Updated: For nearly two months I had been hearing chatter that WilTel was in play. I had heard that even Comcast was interesting in the company, and there was some talk of Level 3. Unfortunately, I could not pin this one down, and now feel bad about it. The $781 million deal is a good step, but not the final step in cleaning up the bandwidth over hang in the market. My sources tell me that within weeks Level 3 will make a play for Broadwing. Using the same metrics as WilTel, the price for Broadwing could be around $500 million, and the deal could come before thanksgiving.
Stock markets are rejoicing at Level 3’s attempt to become the consolidator in the bandwidth market. I am not too sure. Ask yourself this question – if Leucadia was willing to sell WilTel, it means they have had enough of this market. They will soon get rid of those 115 million shares of Level 3 as well, soon. Hey anyone know if Level 3 will have to pay Williams Companies for the right-of-way? Or will they de-comission the Wiltel network? From a financial perspective, this will help ease some of the financing issues facing Level 3!
I have written in recent months that the bandwidth prices have stabilized a tad, and demand from new fangled services like iTunes is increasing. I might have been premature in my prognosis, some smart insiders in the wholesale business tell me. Instead, they think it is a calm during the storm. There are still too many bandwidth providers in the market, at a time when large bandwidth consumers like Comcast, Verizon, SBC and Qwest are building their own infrastructure. I see there is room for maybe one or two more wholesale providers in this market.
Lets analyze this market a little bit further. BellSouth is working with Sprint. Verizon has started aggressively to move its traffic onto UUNet/MCI. SBC has AT&T assets to play with, Qwest has its own pipes. Google is building its own backbone. Comcast has bought dark fiber and has basically started to build its own private Internet. Time Warner is doing the same. Level 3 faces a future where a lot of its IP Transit business is going to vanish, because most of these big players are now peering directly with each other. Yahoo is one of Level 3’s biggest customers, but they are striking a pose with the Bells these days. Will that become a problem for Level 3? Possibly?
Level 3 also has some other issues it might have to contend with: how to replace the dial-up business that is drying up? Where is the future growth – not in bandwidth wholesale because even MCI and AT&T have started to build their own networks again. The glimmer of hope for Level 3 is to become a player in the content distribution business. Wiltel has Vyvx, which could give some expertise to Level 3, and possibly make it a competitor to Akamai. Nevertheless, what happens in the future, only time will tell. But I do applaud Level 3 management for making the move.