Level 3 Communications provides infrastructure for the Information Superhighway as operator of one of the world's largest fiber-optic communications networks, connecting customers in more than 60 countries. Its services include broadband internet access, wholesale voice origination and termination, enterprise voice, content distribution, broadband transport, and colocation services. Wholesale customers include ISPs, telecom carriers, cable-TV operators, wireless providers, and the US government. The company markets its products and services directly to businesses, government agencies, and schools. Its content delivery unit targets video distributors, web portals, online gaming and software companies, and social networking sites. Level 3 agreed to merge with CenturyLink in a $34 billion deal.
Change in Company Type
The proposed $34 billion dollar merger of CenturyLink and Level 3 Communications would create one of the largest telecommunications providers in the US. The deal would see CenturyLink acquire Level 3’s stock. Together, they would own a network that connects more than 350 metro areas in the US. Overseas, they would have a presence in more than 60 countries. While each company has a nationwide network, they say their combination would bring together complementary assets and not result in less competition. Level 3 is strong with enterprise businesses (that market grew at a double-digit rate in 2016) while CenturyLink has a significant number of smaller business clients. With Level 3 carrying some $10 billion in net operating losses, the combined company's tax bill would be low, freeing up cash flow for developing more infrastructure. The deal is expected to close by the third quarter of 2017.
Level 3 Communications generates revenue through a pair of segments: Core Network Services and Wholesale Voice Services.
The Core Network Services business, which accounts for 95% of revenue, is composed of colocation and data center services, transport and fiber, IP and data services, and voice services. Generating 5% of Level 3's revenue, Wholesale Voice Services consists of long distance voice services sold to interexchange carriers (IXCs), wireless providers, local phone companies, cable companies, resellers, and voice-over-IP providers.
Based in Broomfield, Colorado, Level 3 operates in North America, Latin America, and Europe, the Middle East, and Africa (EMEA). The North America region accounts for more than 80% of revenue. Level 3 has more than 250 colocation facilities in North America, about 100 colocation facilities in Europe, and about 15 colocation facilities in Latin America. The company operates some 20 data centers in North America, Latin America, and Europe.
Sales and Marketing
Level 3 serves customers in 500-plus markets worldwide through owned fiber networks on three continents. The company's 10 biggest accounts are responsible for about 15% of revenue.
The company deploys a direct sales force.
After two years of increases, Level 3’s revenue growth stalled in 2016 while its net income plunged in comparison with the company’s 2015 earnings.
At $8.2 billion, the company’s revenue was flat in 2016 compared to 2015. The Core Network Services segment posted an increase of just $10 million to reach $7.8 billion in 2016. Revenue from Wholesale Voice Services, however, tumbled 14%, taking some $67 million in revenue in 2016. Of Level 3’s segments, its North American Enterprise Channel posted the only increase, 5% in 2016. The company lost revenue in Europe (due to the impact of a strong US dollar) and Latin America (because of deconsolidation of its Venezuelan subsidiary and decreases in IP and data services, VPN, and private line services). Areas where revenue rose in 2016 were IP and data services (up $70 million), VPN services (up $118 million), CDN services (up $18 million), and managed services (up $13 million).
Level 3 posted a profit for the third straight year after a string of losses dating to 2007. In 2016 the company’s profit was $677 million, an 80% decrease from $3.4 billion in 2015 when it received a huge tax benefit. The company also spent less on network access costs, network related expenses, and selling, general, and administrative expenses in 2016.
Cash flow from operations rose to $2.3 billion in 2016 from $1.9 billion in 2015. The increase came from improved Network Access Costs and an increase in cash provided by working capital.
Key to Level 3's strategy and market competitiveness is its expansive global network infrastructure, which extends to major metropolitan markets in the US, Europe, and Latin America. Expanding that network is a primary focus of the company's strategy. Relying on its own network instead of other carriers (which it needs for some locations) drives its customer targeting.
Level 3 targets big companies with big technology needs. Its “wedge” strategy is to get a small amount of a customer’s business, provide good service, and get more business. And repeat. Most of the company’s customers start with about $2,000 a month in business. Revenue from that customer segment is subject to wild swings, however. It grew 6% 2016 fourth quarter, a turnaround from an 18% decline in the 2015 fourth quarter.
The company has moved to maintain costs, installing one billing platform and an enterprise resource planning system that can be used in the 60-some countries in which it does business.
An area in which Level 3 admits it needs improvement is with small customers. The company has reduced turnover with those customers, but it is working to maintain improvement. The company noted that CenturyLink has service that could strengthen Level 3 in the small customer market.
Mergers and Acquisitions
In 2015 Level 3 beefed up its security with the acquisition of Black Lotus, a provider of global Distributed Denial of Service (DDoS) mitigation services. The deal adds capabilities to Level 3's existing DDoS service and enhances its security product capabilities.
In 2014 Level 3 bought tw telecom in a stock-and-cash transaction valued at $5.7 billion in order to create a stronger competitor to the incumbents. While Level 3 has an extensive global presence, tw telecom offers a deep metropolitan footprint in the US, serving 75 markets in about 30 states.
Level 3's history goes back to Peter Kiewit Sons construction company, which was founded in Omaha, Nebraska in 1884. About a 100 years later the company used cash to get into telecommunications with the acquisition of Metropolitan Fiber Networks and its fiber optics networks for phone systems.
Today Level 3 has about 106,000 intercity route miles in North America, Europe; and Latin America; 67,000 miles of metropolitan network miles in some 350 cities; 33,000 miles of undersea fiber optic cable.