Windstream Communications' (Nasdaq: WIN) pending acquisition of PAETEC (Nasdaq: PAET) and Level 3' Communication's (Nasdaq: LVLT) move to acquire Global Crossing. Outside of these deals, other regional CLECs, including Integra Telecom and TelePacific, are increasing the competitiveness of their offerings through M&A and aggressive network fiber and copper-based Ethernet build outs.

"These deals are going to change the competitive Ethernet services landscape in the U.S. because of where those companies sit," Cochran said. "There's some room there, but there's only 3 percent distance between the fourth and ninth position on the U.S. side."

Cable operators are also becoming a growing competitive threat to CenturyLink and others. Cox Business holds VSG's fifth spot on the Leaderboard, while Time Warner Cable (NYSE: TWC) holds the sixth spot.

Another MSO that CenturyLink and other CLECs and ILECs will now have to pay closer attention is Comcast (Nasdaq: CMCSA). Initially offering business services over its existing HFC network to SMBs, the cable operator earlier this summer officially introduced its metro Ethernet service to target medium-sized business. 

With these new competitive threats in hand, CenturyLink's success in the Ethernet market will rest on its ability to integrate the network assets and ensure consistent service delivery for new and existing customers.--Sean