Blog Post

Level 3 Shocker

Level 3 is cutting 12% of it workforce, a move it expects to save the company $60-to-$70 million a year. Why the cuts? Despite the promise of VoIP, CEO Jim Crowe says that the end demand from the customers of its wholesale customers is taking a little longer to materialize. Why am I not surprised? Two reasons. First, the VoIP hype has gotten ahead of the market realities. Remember there were only a million VoIP customers at the end of 2004. The market grows exponentially, lets say to 10 million by end of 2005, and each customer pays say $20 a month, or $240 a year, it will be a $2.4 billion a year market. Level 3’s cut is going to be a percentage of that. Second reason is that when you are a wholesale provider, then you are always at the mercy of your resellers. So that’s something Level 3 cannot do anything about. Last point – I have often said VoIP is a deflationary force – it will gain popularity but it will be tough to grow the revenues. Everyone will face the same problem going forward – its not rocket science, its simple logic. The bandwidth prices, while not declining as rapidly as say a year ago are still declining, and there is too much capacity. Having said that, Level 3 is making the right moves – managing itself and waiting for the end demand to come.

2 Responses to “Level 3 Shocker”

  1. I could not agree with you more Charlie, and sometimes, strange as it may sound, the market refuses to acknolwedge the reality. I think it was about eight months ago I posted, the continuing telecom death spiral. Its still somewhere on the site, and that obviously did not make sense to anyone.

  2. Charlie Sierra

    In my college salad days, we used to cut corners and drink “Early Times”, which we took to calling Ugly Times because of the next day hangovers.

    So, Om, you make a great points about the darkside about outsourcing sales and marketing, ie reselling.

    Now thanks Moore’s law and silly investment bankers, raw telephony capacity will exceed demand for another generation, at least.

    So what really intrigues me is just how lame the competitive marketplace really is. I mean giving away more service for ever lower prices is hardly novel.

    What might be interesting is if a carrier ever decides to differentiate itself along a resource that is actually scarce. Then perhaps somebody might unlock some real value, other that short term arbitrage plays on the eternally slow moving incumbents.

    PS. I still have a sense that the recent Telecom bottom will be revisited in a few more years.