Level 3 comes back with a vengeance

Level 3 Communications is demonstrating an increased aggression in the wholesale space, including stepped-up price pressure in some cases, according to multiple sources, as that carrier looks to rebound after provisioning problems put a chokehold on its sales last year.

In the first quarter, Cogent Communications reported a flare-up in price pressure for wholesale services, which forced the company to drop its own prices. Cogent has a standing offer in the market that if any customer can show an invoice for a similar product at a lower price than Cogent’s, Cogent will undercut that price by 50%.

“About a dozen times we had to do that,” Cogent CEO Dave Schaeffer said at an investor conference Wednesday. “We saw someone show us an invoice that was below $18 [per megabit].”

That pricing pressure came primarily from one carrier, Schaeffer said, and although he didn’t name it, he left enough hints to point the finger squarely at Level 3.

Level 3, which was unavailable to comment for this story, recently claimed to have resolved widespread problems in its provisioning systems that forced the company to have to turn away some business last year. Analysts say the carrier is probably now trying to make up for what it’s lost.

“It sounds like provisioning is no longer an issue for [Level 3], so they’re trying to get back in the game and rev up the sales pipeline, and the easiest place to do it is in the wholesale market, where they’re well-known and respected,” said Donna Jaegers, an analyst with Janco Partners. “And Level 3’s never been shy about playing the price card.”

Level 3 and Cogent in particular have historically had a rocky relationship. The two famously faced off in the fall of 2005, when a peering dispute led to disconnections and wide-scale service interruption.

In the wholesale space, Level 3 typically targets higher-end deals than Cogent does. But as Level 3 works to pump its sales back up, it may be reaching down market a bit, overlapping more with Cogent.

Still, Level 3 has done this before, Jaegers said. In early 2006, before the company’s provisioning woes, it took share away from Cogent by dropping wholesale prices from $20 to $10 per megabit, capturing some business from the likes of YouTube and MySpace.

Meanwhile, Cogent and Level 3 may also be competing for personnel, as both are working hard to bulk up their sales staffs this year.

Still, another analyst cautioned against reading too much into Cogent’s description of the first quarter.

“Carriers are inclined to talk about a specific low price from their competitor as indicative of the overall market, and they sometimes blow a particular incident out of proportion,” said the analyst, who requested anonymity. “As an example, a carrier may be selling against Cogent in a key account and the sales manager tells his salesperson not to lose the deal no matter what. This does not mean that is what they are doing across the board, just in a particular account or location. All carriers will offer outrageously low pricing for specific customers at certain times of the month and in certain areas.”

Level 3 is likely being most aggressive with wholesale pricing among customers that are on its network, since the relatively low cost to connect them means it can afford to drop prices. Where the carrier would need to buy a local loop from the incumbent carrier to connect, it is less likely to be willing to go as low.

During its first quarter earnings call, Schaffer predicted Level 3 would continue to force Cogent to offer more discounts to its wholesale customers. And Jaegers said she’s hearing from other carriers as well that are noticing Level 3’s re-emergence in the wholesale space.

“Level 3 is back,” she said.