Level 3's Crowe: Backhaul represents one of many opportunities for its fiber network

Wireless backhaul may represent a great opportunity for large wholesale carriers that have an abundance of metro-based fiber, but James Crowe, chief executive officer of Level 3 Communications (Nasdaq: LVLT) thinks that backhaul represents only one of several opportunities worth pursuing with its fiber network.

"...we would say today that fiber to the tower is something you do on your way to other more attractive opportunities." - James Crowe, CEO, Level 3 Communi-
cations

Speaking at this week's Citi Global Entertainment, Media and Telecommunications Conference, Crowe emphasized the idea that while it will continue to build to wireless cell sites that reside in its network footprint, it will use that same fiber to target business and other wholesale opportunities, including CDN.

"Where we have a bit of an advantage is when we build, we don't simply build to medium-sized buildings or to large enterprise or to content or to wholesale locations, Crowe said. "We try to invest our next dollar of capital in all of those so we get a better return, which gives us more room to either take margin or lower prices."

Multiple opportunities ahead
While Level 3 continues to be bullish about the prospects of bringing fiber to the tower, Crowe doesn't want to have to bet the farm on just one customer segment.

"The question is why would anyone want to build a network and say I am going to limit my available customers to those that happen to own cellular towers?" Crowe said. "Since the protocols that support it today are IP/Ethernet, why would you not want to pick up every building along the way, every wholesale location and every content location?"

Crowe added that "we would say today that fiber to the tower is something you do on your way to other more attractive opportunities."

What makes these other opportunities more attractive is they produce more near-term revenue results. Wireless backhaul may be a steady revenue opportunity, but unlike delivering Ethernet services to a building, the return on investment with fiber to the tower takes 5-6 years.

The collective multi-tasking mantra driven here reflects Level 3's earlier assertion that there are over 100,000 opportunities within reach of its fiber network.

Sunil Patel, Level 3"If you look at another facilities-based CLEC with the same kind of revenue growth, they are spending 25 percent of their revenue on capex." - Sunil Patel, VP & CFO, Level 3

With 8,000 buildings on net, Level 3 previously estimated that there are 100,000 buildings that are about 500 feet away from its network facilities. In 2010, Level 3 plans to expand its fiber facilities into 200 additional locations to meet data center needs, federal government and wireless backhaul.

By multitasking its fiber network for multiple purposes, Sunit Patel, Executive Vice President and Chief Financial Officer of Level 3 said that as it sees 1-plus percent sequential growth rates on its services, it has been able to keep its capex spending as a percentage of revenue down to 12 percent.

"If you look at another facilities-based CLEC with the same kind of revenue growth, they are spending 25 percent of their revenue on capex," he said. "That comes from serving a wider demand set because we have a fuller product portfolio and wider customer base."

Level 3 is not alone in its multitasking fiber networks, however. The soon to be acquired Qwest Communications has taken a similar tact.

Qwest has used its ongoing deployment of Fiber to the Node to not only target residential and SMB customers, but also for wireless backhaul and other carrier-related wholesale opportunities.

"...everyone is buying today for the kind of capacity they need 6, 9 months or even for a year from now."

Economic thaw out
Like every other large service provider, Level 3 was not completely immune to the economic crisis.

"The direct effect the financial crisis had on Level 3 had more to do with large enterprises and large telecom service providers freezing and simply stop buying," Crowe said. "You can do that in our industry because everyone is buying today for the kind of capacity they need 6, 9 months or even for a year from now."

But with fiber being a driver for new host of business and carrier wholesale opportunities, the service provider believes it's turning the corner on the revenue side as both businesses and even carriers are starting to buy services again.

In recent years, Level 3 has broken out its revenue segments. The service provider's business segment, which makes up 40 percent of its revenue base, includes 20 percent medium business and 20 percent large businesses and government.

Patel reported that Level 3 is seeing revenue increases in the medium-sized business market segments.

In 2011, Level 3 plans to continuing to grow the sales force by 10 percent and focusing on customer service. On the customer service end, Level 3 reduced its billing disputes 85 percent.

"The mid-sized market is starting to grow again," he said. "This is a combination of increased sales; in addition we're also beginning to see churn improvements, which is helping to translate to the bottom line."

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