Another level: Level 3 merges with San Francisco ISP

Level 3 Communications gained an immediate foothold in the San Francisco Bay area last week by agreeing to merge with GeoNet Communications.

GeoNet, a regional Internet service provider founded in 1994, has customers in Las Vegas and Los Angeles and leases a nationwide network, but the bulk of its customers are in its Bay area home territory.

The company has targeted Silicon Valley's high-volume data users, using its leased network to control cost and quality for long-distance data traffic.

"Every customer we generate here returns more valuation" than customers in other markets, said David Belove, GeoNet's marketing vice president.

GeoNet has been shopping for a merger partner since last fall, when it retained an investment banking firm to scout prospective partners. Level 3 emerged from a group of about 40 companies.

As a result of the $21-million stock deal, GeoNet will be absorbed Level 3. However, the GeoNet staff will remain intact, said Ron Vidal, senior vice president of new ventures at Level 3.

"We like the GeoNet team, and they're excited about coming to Level 3," Vidal said.

The deal is a bit of a departure from Level 3's growth strategy. Level 3's board has approved spending between $8 billion and $10 billion to build the company, with none of the funds earmarked for acquisitions or mergers, Vidal said. But GeoNet was too good to pass up, he said.

Level 3's interest in GeoNet lies in the company's customer base and sales staff. Those elements give Level 3 an established presence in an important market. GeoNet's backbone leases are short-term deals that expire soon, so it no longer must worry about cutting more deals. Level 3 is leasing backbone until its own network is completed.

Level 3's "assertion that it's purchasing talent in [GeoNet's] sales force is probably correct," said Matthew Kovar, senior analyst at The Yankee Group. "It helps [Level 3] develop [ISP] product expertise and a core department."

Kovar predicted that Level 3 will continue to acquire companies that can serve as seeds for business units that Level 3 will need. But Vidal said such deals will be the exception rather than the rule.

"You can't build a sustainable business on acquiring other companies," Vidal said. "If acquisitions are good opportunities, we will consider them."

DSC Communications last week demonstrated the feasibility of deploying intelligent network services in an Internet protocol environment.

The company has teamed up with Sun Microsystems to develop Web applications based on Java components, which will run on DSC's INfusion intelligent network platform. The project, which used applications developed by Strategic Technology Resources, will let carriers provide the same service regardless of network type. It also allows Internet service providers to test intelligent network-based services.

For DSC, the move into IP was one of the missing elements of its intelligent network program, said Jim Olsen, vice president of marketing for DSC's intelligent network division. "We started doing a lot of wireless networks and moved into other markets from there," he said. "The only place left to go is IP."

In a demonstration at Sun's ISP Conference and Industry Forum in San Francisco, DSC demonstrated a Web-based voting system and a customer service application that allows users to browse catalogs and make voice calls. The company also is prototyping telco-oriented services, including one-number service and browser-based provisioning.

In the first prototypes, STR is using Sun's JavaBeans to create user interfaces to DSC's intelligent network platform.

The move also puts another major SS7 player in the IP market. Several speakers at last week's event said the integration of the signaling protocol will be key to getting IP voice services into the mass market.

Rick Pierson, director of business development for systems integrator Mockingbird Networks, is concerned about the number of alternative signaling protocols being proposed for use in the IP environment. "It's just adding an element of confusion that doesn't need to be there," Pierson said.

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