Level 3 Reorganizes to Target Mid-Market Customers with Local Metro Strategy

| May 12, 2009 | Business Network Services - U.S. | Competitive Intelligence Report

| Analyst: Brian Washburn

Current Perspective: Slightly Positive
Vendor Importance: Moderate/High
Market Impact: Moderate

Event Summary

May 11, 2009 – Level 3 is expanding its operations in Washington, D.C. to pursue mid-market business customers. The expansion will give the mid-market segment greater access to Level 3’s portfolio of voice, data and Internet services. Level 3 will expand its Washington, D.C. fiber footprint, which already passes more than 20,000 business locations. The move is part of a national initiative to expand operations in key local markets, also starting with Nashville, Seattle, upstate New York and Colorado.

Analytical Summary

• Current Perspective: Slightly positive on Level 3’s reorganizing to focus on mid-market customers starting in select metros, because the carrier needed to localize its sales and marketing focus to get feet on the street to sell to mid-market customers, and be more responsive to their specific needs. In refining its enterprise strategy, Level 3 continues to revert to the strategies that it had dropped initially, after the carrier first acquired its more enterprise-focused peers and rivals.

• Vendor Importance: Moderate to high to Level 3, because the carrier’s revenues have been under pressure and have declined in the wake of the economic downturn. Level 3 needs to tap new sources of revenues to respond to the declines: Since the carrier is already well-established in national and transatlantic markets, the untapped potential remains smaller, local and regional enterprise customers.

• Market Impact: Moderate on competing providers starting in Washington, D.C. and imminently in markets in upstate New York, Nashville, Seattle and Colorado, because Level 3 will be pursuing opportunities to extend its fiber-based services at competitive prices to regional and local enterprises. Level 3 has fairly comprehensive metro fiber assets, though enterprise contract lead times and securing access into office buildings will slow down the carrier’s progress.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

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Recommended Competitor Actions

• All competitors can point to Level 3’s financials and claim the company’s mid-market strategy is not a deep commitment, but just a carrier casting about for ideas on how to shore up a declining revenue base. Competitors can state that Level 3 is careening from one issue to the next, and changing its focus from one quarter to the next – lacking the stability that enterprise customers need.

• Incumbent local carriers including AT&T, Verizon and Qwest should take advantage of their extensive access fiber footprints and ubiquitous copper access. They can present themselves as one-stop shops for all enterprise customer needs, with the geographic footprint and extensive relationships to be able to bring high amounts of capacity and an extensive service portfolio wherever customers need to go.

• Competitive access providers can present themselves as being totally committed and totally local in their sales, operations and support. They can tout their low employee headcount as a benefit rather than a flaw, claiming that customers can get in contact directly with their network engineer, account sales rep etc. – even the CEO if they have issues they feel are not being addressed.

• Cable competitors can play up their local footprint and resources, and close relationships to individual communities. They can show off an impressive fleet of vehicles and field technicians (even if these are residential HFC technicians and do not work on fiber). They can also discuss their relationships with individual municipalities under the franchise system, suggesting they might have better relationships than the telcos when it comes to securing construction permits.

Recommended End User / Customer Actions

• For customers starting in the Washington, D.C. area, Level 3’s announcement of increased local sales and local decision-making is all good news. Level 3 is a competitor with a wide array of services, and the carrier’s renewed focus on local and regional enterprises will mean customers will get the personalized attention they need.

• Level 3 has gone in different directions on its mid-sized enterprise customer strategy. But Level 3 has now completed its integration and streamlined its operations among acquired carriers. The carrier had originally intended for its Business Markets Group to serve the mid-market, so Level 3’s localization strategy bolsters what the carrier’s plan had been all along. It seems unlikely Level 3 will be derailed from its mid-market strategy now, as long as its enterprise efforts get some market traction.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

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