According to a report in the Communications Daily newsletter this morning, XO Holdings (news, filings) is planning to file comments this week opposing the Level 3-Global Crossing merger with the FCC and perhaps DOJ. The grounds? That it will give Level 3 too much leverage in the Tier 1 backbone market of course.
While the combined entity will certainly be the largest in terms of traffic, I find it hard to believe that that they will suddenly have the leverage to start pushing around fellow Tier 1 Goliaths Verizon, AT&T, NTT, Sprint, DT, and Teliasonera in any meaningful way. The fact is, being a Tier 1 backbone just ain’t what it used to be – and actually the term itself is a bit meaningless and has been made somewhat obsolete by more nuanced transit free, paid peering arrangements. Regulators have always avoided treading in the transit/peering swamp, and I doubt they will change course on it here.
What XO is really after though seems to be a better peering agreement with Level 3, as they are ‘transit free’ but still not getting the interconnection deal they feel they should from their larger rival. XO’s increased activity and success in the wholesale transport and IP business has put the two companies in opposition much more often in the past few years. By making a bit of noise and trying to set up a speed bump on the road to a merger Level 3 obviously needs and wants, they probably hope to add another minor bargaining chip to the table.
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Categories: CLEC · Internet Traffic · Mergers and Acquisitions · Metro fiber
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Too true Rob, at least that was my take on it. I can’t see this deal slowing down, but I sure hope we are both right on this. I know you will keep us informed should the noise level increase. Thanks.
Does the dealreporter story from Sunday(which I still haven’t seen) that ABVT deal with PE “has stalled” mean that M&A is going to subside or just that the ABVT asset didn’t see the bid it wanted? If those questions are mutually exclusive – i’ll take the former.
Honestly, I’ve been of the opinion that the AboveNet deal will fizzle unless their largest shareholder really wants out. Otherwise there’s no compelling reason for them to do it IMHO. I don’t think their decision to sell or not sell would necessarily be indicative of the industry overall.
Relevant note on the dominance of IP connectivity that Level3/GX would have post merger : http://www.renesys.com/blog/2011/04/level-crossing.shtml#more
Also note DT is not a tier 1 since it buys transit. Verizon and AT&T are not “behemoths” in the IP space – they are smaller than Tinet and Tata for example – they get a lot of their position from a large number of relatively small customers who mostly single home through them, they are not particularly large players in the global IP transit market.
While they are not behemoths in IP, they are overall and the IP backbone world does not exist in a vacuum. L3/GLBC may have market power in IP, but there are limits to what they can use it for.
Everyone I speak to – including, ironically enough, fairly recently John Legere – are all looking for ways to exit the IP transit business. It’s therefore unlikely that any new player will push hard into it at this stage, so to some extent the big end of town in IP transit is somewhat of a vacuum. A lot of it comes down to price, decreasingly small fractions of a dollar per MBit, and this is only sustainable if you have the cost base to do so – which is in turn based on traffic volume and quantity of networks directly connected to (since then a higher proportion of your traffic is paid for at both ingress and egress instead of just one or the other). Level Crossing would potentially have a stranglehold on the economics and the risk is they become very dominant indeed.
are you saying it is a race to the bottom at some point since traffic volume increases are offset (somewhat or totally) by pricing pressures? How does this justify new fiber builds like Allied?
If someone has gross margins upwards of 60% can’t they sustain some margin pressure before exiting entirely?
Allied is not building a network to carry IP traffic, they are building a network to sell capacity to carriers. They are not concerned with the profitability or otherwise of the service layer.
The question of longhaul carriage of traffic that happens to be IP is quite different from the sale of IP transit generally. VzB, AT&T, Comcast etc are shipping tons of bits around, even more so since deploying Project Lightspeed, FiOS, and the alleged 4G services – they need capacity in vast amounts to serve their own needs. These bits are then generally handed off to a peer at no net cost.
That’s a completely different scenario to the job of an IP transit wholesaler.
In the IP transit business (considered standalone) I am not aware of anyone operating at anything even faintly approaching gross margins of over 60%, how can you if you are selling 10G ports for $5-9K MRC? L3 may do so at a corporate level, but I can absolutely assure you it isn’t the wholesale IP traffic that is contributing significantly to that number.
But the dominance of any one party is the exact opposite of the reason why the IP transit business is so difficult – there is tons of competition. I can’t see how Level 3 could use that position without quickly losing it to very well funded competitors – whether or not those competitors like the business today.
well put. That was the point of my question, if it wasn’t clear.
There is tons of competition, so prices are very low. In this context, the difference between being paid once for each bit carried and twice for each bit carried is enormous. If you are able to approach, let’s say, a 60% on-net traffic ratio when your competitors are at 30-35%, that is a colossal benefit when it comes to calculating what price you can get down to.
Having well-funded competitors is fine, but as such how would you write a business case that says “let’s go strongly into a completely cut-throat market where margins are approaching single digits, there are essentially no barriers to entry, and no differentiation is possible,” instead of investing in, say, a mobile network or a new datacentre? What would be the benefit of propping up a poor margin business when there are so many other sources of supply?
To give you an idea of scale – and I should say I’m not responsible for the IP business where I work – we are adding 300-350 10G waves this year to our public IP network (after the 200 we added last year). I guess that means next year we’ll need 5-600 more and by 2015 we’re projecting we’ll have a core longhaul network with well over 20Tb/s running across it just for public IP, ignoring the aggregation and edge pieces. Leaving aside the cost of lighting that capacity (what does a long haul 10G or 40G card cost?) you need to think of the cost in router chassis and cards to carry that traffic.
And we don’t even operate a consumer business…
http://finance.yahoo.com/news/Level-3-Receives-Department-prnews-973410848.html?x=0&.v=1