VSG: Level 3's tw telecom acquisition helps it surpass Verizon in Ethernet race

Level 3 Communications' acquisition of tw telecom continues to have a rippling effect as it has enabled the service provider to surpass Verizon (NYSE: VZ) for the No. 2 spot in Vertical Systems Group's 2014 U.S. Carrier Ethernet Leaderboard.

"Level 3's acquisition of tw telecom jumps it into second place on the Leaderboard," said Rick Malone, principal at Vertical Systems Group. "The combined entity finishes the year behind market leader AT&T and ahead of Verizon, which drops to third."

A key asset that tw telecom brought to the table was additional metro fiber-based on-net buildings. By purchasing tw telecom for $5.7 billion in cash and stock last June, Level 3 immediately expanded its on-net fiber building footprint. tw telecom brought nearly 21,000 buildings connected to its fiber network to Level 3.

During its fourth-quarter 2014 earnings period, Level 3 reported that Ethernet and data services sales to large business drove up the company's Core Network Services (CNS) revenues to $1.49 billion. Similarly, Level 3 said that tw telecom's data and Internet services were $271 million, up from $235 million in the year earlier quarter.

For its part, Verizon continues to see gains every quarter with strategic services like Ethernet, a trend that continued into the fourth quarter of 2014. Strategic services rose 1.5 percent year-over-year to $2.1 billion over the fourth quarter of 2013, but legacy declines drove down overall business services to $3.4 billion.

Verizon could potentially face further challenges in holding onto its Ethernet port share as the telco has entered a deal to sell off wireline assets to Frontier in three states, including California, Florida and Texas. However, the ultimate impact of that deal probably won't be felt until it completes the sale next year.

In terms of overall Ethernet port shares, AT&T (NYSE: T) continued to hold onto the top spot, while Verizon dropped to third followed by CenturyLink (NYSE: CTL), Time Warner Cable (NYSE: TWC), Comcast (NASDAQ: CMCSA), Cox and XO.

The Level 3/tw telecom deal is just one of two deals that will shake up the outlook of the Ethernet market. If Comcast is successful in purchasing Time Warner Cable, which currently hold the fifth and sixth spots, respectively, the cable MSO will advance its standing in the Ethernet market segment.

Like Level 3's acquisition of tw telecom, Comcast will immediately expand its Ethernet service base with additional HFC and fiber-based assets. By purchasing Time Warner Cable, Comcast will gain 860,000 on-net buildings and the 8,700-mile regional fiber-based network from TWC's acquisition of DukeNet.

Rosemary Cochran, co-principal of Vertical Systems Group, told FierceTelecom in a previous interview that "when you start consolidating, some interesting things can happen, but it's too early to tell and depends on who is standing in what position at the end of the year."

For more:
- see the release

Editor's Corner: Level 3's tw telecom deal is all about scaling its local-to-global service presence

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