Silent Partner

Monday April 11th arrived with confirmation of one of the longest running rumors of the telecom mill. Level3 has agreed to acquire its competitor Global Crossing in a tax-free stock swap valued at $3 billion. Deal terms specify that Global Crossing shareholders receive 16 shares of Level3 for every common or preferred stock held at closing. Speculation of just such an event has been circling the telecom campfire for years now so this week’s news came as little surprise.

Should regulators give the deal a thumbs-up the combined entity will represent a dominant force amongst Tier 1 networks. As previously discussed in this blog, Renesys shows Level3 to be the largest global network as measured by the sheer amount of IP space transited on their network. Based on this same ranking schema Global Crossing is the third largest network behind Sprint. Put the two together and you’ve got a massive operation with significant reach in terms of geography, route miles and access.

Based on this information executives on either side of the deal were quick to point out the economic efficiencies to be gained by merging networks. Consolidated operations will definitely help to reduce costs in terms of sharing network access and settlement free peering arrangements as well as eliminating overlapping support personnel and systems. There is however another and less favorable side to consolidation in our opinion.

Level3 has already struggled to integrate the 31 companies it has acquired since 1992. This list includes some rather sizeable operations such as Genuity, Williams and Broadwing. Silent Partner has experienced firsthand the difficulties of managing such a huge, disparate asset base. Capacity requests show no availability only to change 24 hours later. At other times buildings with legacy Williams or Broadwing fiber demarked come back as “off-net” according to L3. This confusion leads long provisioning intervals, messy support during outages and a general sense of frustration from the customer perspective. Integrating a network as large and far-reaching as Global Crossing’s will clearly present problems for the new entity.

While most analysts were quick to discuss the network implications of Level3 gobbling up Global Crossing, Silent Partner is curious to see what effect if any there will be upon the datacenter industry. Last summer Level3 conducted a detailed strategic assessment of its colocation business that led many to believe they were considering selling this unit. Traditionally L3 datacenters suffered from low power density since most were built in the telco colo style of the late-90s. L3 often uses these sites to house their own equipment therefore selling off excess capacity was essentially gravy on top of their core business. Obviously getting customers to colocate within a L3 datacenter guarantees control over their network spend onsite. By November of 2010 however Level3 had committed to upgrading 10 facilities in the US in order to deliver better power density. Thereafter a renewed push was made to sell colocation through direct and indirect channels. 

On the other side of the fence Global Crossing’s strategy has been largely the same in that most of their facilities are telco grade with the exception of a few key strategic markets where they operate more modern sites and in some cases offer hosting. Global Crossing has been a dominant player in Latin America wherein they operate 15 datacenters including sites in Argentina, Brazil, Chile, Columbia, Ecuador, Peru and Venezuela. This meshes well with L3’s datacenter footprint that is stronger in Europe and North America. Should the combined entity be able to update facilities to more current power densities they could become a player in the space. Carrier neutrality is of course a concern but Silent Partner believes that for certain network-intensive customer verticals like content and gaming the strength and reach of their networks provides a compelling reason to colocate with the new Level3 (access to peering notwithstanding).