| ID Number: DPRO-99543 |
Level 3 Communications Internet and Network Services
8 October 2004 Kathleen M. Adams Level 3 is struggling amid weak demand and pricing pressures. The wholesale provider is attempting to offset declines in communications service sales through revenue streams generated by new services.
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| Table of Contents
|  | Corporate Headquarters
|  | Overview
|  | Analysis
|  | Pricing
|  | Competitors
|  | Strengths
|  | Limitations
|  | Recommended Gartner Research
|  | Insight
| List of Tables
| Table 1. | Infrastructure |
| Table 2. | Access and Transport Services |
| Table 3. | IP Services |
| Table 4. | Security |
| Table 5. | Service-Level Agreements |
| Table 6. | Support |
| Table 7. | Price List: Level 3 Services |
| Analysis
| Corporate Headquarters Level 3 Communications 1025 Eldorado Boulevard Broomfield, CO 80021, U.S.A. Tel: +1 720 888 1000 Internet: http://www.level3.com/
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Overview
Table 1. Infrastructure
Network Architecture
Network Architecture | Multiprotocol Label Switching (MPLS) 10-Gbps wave network backbone; migrating MPLS from the core to the edge. Edge routers from Cisco, Juniper Networks and Laurel Networks have been deployed.
Global Network | Level 3's global network spans 23,000 miles across 20 markets in Europe and 77 markets in North America. Level 3 also operates metropolitan-area networks (MANs) in 36 cities across the United States and western Europe.
North American Coverage | • MANs: facilities-based MANs in 27 U.S. markets consist of eight to 10 conduits (with one or two of the conduits populated with fiber). A typical MAN consists of a gateway site connected to central offices, third-party colocation sites and end-user buildings via a local fiber network. • Intercity Network: 19,400-mile, eight-ring intercity network consists of multiple (12) conduits (but only one conduit is currently outfitted with fiber; the rest are being held in reserve to allow future deployment of newer generations of optical fiber) and connecting 200 North American cities, including 77 cities where Level 3 offers service (services are carried over the MANs or via leased network arrangements). Part of the network was constructed along rights of way procured from the Union Pacific Railroad. Equipment deployed on the network includes dense wave division multiplexer (DWDM)-capable fiber and Synchronous Optical Networking (SONET) transmission equipment, Corning's Leaf fiber and Lucent Technologies Softswitch. Approximately 2,985 miles of the 198-400-mile network are a result of Level 3's acquisition of Genuity.
European Coverage | Under a joint build agreement with Colt Telecom, Level 3 built a pan-European multiple (six to 12) conduit network (outfitted with Corning's nondispersion shifted Leaf fiber) consisting of two fiber optic rings and totaling 3,600 miles. • Ring One: approximately 1,800 miles, connects Paris, Frankfurt, Amsterdam, Brussels and London. MANs have been built in each of the five cities as well. • Ring Two: approximately 1,600 miles, connects the German cities of Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg, Munich and Stuttgart. MANs are operational in Berlin, Dusseldorf, Hamburg and Munich. In addition to the two rings, Level 3 has added 11 additional markets to its European network, primarily through leased wavelengths and capacity acquired through its acquisition of Genuity network assets. Additional cities include Cologne, Karlsruhe and Leipzig, Germany; Copenhagen, Denmark; Geneva and Zurich, Switzerland; Madrid, Spain; Manchester, U.K.; Milan, Italy; Stockholm, Sweden; and Vienna, Austria. Level 3 owns local networks in nine European markets: Amsterdam, Berlin, Brussels, Dusseldorf, Frankfurt, Hamburg, London, Paris and Stuttgart.
Trans-Atlantic Coverage | Level 3's pan-European network is connected to the North American intercity network by way of the Yellow undersea cable system. Level 3 owns two of the four fiber pairs on Yellow. Level 3 also leases capacity on Global Crossing's AC-1 and Cable & Wireless' Apollo cables to serve as redundant capacity.
Asia/Pacific Coverage | In January 2002, Level 3 sold its Asian assets to Reach, a venture between Pacific Century Cyberworks and Telstra. Assets sold include: • Japan: a Type I license in Japan to provide international privately leased circuit and Internet access services over its own fiber network • Hong Kong: an international submarine cable-based External Fixed Telecommunications Network Service license in Hong Kong Note that as part of the agreement, Level 3 purchases capacity and services from Reach in Asia to be able to service customers with capacity needs in Asia. Additionally, Level 3 provides capacity to Reach in North America over its intercity network.
Trans-Pacific Coverage | In January 2002, Level 3 sold its Trans-Pacific cable assets to Reach. These include three fiber pairs on the Northern Asia cable system (dubbed "Tiger") connecting Hong Kong, Japan, Taiwan and Korea, as well as capacity on the Japan-U.S. cable.
Gateway Centers | Operates more than 70 carrier-neutral data center facilities, including 66 facilities in North America. Eight of the European facilities include Berlin, Munich, Hamburg and Dusseldorf, Germany; Brussels; Belgium; London; Paris; and Amsterdam. Colocation customers in most major cities can access eight to 10 other network providers in each Level 3 facility.
Traffic Exchange | Private peering with 90 domestic (U.S.) Internet service providers (ISPs) and 150 international ISPs. Purchases transit from one major ISP.
Source: Gartner and Level 3.
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Table 2. Access and Transport Services
Access
Remote Access | Level 3 sold its eRAS and Dialinx remote access services to Fiberlink Communications in May 2004.
Managed Modem | (3)Connect Modem: provides management of dial-up access to either the Internet or a corporate data network. As part of the service, Level 3 arranges the provision of local network coverage and provides dedicated local telephone numbers, racks and modems, and dedicated connectivity from the customer location to a Level 3 gateway facility.
Transport Services
Wavelength Services | Wavelength services enable customers to build and manage a network by deploying their own SONET, asynchronous transfer mode (ATM) or IP equipment at the endpoints where the wavelength is delivered. The following services offer an optical point-to-point unprotected connection of a fixed amount of bandwidth (either 2.5 Gbps or 10 Gbps) on a particular wavelength. (3)Link Metro Wavelength: available in 27 U.S. and nine European cities. (3)Link Intercity Wavelength: available in 62 U.S. cities and nine European cities. (3)Link Global Wavelength — Transatlantic Service: Service is available between mainland Europe and the United Kingdom and the United States.
Dark Fiber | (3)Link Metro Dark Fiber Service: Level 3 sells dark fiber, conduit and network extension services in 33 U.S. and nine European metropolitan areas. (3)Link Intercity Dark Fiber Services: Level 3 offers dark fiber, conduit, running-line colocation and network extension services across its North American and European networks.
Private Line | (3)Link Metro Private Line Service: Digital Signal Level 3 (DS-3), Optical Carrier Rate 3 (OC-3), synchronous transfer mode 1 (STM-1), OC-12/12c, STM-4/4c and OC-48/48c. Available in four types. • Metro Access Point-to-Point: circuit is installed between two customer sites by way of Level 3 gateway in that city. • Metro Access: circuit is installed from customer location to access backbone services located at Level 3 gateway. • Metro Hub and Spoke (also referred to as point-to-multipoint): provides dedicated interconnection between Level 3 and a customer location, plus incremental interconnection between the customer's hub in the Level 3 Gateway and Level 3 On-Net and Off-Net locations, and Level 3 colocation. Hubbing is currently available only in North American Level 3 Gateway cities. • Metro Managed Ring Service: provides the customer with a dedicated optical metro ring service connecting two or more on-net locations within a single metro market. Access options include on-net access, off-net access or customer-provided access. (3)Link Intercity Private Line Service: dedicated, point-to-point protected service offered in the following speeds: DS-1 (on a selected basis), DS-3, OC-3/3c, STM-1, OC-12/12c, STM4/4c, STM-16/16c and OC-48/48c. Available in 68 U.S. cities and 16 European cities. (3)Link Private Line — Transatlantic Service: DS-3 to OC-48. Service is available between mainland Europe and the United Kingdom and the United States. (3) Hub Private Line: private-line service enabling customers (carriers, systems integrators,) to dynamically provision, upgrade and manage metropolitan and long-distance private-line circuits on a pay-as-you-go basis via Level 3's On-Net Transport Activation Process (ONTAP) system. Available in speeds ranging from DS-1 to OC-48 in 83 markets in the United States and Europe. Unprotected Private Line (3)Link Unprotected Private Line: dedicated, point-to-point, unprotected private-line service available at rates of OC-3c, STM-1, OC-12c and STM-4c. (3)Link Unprotected Private Line — Transatlantic Service: STM-1/OC-3 and STM-4/OC-12c. Service is available between mainland Europe and the United Kingdom and the United States.
Ethernet | (3)Flex Ethernet: extends Ethernet from the LAN to the WAN. Offered in two classes of service: Optimized (variable bit rate service) and Enhanced (unspecified rate service). (3)Flex Metro Ethernet: optical, point-to-point metropolitan-area Ethernet service supporting Gigabit Ethernet and 10-Gigabit Ethernet speeds. The service can be configured as unprotected or protected and is available in 36 U.S. and European markets. Also provides connectivity to (3)Flex Ethernet and (3)Crossroads services.
Frame Relay | (3)Flex Frame Relay: supports speeds ranging from T1/E1 to OC-48/STM-16. Available in 90 cities in the United States and Europe.
ATM | (3)Flex ATM: supports speeds from DS-3 to OC-44 and three classes of service: Enhanced, Optimized and Premium. Available in 90 cities in the United States and Europe.
Source: Gartner and Level 3.
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Table 3. IP Services
Colocation | (3)Center Colocation: provides space for customer to locate servers, content storage devices and communications network equipment. Connectivity to the Level 3 network and to other carrier networks, the public switched telephone network and the Internet is available. Also offered are AC/DC power; emergency backup generator power; heating, ventilation and air conditioning; fire protection; and security. Level 3 offers colocation in 73 facilities in the United States and Europe; 41 of the sites are IP-enabled Level 3 gateways.
Internet Access | (3)CrossRoads: high-speed Internet access service available in 100Base-T, Gigabit Ethernet, DS-1, DS-3, OC-3, OC-12, OC-48 and 10-Gigabit Ethernet using a variety of interfaces, including Ethernet and SONET. ATM and frame relay access options are also available. Internet Advantage: managed dedicated Internet access available in speeds ranging from T1 to OC-3. Offered in the following service levels: • Internet Advantage Gold Service: Internet access equipment (router and channel service unit/data service unit) owned and managed by Level 3. • Internet Advantage Silver Service: Internet access equipment owned by the customer but managed by Level 3. Advanced options available a la carte. • Internet Advantage Bronze Service: Customer owns and manages Internet access equipment. Advanced options available a la carte (available in United States only). • Internet Advantage Port-Only Service: Provides port-to-customer installing and managing of the local access circuit (available in United States only).
Voice Over IP (VoIP) | (3)Voice Termination: IP-based long-distance service that converts calls to IP while transversing the Level 3 network, then delivers calls in the desired format of the called party. During the first quarter of 2004, this service was enhanced via a capability that enabled customers to hand off traffic directly to Level 3 via an IP interface. VoIP Local Inbound: terminates public switched telephone network (PSTN)-originated calls to IP termination points using Session Initiation Protocol and Enum for translation between the PSTN and IP endpoints. Available in 300 U.S. markets. VoIP Toll Free: terminates toll-free calls that are originated on the PSTN. Available in the United States.
IP Centrex | (3) Tone Business: turnkey solution for small and midsize businesses sold through resellers and partners. Based on softswitch platform. Includes Class 5 features, unified messaging, find me/follow me, conferencing and call center capabilities and interoperates with legacy/PSTN voice mail and e-mail systems. Service was obtained through acquisition of Telverse Communications.
IP Virtual Private Network (VPN) | (3)Flex Network IP VPN: MPLS-based IP VPN supporting access speeds of DS-1, DS-3, OC-3, OC-12, OC-48 and the following technologies: Ethernet, ATM, frame relay and private-line. Able to integrate with VoIP platforms for local, long-distance, IP PBX, call center or call center functionality. Available in 90 cities in the United States and Europe. VPN Advantage for Nortel Networks Contivity: IPsec-based network IP VPN capable of supporting remote access, intranets and extranets. Utilizes Nortel's Contivity series VPN gateways. Includes shared administrative control via the VPN Advantage Authenticated Web Server (AWS) and client software for each remote user. Access options include dial-up, cable, digital subscriber line (DSL) and dedicated connections. Available in 43 countries. VPN Branch Office Service: designed for branch-office intranets and business-to-business extranets. Includes Nortel Contivity gateways, triple digital encryption standard (3DES) encryption, IPsec tunneling, authentication and connectivity via Integrated Services Digital Network, DSL or T1/E1.
Source: Gartner and Level 3.
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Table 4. Security
| Site Patrol Managed Security: combines Nokia IP series security appliances and Check Point's FireWall-1/Virtual Private Network 1 application and includes 24×7 proactive monitoring, security management, incident rapid-response services, and maintenance of equipment and software. Security is based on stateful inspection firewall technology, 3DES and IPsec-based VPNs. Site Patrol is applicable for the entire organization, from headquarters to branch offices to mobile employees. Available in 55 countries.
Source: Gartner and Level 3.
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Table 5. Service-Level Agreements
Dark Fiber | Fiber cuts repaired within 12 hours; credit of 1 percent of monthly operations and maintenance for each hour over 12 hours (up to monthly).
Unprotected Private Line | Mean time to repair: negotiated Provisioning: 10 days or less
(3)Link Private-Line U.S. Intercity Service | Mean time to repair: two hours Availability between gateways: 99.99 percent
(3)Link Private-Line Metro Services | Mean time to repair: two hours Availability between gateways: 99.99 percent Noncompliance credits for service interruptions of 24 hours or less: • One to eight hours: 1/4-day credit • Eight to 12 hours: 1/2-day credit • Twelve to 16 hours: 3/4-day credit • Sixteen to 24 hours: one-day credit Noncompliance credits for service interruptions of more than 24 hours: credit of 1/24 day for each one-hour period, up to a maximum of eight hours. Interruptions more than eight hours will be credited one day. No more than one day's credit will be applied for any 24-hour period.
(3)Link Private Line — International Service | Mean time to repair: two hours (for equipment failures) Availability between gateways: 99.9 percent Noncompliance credits for service interruptions of 24 hours or less: • One to eight hours: 1/4-day credit • Eight to 12 hours: 1/2-day credit • Twelve to 16 hours: 3/4-day credit • Sixteen to 24 hours: one-day credit Noncompliance credits for service interruptions of more than 24 hours: credit of 1/24 day for each one-hour period, up to a maximum of eight hours. Interruptions of more than eight hours will be credited one day. No more than one day's credit will be applied for any 24-hour period.
(3)Flex ATM, (3)Flex Frame Relay, (3)Flex IP VPN | Availability: 99.98 percent for all classes of service (higher with redundant ports) Latency (all classes of service): 10 to 45 ms (by mileage) Packet Delivery: • For Enhanced • (Committed Information rate) for Optimized • For Premium Jitter: • 10 ms for Optimized • 2 ms for Premium
Internet Advantage | Service-level agreement (SLA) covers only the equipment, wiring and circuits within and between Level 3 POPs, as well as the local access line, only if the local link was ordered through Level 3. • Service Availability: 99.97 percent. Nonconformance penalty is a one-day credit of service charges and telco fees for outages between 10 minutes and 60 minutes, and a three-day credit of service charges and telco fees for outages longer than 60 minutes. A maximum of 15 days' credit may be provided during a single month. • Latency: Average monthly round-trip latency of 55 ms or less. • Packet Loss: Average monthly packet loss will not exceed 0.5 percent or the customer will receive credit equal to one day of service charges and telco fees.
VPN Advantage | The following SLAs apply only to services carried over Level 3's backbone. • Dedicated access users are guaranteed up to 99.9 percent network availability and a round-trip latency of less than 125 ms. These values are averages measured over a month time frame and across all of the customer's VPN Advantage sites. • In cases of noncompliance, Level 3 will credit the customer 1 percent of the monthly recurring cost for each 0.1 percent of availability under the availability guarantee and 1 percent of the monthly recurring cost for each 1 ms of latency over the latency guarantee.
Source: Gartner and Level 3.
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Table 6. Support
Reporting/Customer Network Management | Web-based network usage reports display use and peak activity periods. Stats Advantage Service: this former Genuity product is a Web-based network management reporting tool allowing up to six months of performance data (minimum, maximum, average, 95 percent) to be viewed in real time. Includes bit rate, discard rate and error rate in graphical and tabular format. Stats Advantage also supports user-configurable automated reports that provide usage and performance characteristics, helping customers to monitor their network performance and access needs. Online Customer Service Center: Web-enabled application enabling customers to request new or additional services, review order status, review and modify customer profile, review Level 3 product information and access various reports for (3)CrossRoads, (3)Connect Modem and (3)Flex services. Additionally, customers are able to create new repair tickets, view open repair tickets and view a 90-day history of closed repair tickets. ONTAP: automated process for receiving and processing customer orders. Provides customer with verification of requested capacity and confirmed delivery date. Supports (3)Link Intercity Private Line and Metro Private Line, (3) Hub Private Line (all types), (3) Link Unprotected Private Line, (3)Link Global Wavelength and CrossConnects. Online Customer Service Center: Web-enabled application consisting of the following components: • Product Management: request new or additional services, view order status and view information about customers' installed services. • Reports: view statistics for (3)CrossRoads, (3)Connect and (3)Flex services, as well as Service Level information. • Request Management: create and view trouble tickets, change/add domain names, request additional IP addresses. • Invoice Management: view invoices for prior 13 months. VPN AWS: allows customers to add and delete users, generate reports, manage digital certificates, enter and review trouble tickets, and configure and manage groups of users.
Field Technical Support | (3)Tech: 24x7 technical field support service for colocation and dark fiber customers in the United States and Europe. Customers can buy the services on an as-need basis or in packages for scheduled maintenance.
Network Operation Centers | Level 3 has an Operations Center in Broomfield, Colorado, United States. Additionally, Level 3 has built a fully redundant Operations Center in Atlanta, Georgia. The Atlanta facility will perform the same functions as those previously maintained in the former Genuity's Woburn, Massachusetts Operations Center.
Source: Gartner and Level 3.
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Analysis Level 3 relies primarily on a wholesale model to deliver its services. The company also sells direct to businesses, although its target market tends to be larger companies that require significant amounts of bandwidth. Due to the economic downturn and the toll it took on its business during 2001 and the first half of 2002, Level 3 gradually began shifting its target wholesale customer base toward larger, more stable and established companies and away from startups. Its primary customers now include interexchange carriers, systems integrators, ISPs, competitive local exchange carriers (CLECs), cable operators and satellite companies. Most of these providers use Level 3 services as the underlying solution that enables them to deliver services to their customers. Some providers re-brand Level 3's services and sell them to end users either as turnkey solutions (that is, simply branded) or as part of a larger solution (that is, Level 3 service is used as a building block on which other services are added). Certain Level 3 services, including VoIP and IP VPN solutions, are sold through resellers and partners via the Level 3 Enabled Partner Program. Level 3's credibility and financial health received a much-needed boost in July 2002 when three investors purchased $500 million in Level 3 debt. Proceeds from this investment were used to refinance loans and fund acquisitions, including the purchase of Genuity in February 2003. One of the investors, the Berkshire Hathaway investment firm, has since sold its stake in Level 3. Despite a brief reprieve and relatively favorable results in fiscal 2003, Level 3 is struggling again amid pricing pressures and weak demand in the telecommunications sector. Its losses are narrowing, but this is attributable to cost-cutting efforts, sale of noncore assets and reductions in interest expense rather than through organic growth in its communication services business. Revenue for communications services has been declining through 2004. Communication revenue fell to $391 million in the second quarter of 2004 as compared to $434 million in the second quarter of 2003, and to $780 million for the first half of 2004 vs. $1.13 billion in the first half of 2003. Note that the revenue number from the first half of 2003 included $326 million in noncash revenue associated with the termination of a dark fiber contract. Excluding these, revenue for the first half of 2003 was $804 million, still higher than those recorded for the first half of 2004 and therefore still indicating a decline in communication revenue year-over-year. The outlook for fiscal 2004 is not promising, especially in light of AOL's (Level 3's largest managed modem customer) decision to reduce dial-up capacity and its overall spending with Level 3. AOL's decision is expected to reduce Level 3's fiscal 2004 revenue by up to $150 million. In an attempt to spur communication service revenue, Level 3 has introduced a string of new services and expanded its distribution channels. Several MPLS-based and VoIP services were added to Level 3's portfolio, including an IP Centrex service that was gained through the acquisition of Telverse Communications in July 2003, a VoIP service targeted at large organizations, national Ethernet service, ATM and frame relay emulation and an IP VPN. Level 3 has signed on some notable customers for its advanced services, including: SBC Communications: (3)Tone (IP Centrex) customer Charter Communications: (3)Voice Termination customer Computer Sciences Corporation: using (3)Flex Network MPLS-based IP VPN to connect Sears, Roebuck and Company retail stores across the United States Moviefone (owned by America Online): (3)VoIP Local Inbound Pac-West Telecomm: (3)Tone (IP Centrex) customer These new advanced services coupled with geographical expansion of projected high-demand services across Europe may result in new sources of revenue growth through 2004 and 2005. However, some of Level 3's customers are likely to implement their own solutions and slowly replace the Level 3-provided service. On the channel front, Level 3 has increased the size of its sales organization by approximately 100 employees. Additionally, through the availability of lower-speed data services with its WAN Ethernet, ATM and frame relay services, Level 3's addressable market for these services has been increased to include small and midsize businesses. Several regional Bell operating companies (RBOCs), including BellSouth and Verizon, have introduced attractive bundled packages to the small and midsize business market. The success of competitors' packages will make it a challenge for Level 3 to succeed in this price-sensitive market. Level 3 continues to pursue acquisitions, particularly distressed assets, but this method of growth can be rather unpredictable. Acquisition targets must meet specific criteria — Level 3 seeks out organizations that provide similar services, operate in similar geographic areas and have similar customer bases so that it can migrate their traffic (and revenue) to its network while reducing costs. Level 3 purchased the wholesale dial access business of ICG Communications in April 2004.
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Pricing
Table 7. Price List: Level 3 Services
Service | Pricing Parameters
--- | ---
(3)Flex ATM | Billed on an aggregate usage basis. Discounts given for aggregated commitments.
(3)Flex Ethernet | Billed on a usage basis.
(3)CrossRoads Internet Access Services | Destination Sensitive Billing (DSB): customers are charged for bandwidth based on the origination and destination of traffic. DSB customers pay for either sent or received bandwidth, not both.
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Competitors Level 3's main competitors include Sprint, MCI, Qwest, Savvis, AT&T, Global Crossing, RBOCs, CLECs, France Telecom, Deutsche Telekom, Telia International and Colt Telecom Group.
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Strengths Level 3 has one of the largest Internet backbones globally. Through the introduction of lower-speed data services with its WAN Ethernet, ATM and frame relay services, Level 3's addressable market for these services has been increased to include small and midsize businesses. Level 3's strategy of acquiring distressed assets has generated quick returns on investment. Level 3 is experiencing growth in terms of customers and bandwidth; however, like many other companies in this space, growth in bandwidth is not equating to growth in revenue, due to sharply falling bandwidth prices. The Level 3 network was built with up to 12 conduits to allow for the installation of newer technologies and equipment. Each new generation of fiber is expected to reduce costs by allowing optical transmission equipment to be spaced further apart and carry more traffic than the same equipment deployed on older-generation fiber.
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Limitations Level 3's losses have narrowed, but this is attributable to cost cutting efforts, sale of noncore assets and reductions in interest expense rather than through organic growth in its communication services business. AOL, Level 3's largest managed modem customer, is reducing its overall spending with Level 3. AOL's decision is expected to reduce Level 3's fiscal 2004 revenue by up to $150 million. Level 3 is predicting a high single-digit percentage decline in Communications revenue for 2004. Although Level 3 paid off $1.125 billion in bank debt in September 2003, it now holds $5.5 billion in junk-rated debt, considerably more debt than some of its rivals that have shed debt through bankruptcy filings. The high debt load may limit Level 3's ability to compete effectively on price.
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Recommended Gartner Research MarketScope: North American Internet Service Providers, M-21-3010 Magic Quadrant for U.S. Network Service Providers, 4Q03, M-21-2232
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Insight Level 3 is struggling with decreased communication service revenue and the very likely prospect of weak results for fiscal 2004. A string of new VoIP and MPLS-based service announcements, coupled with an expanded distribution channel, should lead to a rebound in revenue, but this will not occur until 2005 at the earliest. Level 3 is recommended for larger organizations requiring significant amounts of bandwidth.
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