Level 3 Communications is building an IP-based network, which
can be constantly upgraded. It has already managed to raise
$6.5 billion so far to fund its network and is clearly one of
the best capitalized start-up businesses. It has been able to
raise these funds owing to an original business plan and the
experienced management team led by the president and CEO, James
Crowe has virtually rebuilt the management team behind the
success of the competitive access provider MFS Communications,
which was eventually sold to WorldCom for $14.3 billion in
1996. The company had only started up in 1989. Investors
clearly believe that Crowe can repeat that success with Level 3
Communications and attract a significant share of large
enterprise clients that benefited from previous contacts with
According to Stephanie Comfort, principal telecoms analyst at
Morgan Stanley Dean Witter, Level 3 can leverage two main
advantages: "Level 3 has two really key assets. In an industry
where management and execution are critical, they have a top
notch group of people with a proven ability to execute and an
ability to learn from their mistakes. They have gone through
the education process with MFS and come out of that with a
renewed perspective and can apply that to the new company. From
a management and execution perspective, I think that they are
top notch. That is critical.
"The other critical part is the business plan, which is really
creating the state-of-the-art network: an IP-based network with
just significant capacity to handle what they believe is going
to be an exponential leap in demand, driven by data, Internet
and all those video and broadband applications. So I think that
the plan makes a lot of sense. I would say that they are the
telco for the next century in terms of where they are going.
The management provides you with greater confidence that they
can actually execute that plan."
Market expectations for Level 3 Communications are high, but
with Crowe's track record, few would bet against Level 3
Communications. According to Comfort: "He has such a large
market capitalization which is a blessing and a curse in some
ways to live up to, because clearly a lot of expectation is
built into that evaluation."
However, despite the optimism about Level 3 Communications,
there are a number of risks. To date Level 3 Communications has
only completed the build of 400 miles of its 16,000 mile
pre-funded inter-city network and still needs to obtain
development rights in many parts of Europe. Similarly, IP-based
voice telephony has so far failed to gain market acceptance,
owing to doubts about its ability to deliver the requisite
quality that businesses require. Clearly improvements in
voice-over-IP quality will be crucial to the company's success.
Level 3 is also likely to face competition from new entrants
leveraging new technological advances. It is perfectly feasible
that a Level 3, mark 2 or a "Level 4", as Crowe calls it , may
emerge and seek to usurp Level 3 Communication's position.
Comfort adds: "I think that the other issue is actually going
to be building out the network, in terms of the following: Is
the technology really there?. The way I describe it is are they
on the leading edge or the bleeding edge. Are they so far ahead
that they are taking that risk, in terms of putting a
technology in place that may be just way ahead. Is it just a
way to high cost something that in five years somebody can come
in and implement at a lower cost. I think that is the real
issue. That sort of fine line between being leading edge and
having the advantage to become the low cost provider based on
all of the advents of technology or to be on the bleeding edge
where they are the only ones out there who are implementing
this stuff and you know, either they don't get the right costs
in terms of the cost of the equipment or the technology gets
Level 3 Communications is indicative of an industry that is
moving away rapidly from traditional models. In an exclusive
interview with Global Telecoms Business, the president and CEO
of Level 3, James Crowe, outlines his vision of the future.
How many cities does Level 3 currently offer service
to? How many will you be offering services to by the end of
this year? Is the network build-out on schedule?
Crowe: We are offering services today in 19 cities.
That is 17 in the US, London, the UK and Frankfurt, Germany in
Europe. By the end of the year, we aim to offer services to 33
cities, 27 in the US, six in Europe. The network build-out is
on schedule. In February we actually announced an acceleration
of the completion date. We announced for our US inter-city
network that we were going to be completing 50% more of the
network in 1999 than we thought we were.
How much is the network costing to build? How has the
network been funded? What suppliers have you been working with?
How much do you spend annually on network build-out?
Crowe: Let us define the network. That includes 50 US
city networks, multiple loops in individual cities and a 16,000
mile inter-city network. It includes 16 European cities and a
3,500 mile pan-European network. It includes six Asian cities
and then the undersea capacity. That network is going to cost,
including the development expenses and the operation expenses
to get to cash flow break even, about $8-10 billion. It is
funded in phases.
We break that entire build-up into five individual phases.
Each of these are stand-alone. In other words, we can do one,
but not two-five. We can build one-three, and not the following
two phases. Three of the five phases are pre-funded. We have
raised about $6.5 billion. Approximately, $5.2 billion of that
is in cash. The balance has been spent on the operations and
network today. So we have an additional $2-4 billion to raise
to finish phases four-five. Our capital expenditures are at
about $2 billion a year. Then we have another half a billion a
year or so on operating expenses.
We have not announced and do not intend to announce individual
suppliers, in the belief that we will be working with many of
them and that sometimes we will shift from one particular
provider of a component, to another. So it is something that we
tend to shy away from. We have publicly said, if you are
interested, that we are buying Alcatel Cross Connects. We are
buying Nortel optical fibre. We are using Fore ATM switches. Of
course, we work with Cisco on core routing. But we have not
said any more than that.
Level 3 has come to the industry's attention by
building the first digital all IP network. In your opinion,
what is so unique about your operations?
Crowe: Let us answer that question first from a high
level. Then we will provide some of the specifics. I would say
that we are the first carrier to fully leverage something that
we call "Silicon Economics", which may not be a familiar term.
However, I guess that the dynamics are familiar. By "Silicon
Economics", I simply mean a very rapid price performance
improvement for a service or product, but in our case a
service, which is price elastic. To put those two thoughts
together, you end up with very rapid decreases in unit costs
and unit prices and very rapid increases in demand, just as we
saw in the microprocessor industry.
It is now apparent that Internet Protocol, as well being a
technology, is also a new kind of economic model for developing
new technology. Traditional telephone technology is centrally
planned, if you would. It has been controlled by government
bureaucrats around the world for 80 years. One of the major
virtues of IP is that the technical direction and development
is set in the market.
In fact, if you were to look today at the components of a
modern IP network, you would find that if demand was
sufficient, you could drop your costs: that is your prices to
your customers; 30, 40 or 50% a year, if you build the network
properly. That is the rate at which the underlying technology
is improving. The second part of it, is it price elastic? That
is, if you drop the price more than 1%, is demand going to go
up more than 1%?
We think that the answer is pretty resoundingly positive. So
our goal is to couple very rapid price improvements with very
rapid increases in demand. That is a new thought for the
industry. We think that we are building a network to do just
What are the differences between you and carriers such
as Williams and IXC?
Crowe: Specifically, we are building a network that
we think is continuously upgradable. I mean a network that can
capture the underlying price performance improvements in the
network's components. In our case, the most obvious example of
that is building a network that has multiple conduits, so that
we can accommodate each new generation of fibre, when that new
generation allows us to drop our costs and prices. That also
means building flexibility into things, such as the electronics
that drive the optical fibre and spacing there. It means
building operating support systems that can scale rapidly. It
involves literally all parts of the organization: real estate
acquisition, procurement of parts and electronics and
components from vendors. All of those have to be developed to
rapidly change and evolve. We have taken that approach much
further than our competitors. We are also end-to-end.
That is not the approach of the two companies that you
mentioned. To see the reason, you have to understand the
concern of AT&T and Sprint and other long-distance
operators, who simply have long-distance only networks, as they
contemplate the entry of local providers into their business.
Obviously, customers want end-to-end service. The mere fact
that we have moved to IP doesn't mean that we expect dynamic
changes. So we are end-to-end. We are building local and
long-distance networks. We are also building simultaneously in
the US and internationally. That is a differentiator. Finally
we don't deploy any circuit switches. This may be the best way
to illustrate the difference between ourselves and other
Today all our competitors, without exception, deploy circuit
switches, because voice is where the money is. In fact voice
networks still account for 90% of the revenues associated with
Admittedly, data represents 50% of the traffic flow, but only
10% of the revenue flow. We will address that issue by offering
a voice service that is a new technology that we have jointly
developed with a number of others, including Lucent, Nortel,
Cisco and Ascend, which allows you to offer public telephone
quality voice. You simply pick up the phone, dial "1" and make
your call, but still use IP technology. I think that is a key
matter, since it keeps us from having to deploy circuit
switches, which have a very slow price performance improvement
and lock you into the technology of the past.
What makes you believe that the cost of
packet-switching technologies will decline in the same way as
computing technology? What impact will Moore's Law have on
Crowe: I think that the past is our best guide to the
future. To date, the kind of developments that make up the
modern IP network have been doubling in price performance about
every 20 months, which is not too dissimilar to Moore's Law.
You should look at optical technology, which is a combination
of optical fibre and WDM. That has actually been doubling in
the amount of performance you buy for each dollar about every
We spend a fair amount of time with the technology providers.
You can see in the labs the technologies that are going to
continue and perhaps accelerate that kind of improvement. So we
are not going to speculate as to whether something similar to
Moore's Law is operating in the technologies that constitute
modern networks. We can demonstrate this factor with data. The
question is, how do you build the network that can bring that
kind of price performance improvement to the buyers of
Once you have built your network, in view of rapid
technological advances, surely there is a chance that you could
discover that you may be outpaced by another upstart
Crowe: That is our biggest single worry. We don't
want you to do an interview with a Level 4 in another year or
two and have them explain why they have a better network than
us. In fact, that answer I gave you earlier about why we think
we might be approaching the business a bit differently than our
competitors gets the same answer.
We think that we are the first communications company to build
a network that can continuously adopt new technology at a lower
price than our competitors. We are building into the network
the assumption that technology will change and change rapidly,
and not just the electronics but the fibre itself.
Could you tell us about Level 3's IP Voice Service?
What level of revenues do you expect to come from voice
services? Could you tell us about the IP voice demonstration
that you gave in February at an analyst and investor
Crowe: Sure. The service that we demonstrated in
February and are testing commercially as we speak, is voice of
the kind that you are used to and businesses around the world
are used to and have been for a long time. It requires you to
do nothing more than choose us today as a long-distance
provider. In about another year, the software will be released
to do local calling, but today it is long-distance.
So you simply elect us as your long-distance provider. You
pick up the phone and you dial, nothing more. It doesn't
require any additional equipment and doesn't require you to
dial long strings of digits. It has the same perceived quality
as the telephone network. That is what we showed a very large
group of analysts and investors in New York on February 2. We
used in that case both our own soft switch technology, as we
call this, and soft switch technology from Lucent Technologies.
We have the soft switches from Cisco and Nortel in-house now
and are testing those. Simply put, it works.
Without getting into all the technical underpinnings of the
service, it works for the following reason: for the first time
IP networks and IP voice service are inter-connected fully and
completely, instead of partially as was the case with previous
solutions: all the signaling and databases that run the phone
system are inter-connected. In terms of the kinds of revenues
that we would expect, we have not publicly made a statement on
that issue. I think that we will leave it there for the time
Why do you think that you have gained so much media
attention? Do you think that it is down to the scale of
ambition of Level 3 or more to do with your personal background
at MFS and WorldCom?
Crowe: Well I tend to think that any time a start-up
announces a business plan and backs it with $4 billion to start
with, that gets attention. I don't know if we are the best
capitalized start-up in business, but we have certainly got to
be on the list of candidates. I also believe the fact that we
started life with a complete senior management team with
two-three exceptions and that the senior management team had
worked together, many of them for ten years or longer, is a bit
different. I think that certainly causes some media attention.
I think the fact that the same team built the company MFS,
literally from zero, achieving a value of $14.3 billion within
five years of our IPO, probably receives some attention as
When analysing the history of MFS and the current
situation with Level 3, many use the term: "history repeating
itself". Is that how you view the situation? What are the main
differences between MFS and Level 3? How did your experiences
at MFS prepare you for the challenge at Level 3?
Crowe: MFS was founded to take advantage of two
inter-related trends. The first was the shift from copper
analogue technology to optical fibre technology. The second
concerned the shift from central control and monopoly
regulation to competition. Both of those are one-time events:
we viewed them as such at MFS. We viewed it as a historic
opportunity: we think that we helped shape some of those
trends, particularly in the regulatory arena. Fortunately, it
paid off for both our employees and stockholders.
At Level 3 we are trying to capitalize on something much more
fundamental. That is a shift from an industry that has
literally been frozen in terms of the kind of pricing and
demand that customers deal with and frozen by monopoly
regulation, to an industry that is going to be market-based and
resemble much more every other technology-based industry with
very rapid performance improvements and very rapid increases in
So we think that the opportunity with Level 3 is much greater
and is infinite: there is no one-time shift that creates this
opportunity. There are challenges associated with capitalizing
on this opportunity. They are, of course, similar to what we
saw with MFS, specifically growing a business very, very
rapidly and having experience with all the challenges that come
from rapid growth. But there are some major differences. They
lie in the nature of the kind of people that we have with us.
We have many more software engineers, network architects and we
focus much more on the technology than we did with MFS.
A number of telcos are building high-capacity
fibre-optic networks. Do you believe that demand will match the
bandwidth that is coming on-line? What do you believe to be
Level 3's competitive advantages?
Crowe: I think this question is clearly on many
people's minds today. I think that you can't give the answer
without expanding the question a bit and saying: "What do you
think that the demand will be at a particular price?" I think
that if we were to introduce an enormous amount of capacity
into the market and prices were likely to stay at the level
they are today, we would most certainly have a glut. But as I
said earlier, in a properly built network, the potential to
drop unit prices at a very rapid rate is clearly there. The
emphasis is on a properly built network.
It is a little like asking if, at the time, Intel was
producing 286 chips and they continued to produce 286 chips for
ever and never changed the price, whether there would be
sufficient demand for computing, given all those chips that
were being produced. It is an interesting theoretical question,
but has nothing to do with the market, as Intel continues to
improve and introduce the 386, the 486, the Pentium, each of
which had very large price performance improvements. As the
price dropped, demand went up even more quickly. We think it is
clear that if you drop price rapidly and build a network which
allows you to drop your costs even more quickly, demand will
certainly appear at those lower prices. It does not mean,
though, that all fibre and all networks are created equally.
There will be winners and losers in this process. Those who
have networks, which are tied to the past and are not
upgradable, will be in the position of someone producing 286
chips and competing with Intel, when Intel introduced the 386
and so forth.
In a recent interview with Global Telecoms Business,
Bernard Ebbers said that new entrants such as Level 3 may find
it extremely expensive to acquire business by pricing products
at substantially less than market levels to obtain that
business. How much are you prepared to pay to acquire such
Crowe: Given my answer to the last question,
hopefully my answer to this question will be pretty obvious. If
we believed that we were introducing the same products with the
same underlying costs at the same price and that we would only
gain market share by dropping prices far more rapidly than our
costs, then the issue of how much we would pay for the business
would make sense. What I have said, of course, is that we think
the right approach is to drop your costs even more rapidly than
your price. In this case, we are not paying to acquire the
business: we are creating value.
Can you explain how you intend to invest the proceeds
from the offering of 25,000,000 shares of common stock
underwritten by Salomon Smith Barney, Goldman Sachs, CSFB,
Merrill Lynch, Fenner & Smith, JP Morgan and Morgan
Crowe: We have already announced that we are using
those proceeds to fund the third phase of our business plan.
Prior to this offering, the phased approach that I spoke about
earlier was in place and we had funded phases one and two. The
offering funds for phase three are largely aimed at developing
our network in Europe and Asia and building out the US city
networks. It has a substantial European focus.
When do you expect the share offering to be completed?
How will the additional shares dilute current dividends? How
would Level 3's plans be affected by a market recession?
Crowe: The offering was completed less than two weeks
ago. As we don't pay dividends, we certainly won't be diluting
any current dividends, as long as we use the money to invest in
expansions that create value. We view this as a way of adding
to shareholder wealth. If there was a market recession, I don't
believe that it would affect us. If access to capital dried up
for a period of time, we would simply wait to fund phases four
and five at a later stage than we otherwise would.
How do you view Qwest? What is behind Level 3's
decision to move its corporate headquarters to Denver from
Crowe: I view Qwest as a well managed organization
and I have great respect for them. I have already spoken about
the ways in which I think we are different. As to why we are
moving to Denver, it is pretty straightforward. I mentioned
that we are hiring technology workers, in particular software
engineers, network architects, people who are in great demand,
literally around the world. When we entered the business here,
we knew that we needed to attract and retain more than our fair
share of these vital technology workers. We literally built an
entire programme to try to accomplish that goal - one of the
features of which was to hire a polling firm and actually poll
the people with the necessary talent as to where they would
like to live. Denver topped the list.
What was the significance of being able to lure away
18 executives from WorldCom to Level 3, who had previously
worked with you at MFS? What do they bring to Level 3?
Crowe: A slight correction. It should say 18
executives who previously worked with us at MFS. All 18 did not
work for WorldCom. That is a smaller number. It is true that it
represented 18 of the top 20 executives at the time when that
statement was made: it might be now 17 or 18 of the top 21. In
any event, it is true that we have hired a large number of
individuals who have worked together before. Anyone who has
ever attempted anything knows the importance of working with a
group you enjoy being with and with whom you have experience
together. That is pretty straightforward. As we did with MFS,
we had very low turnover at MFS compared to the industry. I
think that we may have even less turnover here, because
everyone of those individuals chose to be here.
All of the individuals were fortunate. They had done extremely
well through the success of MFS. Many, of course, would never
have to work again if they chose not too. They came together to
form Level 3. That is a powerful force when people are there,
because they want to be there, rather than to meet their
day-to-day needs or day-to-day living expenses.
Do you think that this situation has created lasting
ill feeling with MCI WorldCom? Do you think this is one of the
reasons why they won't peer with you? What are the
ramifications of this situation?
Crowe: Well let me speak for our side. At the time we
merged MFS with WorldCom, I said that it was the only
communications company large enough to buy MFS whose stock we
would want our shareholders to accept and whose management we
would want as stewards of our shareholder's money. I am happy
to say that Bernie Ebbers and his team have proved that
statement absolutely correct. They have done an outstanding
I would hope and I believe that WorldCom operates their
business as we do ours, as a business. I think the issues of
peering are business issues, rather than personal issues. I
think that as soon as WorldCom thinks it is a good business
idea to peer, they will do that in an instant. In fact, I am
certain of it.
And I think that as we go forward, we will continue to do
business. We do business across the US. We buy service from
them in certain areas. Like other every other carrier, I
suspect that we will have multiple relationships. We will
compete and we will co-operate wherever that creates value for
What was the significance of the acquisitions of XCOM
Technologies and GeoNet Technologies? Do you think that you
will need to make further strategic acquisitions to accelerate
your competitive position?
Crowe: Cisco is one of the organizations that we have
the greatest respect for. In some ways we model large parts of
our operations after Cisco. Specifically, I guess that we view
mergers and acquisitions in the same way as Cisco. We have
learned from them. Their CEO John Chambers would say it better
than I do. But effectively they believe in a very fast moving
industry: you don't make large acquisitions in an attempt to
purchase large amounts of market share. The integration costs
are just too high. They slow you down too much. Cisco buys
individual smaller companies to accomplish the strategic,
targeted technology acquisition with some very precisely
focused goal. We have tried to do the same.
XCOM Technologies was acquired to get the initial framework
for our soft switch technology. That has been successful in
allowing us to move quickly with the soft switch which I
described earlier. GeoNet and additionally BusinessNet in
London and miknet in Frankfurt are tenant service providers who
sell to larger businesses and who had, most importantly, a
cadre of talented individuals with the kind of skills that I
mentioned earlier. So they are small and targeted. I expect
that we will continue to pursue that small targeted approach. I
think that it is much less likely that we would do some kind of
large strategic acquisition because that simply slows you down
You have been very scathing about monopolies in the
past. Do you think that the RBOCs and AT&T will be able to
compete on a level playing field with Level 3? You said in a
recent interview that: "Monopolies offend you". Why?
Crowe: There are an awful lot of companies that would
be dangerous to generalize about. I think that as a generality
it is much easier when the game changes as it has in
communications, when we see a whole new economic model
developing: it is much better to have a blank sheet of paper
and a good team of people and sufficient capital, than to try
and change a 70-80 year old company. However, it only takes a
small group of people, perhaps one, the CEO, who are visionary
and dedicated and driven enough, to change a whole company. We
have seen examples of that. Jack Welch at GE completely redid
the company. Mike Armstrong at AT&T is a pretty unique
individual. So it is entirely possible that one individual can
change the corporation and re-format it around a proper model,
but as I have said, I would rather be in my own shoes.
Obviously these companies have large customer bases
and global reach and are spending vast sums to upgrade their
networks. How are you going to attract the key corporate
clients away from the big players?
Crowe: I would have said that they are big, slow and
saddled with a high dividend pay-out. They have got 100,000 or
200,000 or 300,000 individuals, who are trained in older
technologies and who have investments in the past. They have
got stockholder bases that don't tolerate a reduction in
dividends and the kind of major investments it takes to
completely redo their network.
How are they going to compete? I would have said that history
teaches us that when major changes occur in the economics of an
industry, it is almost always the newer competitors, unfettered
by all the shackles of the past, that create value, rather than
the major players who have invested 70-80 years in an old way
of doing a business. I guess that I would have a different
perspective. I believe that history would support my
For a new entrant such as Level 3, marketing is
obviously going to be a key differentiator. How much do you
spend annually on the marketing of services? How are you
marketing Level 3?
Crowe: We view marketing slightly differently than
some of our competitors. The best way to describe the
difference might be to draw an analogy to what happened in
computing. IBM was vertically integrated 20 years ago. It did
everything from bending metal to the construction of
processors, operating systems and applications.
At the time observers would have said that they are a
marketing powerhouse and asked how any new entrant could take
customers away from the kind of dominant provider that IBM was.
If you were a new entrant and if your model was to be just like
IBM - in other words a vertically integrated mainframe
supplier- and you believed that you were smaller, faster and
more fleet of foot and therefore could take customers away, the
question of how you spend enough marketing dollars certainly
would be right on point. However, we now know that this would
have been the wrong approach to compete with IBM.
Under the forces of what I would call again "silicon
economics", the old model, which was vertically integrated,
broke apart. New companies did not think about competing with
IBM at every level, supported by enormous SG&A
infrastructure. They took one component of IBM's operations.
Instead of trying to obtain 3-4% market share of IBM's whole
market, they went after the 40-60% market share of an
We now know that this model created enormous value and didn't
require those new entrants to build huge sales forces. They
sold through others. We adopted the same approach. We don't
intend to hire thousands of salesmen. We don't intend to market
to the consumer and small business where the costs are high. We
intend to distribute our rapidly falling cost and price product
through others. We intend to leverage the power of the web,
which is clearly a disrupting force in marketing and sales.
Many believe that Level 3 will be at the forefront of
offering new value-added applications. What new services do you
intend to offer customers? In your mind, which applications
will be most popular?
Crowe: As I said in the answer to the previous
question, I think that our model is slightly different. We
would see ourselves selling to others, maybe hundreds of
others, who would develop new applications and services to sell
to customers. Certainly, some of those new applications, if
they are widespread and have appeal throughout our market,
might be incorporated in our services.
But in general we expect the market, rather than one company,
to test thousands of new ideas and applications. While many of
those applications won't succeed, some of them will be
developed into all those new applications. If you went to our
gateway facility in London, you would see a very large facility
connected directly with our broadband facility, aimed at
allowing anyone with a server and a good idea to co-locate with
us and offer their applications to the market.
It has also been claimed that the Internet is still
too slow for effective business to switch to e-commerce. How
will Level 3 seek to obtain market share in this area and how
will you reduce delays in use of services?
Crowe: Today we deal with that issue by building a
much more complicated network than we may have to in the
future. Today we are resolving this problem by building our own
network end-to-end, where we can control delays and insert a
layer of technology called ATM: ATM among other functions
allows us to control delays through the network. As technology
improves, we believe, along with many others, that IP will gain
new functionality which will allow us to control delays through
the network. But today we need to do that with ATM.
Level 3 has a market cap of over $15 billion. How will
you manage to live up to market expectations, given that it
will take a while before you have accrued significant revenues
or acquired major customers? Are you benchmarking Level 3's
progress for investors?
Crowe: Let me make a couple of points. I think that
our market cap is maybe over $20 billion. Your second point is
certainly true. The market expects a lot from us. I would say
that I hope it won't be a while, before we obtain major
customers. Our investors should be disappointed in us, if we
did not make announcements concerning major customers on a
regular basis in the future.
But fundamentally our investors expect a lot: if we can pursue
the plan successfully, I have articulated to you that we are in
fact undervalued, cheap. The key is in implementation. It is a
huge market: our goal, as I mentioned earlier, is not to get
2-4% of the traditional vertically integrated telephony market,
but rather a very large percentage of a narrower set of
services: if we are successful there, our current market value
will seem very, very inexpensive indeed. Yes we do benchmark.
If you were go to our web site or check our public releases,
we publish regularly a long detailed set of metrics and expect
that we will be judged by our ability to achieve those
benchmarks. We owe it to our investors to set those kinds of
goals so that they can judge whether or not we are implementing
properly and in accordance with what we said.
How do you plan to keep down overheads and SG & A
costs? Will this involve outsourcing?
Crowe: The answer is "yes". Any part of our business
that we do not consider key is a candidate for outsourcing. But
more importantly, for any communications company, the big
expense is the marketing and sales expense. As I mentioned
earlier, we are not attempting to duplicate the enormous SG
& A that our larger competitors have. Instead we are
distributing our products through others. So we are
dis-intermediating, component by component, market by market
and piece by piece the old distribution channel. You can see it
happen as we speak.
The AOLs of the world, if they are anything, are taking direct
aim at owning the relationship with the consumer that
traditionally has been held by the telcos. E-commerce and many
of the web hosting companies and ISPs are doing the same. So we
are not going to try to duplicate that big infrastructure
in-house. We are going to take advantage of the 6,200 ISPs that
are already in place and many, many web hosting companies,
portal companies and on-line service companies and let them
distribute the products.
Can you describe your debt repayment plans? When do
you expect to become EBITDA positive?
Crowe: Our debt repayment plans are pretty
straightforward. They are part of the covenants and the terms
and conditions of the debt that we have issued. It is public
debt and is in two pieces. The first piece was a $2 billion
offering that is publicly traded that we completed in spring
last year. That pays interest currently. We start paying the
principal in May 2008. The other offering, of $500 million more
recently in the fall, pays no interest for five years and then
it pays interest only with a balloon at the end. We have not
commented yet on going EBITDA positive. We think that analysts
generally have assumed that we will go EBITDA positive in
How do you view the recent era of consolidation in the
US? What are your opinions on the SBC/Ameritech, Bell
Atlantic/GTE mergers? Do you think that these mergers will
allow the RBOCs to stem the tide?
Crowe: I think that the natural reaction of dominant
companies in the face of major changes and competition from
others, who are growing their revenues rapidly, is to merge.
Because if you can't respond by growing your revenues - in
other words the larger providers cannot compete by growing
their top line rapidly - the next alternative is to merge and
cut costs. That at least gives you profit enhancement in the
short term. But at the end of the day, if you hook two
slow-moving large organizations together, it doesn't seem
realistic that you are going to get anything except a much
bigger, even more slow-moving company.
How do you view the regulatory environment in the US?
Do you think that the FCC is doing a good job in opening up
telecoms markets? How do you compare the regulatory situation
in the US and Europe?
Crowe: I think that in general, when viewed over a
reasonably long period of time, say over the past 10-15 years,
the combination of the FCC, the courts and legislatures have
dropped barriers to competition. Certainly there have been some
mis-steps. There have been some policies that didn't work as
they should have, because they didn't recognize the realities
of competitive markets. There has been an occasional time,
where there has been a reliance on managed competition or
duopoly. But overall there has been clear and direct progress.
Perhaps the challenge for the next ten years is even bigger
though. Right now the FCC and others are wrestling with what to
do with so-called converged networks. Networks such as ours
that are IP-based can offer all the same services as networks
and companies that have been traditionally regulated. This is a
tough one and getting that right is going to determine the pace
that communications improve over the next decade. That is a big
In Europe the regulators have moved much more quickly than I
would have ever expected over the past two-four years. As we
talk with regulators in Europe, both in the EU and the
individual countries, there is a clear recognition that there
is not a choice as to whether to introduce competition, if you
want to have a modern communications infrastructure. What has
happened in the UK and the US is too compelling to ignore.
In fact, the UK may in some way be the best example
world-wide, where barriers have dropped rapidly. The amount of
investment in the UK communications infrastructure is
incredible and the improvement rate in the UK has been nothing
short of incredible.
So I also believe that Europe - and this applies more to
Europe than the UK - in theory has dropped all the barriers.
There are many practical barriers that still have to be dealt
with. It is not enough when you have a large dominant monopoly
to say: "OK, let the competition begin", if competitors can't
for instance inter-connect with existing providers and choose
whether to do nothing or instantly build to every customer
within a country. That is not real competition. But I trust
that the issues related to unbundling and access to the
dominant provider's network will be sorted out. I think they
are being resolved as we speak.
What are your opinions on the recent Vodafone/AirTouch
merger? Were you surprised that MCI WorldCom considered
AirTouch? Do you believe that the paradigm has shifted to
wireless? How does the huge demand in wireless services affect
Crowe: As I mentioned earlier, we can learn from
history: when industries are affected by the kinds of forces we
see in communications, where the pace of change accelerates,
technology improves at an incredible rate and customer demand
for new applications is seemingly insatiable, it is not
realistic to expect that customers, and more importantly
companies, will be able to simultaneously offer the best
services in multiple industry segments. That is a clear lesson
Quite simply it is impossible to be everything to everybody
and put it all on one bill. I think that is a competitive
advantage. I expect that you are likely to see that wireless
will improve at an incredible rate, but I think it is unlikely
that the big bundled service providers are necessarily going to
be the only providers who create value.
As to how wireless demand affects Level 3, every antennae that
is erected requires more fibre and a carrier such as Level 3 to
provide inter-connecting services. We view wireless as
completely compatible. At the end of the day, wireless is a
fairly narrowband distribution system, while we are a wideband
trunk line, a water main if you would, to the wireless garden
Finally, what are your hopes and ambitions for the
company over the next five years? In your view how will the
telecoms landscape change?
Crowe: I think that five years from now we will look
back and discover first of all that the changes have been
incredible. I think that we will find that IP-based networks
are carrying 90% of the traffic on global networks and maybe
50% of the revenues. It doesn't mean that the whole circuit
switch network will go away. But that is not where the value
creation and the excitement and the fun will be. That will be
an IP-based network.
We will see e-commerce as an accepted normal way of doing
business, simply because it is a less expensive way to
distribute than the old model. We will see that the notion that
"bigger is better" is no longer accepted. I think that we will
find that a number of companies, whose names we didn't know
only a few years ago, have created enormous value. I believe
that Level 3 will be one of those companies.