James Crowe

Most CEOs confronted with a stock price that has plunged from $91 to $13 over the past year would be looking for a parachute — or, at the very least, a safety net. But James Crowe, CEO of IP network and broadband services provider Level 3 Communications, tries to take it in stride.

“As a shareholder with a substantial portion of his wealth tied up in Level 3, I probably speak for everybody when I say that we're not happy,” Crowe says. “If we had seen that kind of stock performance for Level 3 alone, I'd be real unhappy. I suspect our shareholders look around, though, and understand it's the whole sector.”

Crowe also always keeps his focus on the future, as he keeps one eye on the past.

“Anybody who doesn't have a long list of things they'd do differently isn't learning as they go along,” he says. “We have one rule at Level 3: ‘If you're going to make mistakes, learn from them, and don't make the same mistake twice. Try to make a new one each time.’”

One mistake Crowe says he and Level 3 made was not emphasizing projects that generate a quicker return on investment.

“We started that process back in October, and we probably would have started back in February if we could have seen the future,” he says.

While Crowe may not be able to predict the future, his plan to attack it includes moving most of Level 3's traffic from leased fiber to built fiber and accelerating penetration into metropolitan markets.

Level 3 owns its own softswitch network but leases needed broadband connections between cities and within the metro, Crowe says. However, during the past two years, the company has spent about $10 billion to build metropolitan, intercity and undersea facilities in the U.S. and Europe, negating the need for leased connections.

“At the end of April 2001, we will be 50% complete, and, at the end of May, we will be 95%,” he says. “And you can see it in our margins, which increased markedly in our last earnings report. It's one of the reasons we feel good about margins for the year, because we're operating on our own network early.”

By increasing capacity on its network, Crowe believes Level 3 can continue to attract customers during the current economic downturn.

“There are certainly companies that would have bought our services if they had been able to get funding, and there are other companies that would have built or upgraded their own networks,” he says. “But because of the tightness of the capital markets, they are instead looking to focus their capital on outsourcing parts of their networks.”

This may be true, but perhaps only in the sense that half a loaf is better than none.

Market conditions recently forced XO Communications and Level 3 to modify two agreements. The original deals called for XO to purchase 24 fibers and empty conduit from Level 3's 16,000-mile intercity North American network for $700 million, plus nine European metro fiber networks and a pan-European intercity fiber network from Level 3 for $148 million.

Now, XO and Level 3 have canceled the agreements concerning the European networks, and will apply $128 million already paid on these networks to the $700 million XO owes Level 3 for the North American commitment. XO also will purchase $30 million in wavelength services from Level 3.

At first glance, it's a lesser deal for Level 3. But Paul Kellet, senior director of research for Pioneer Consulting, suggests this may be the only deal these companies can make at the moment.

“Yes, it's half a loaf,” he says. “In the best of all worlds, where capital is fairly available, a carrier is going to want to build its own network. But when it's not, then you have to use parts of another company's network.”

Best known for its long-haul capabilities, Level 3 is shifting more of its efforts to metro markets, where there is greater market potential.

“We've announced a focus on U.S. metropolitan facilities, where there remains a real scarcity,” Crowe says.

Crowe says Level 3 differentiates itself in the metro space by building metropolitan rings that collect traffic from various types of access networks and by utilizing Ethernet over fiber, which more effectively transports the IP-over-Ethernet traffic generated by business customers.

“In the local loop today, the technology is available — and it is less expensive — simply to move Ethernet over glass,” Crowe says. “There's a limit as to how far you can do it with today's technology, but it's far enough to be fine in the local metropolitan area.”

With abou$4 billion in cash on hand at the start of second quarter 2001 and projections to go EBITDA-positive during the fourth quarter of this year, Level 3 is in solid position to survive the current economic downturn, says John Andreozzi, an analyst with KMI Corp.

“Of the second generation of carriers, they seem to be probably in better shape than most,” he said. “They had a better plan to begin with, and they had a lot of cash to begin with.”

Andreozzi also praises Level 3's multiconduit approach to building its network, which increases the company's ability to generate profits from dark-fiber sales. This tactic also benefits Level 3 as it pursues its new metro strategy, according to Crowe.

“We can make fiber almost without limit. That ideally suits us for metropolitan Ethernet connectivity.”