Level 3 Communications
Blood On the Streets

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By trepanne
June 21, 2001

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Well there we have it.

Note to self about market timing: News isn't bad enough until it hits the front page of the Wall Street Journal. Boy, I could have saved myself a bunch of money.

So let's take a look at what we've got here.

There's no question but that LVLT altered the basic business plan to capitalize on a massive growth spurt that was a transitory bubble, and now they're getting caught in the snapback. Colocation is the clearest example... I still believe that the colocation model has important fundamental advantages for certain businesses, but we were not witness to the dawn of a new dot-com age to which LVLT was supplying the arms. The pendulum has swung the other way, and is now pulling transport revenues back out with it...Yahoo! Broadcast, et al are not going to ramp up massively right away. Hello, earnings warnings.

However, that bubble had an important advantage: It allowed us to unload a bunch of dark fiber on suckers and finance the completion of the network. This is key. It was indeed "opportunistic" revenue, but we got the cash.

So we have the network, and it is paid for and lit, trout or no trout. We have built it, and they have not yet come.

We have been caught in a growth posture when the market snapped the other way. Considering the amount of capital that's been invested in the network, the only acceptable business model for LVLT involves very high margins. The top line flattens and falls; we cut some middle lines to preserve the bottom line (at least in ratio form). Sorry for the laid-off, very cold-blooded, just the sort of behavior I want from the stewards of my life's savings. I would expect nothing else. What really sucks about this situation is that it nails down the conclusion that revenue growth is nowhere to be found for the moment. I don't like that. It makes me afraid that LVLT is going to starve to death before its manifest advantages can come into play.

At the base of the pyramid, the forces driving growth of data traffic are as strong as they ever were (but not stronger, sorry brave new world of broadband), and the driving force toward IP is just as strong. AOL just keeps on clocking new subscribers. American businesses just keep transferring more and more files over more and more private networks, because this just keeps saving them more and more money. Voice traffic continues to be much cheaper when statistically multiplexed rather than time-division multiplexed... and so on.

Where does all this traffic go? Ultimately, the vast bulk of it goes over the telephone networks and data networks of Sprint, AT&T, and MCI. It is these networks that have got to stop adding ATM switches and circuit switches to get cost structures down; it is these networks that must migrate to IP. It is these networks that have frozen almost all capital spending on IP/fiber networking gear. It is these networks that are going to run out of capacity.

I don't care about dot-com customers. I don't care about colocation. I don't care about residential broadband. I don't care about dark fiber any more. I DO care about enterprise, but I'm chary of any business model that involves going head-to-head with UUnet or Worldcom. Qwest might be able to do it. We'll see. But I see no salvation there for LVLT.

It's the carriers. It's the carriers. It's the carriers.

They are not buying anything. Their networks will fill up. They will not allow badly needed revenues to slop over the side of the bucket. There's boatloads of capacity around. They will do mergers, they will buy from bankruptcies, or they will outsource.

The "buy from bankruptcy" solution won't work. I expect mergers to start going down. But given the situation in the capital markets -- and in the fiber networks -- the outsourcing solution makes the most sense.

Anyway, I'm watching and waiting to see which way the carriers will jump. It's a big deal. Layoffs, stock price, dot-com bubble collapse, $9B wholesale market.... mostly noise, as far as I'm concerned.

Differential survival of catastrophic conditions yields new ecosystems. Mammals succeeded dinosaurs.

This is really going to suck, but it's not going to suck equally for everyone. Thank god we've got more cash than anybody else. Thank god our network is better than anyone else's. It might not save us, but it stacks the deck in our favor quite a bit.

Watch the revenues.