Competitive operators look on the bright side

A burst of activity among competitive service providers is primarily a good sign, according to both the competitors themselves and to some industry analysts.

“This is not going to be giddy, hockey-stick growth,” said Craig Claussen, analyst with New Paradigm Resources Group. “This time around, it's going to be a more sober experience. But the companies that have hung in there and stuck to their knitting are doing better.”

Six weeks after they announced their own merger, CTC Communications and Choice One Communications said they are also acquiring Conversent Communications, another integrated communications provider, to increase their scale and footprint further.

“The fact that we are able to get Goldman Sachs to step forward and form a syndicate to help us acquire Conversent is further indication” that investors are viewing the competitive market positively, said Ray Allieri, CTC president.

Global Crossing's impressive stock rise, from just more than $18 on March 16 to more than $26 a share by March 29, is another indication of investor mood, said Anthony Christie, chief marketing officer for the company.

“There is ample evidence of more of an appetite in the capital markets for telecom,” he said. “The market is not completely back, but it's picking up again. And there are fewer avenues to invest in — you've lost four to five investment options with the mergers over the past year.”

Christie said Global Crossing has seen improvement in demand and, with consolidation in the industry, a slowdown in price cuts.

XO announced in mid-March that it is lighting up the fiber-optic cables it owns within Level 3's networks and deploying Ethernet over copper gear to extend its local network reach as well. The decision reflects the changing economic realities, said an XO spokesman.

“We invested $750 million in Level 3, and as a result, we essentially own 18 fiber strands on their network,” he said. “At the time, it made more economic sense to buy wavelength services from Level 3 than to invest the capital required to light our own fiber.”

That has now changed, and XO is starting to light its own network, using Infinera gear to light 40 wavelengths between cities. As the contracts for its wavelength services come up, they will not be renewed.

Level 3's share cost surged to its highest point in more than a year, jumping from less than $3.50 per share to more than $5.50, after the company said it would do better both for the first quarter and for the year.

Claussen thinks Level 3 was ahead of its time in building an IP backbone and is now reaping the rewards of having survived. “They're seeing many more peering arrangements with small ISPs and VoIP players,” he said. “The rest of the industry is catching up to them.”

Brian Washburn, analyst with Current Analysis, added a cautionary note, however, pointing out that some of the revenue boost Level 3 is seeing comes from the AT&T traffic it now carries as part of the WilTel acquisition. That traffic is going away, as will XO's long-haul business, he said. Other telcos such as McLeod and 360 Networks are already gone.

“They are in tight with the big cable companies, and that's good,” he said. “But they are losing telco business.”