On the Offensive

Posted: 1/2004

On the Offensive
Level 3 Growing Resale Channel to Sell Enterprise Solutions
By Josh Long

Level 3 Communications Inc. is soliciting
phone companies, VARs and systems integrators as part of its strategy to support
topline growth through the sale of products designed for enterprises.

In 2002 and 2003, Level 3 exchanged debt for equity,
repurchased bonds, bought software resellers and performed other forms of
restructuring designed to shield the company from the type of cash crunch that
forced its rivals into bankruptcy. Level 3 executives say those restructuring
efforts are largely complete. The Broomfield, Colo., company says it has moved from a
defensive position to an offensive strategy, and is seeking ways to increase
overall sales while preserving high margins. In the third quarter, Level 3
posted a gross margin of 78 percent in its communications business.

We are not trying to grow our direct enterprise business.
We are trying to grow our partnerships to service the enterprise, says Glenn
Russo, senior vice president of Level 3. It avoids the conflict with our
traditional wholesale base. It is also a very cost-effective model.

Level 3, the operator of a national fiber-optic network, is
seeking sales partners that will own the customer.

We want partners that can own the customer relationship and
the customer support, Russo says. We view our partners brand as being
important there.

Since the late 90s, Level 3 has sold wholesale
communications services including dark fiber and metropolitan private lines to
phone companies, cable operators and ISPs over its own network. But until recently, it did not have products designed
specifically for enterprises.

Through the acquisition of Genuity Inc. in February 2003,
Level 3 incorporated a product that provides enterprises high-speed capacity to
the Internet over a T1 circuit or fatter pipe. Verizon Communications Inc., the
No. 1 local phone company, was selling that product through Genuity; now the New
York-based phone giant sells the product, Internet Advantage, through Level 3.

Phone giants such as Verizon are not the only sales partners
Level 3 is soliciting. Russo says the company plans to introduce a formal
program for VARs to reach small and medium-sized enterprises.

I think the VAR channel, in particular, will service the
small and medium-sized enterprise very effectively, he says. Systems integrators, Russo says, also represent an
important sales channel. Level 3 has not named any systems integrator partners.
They are key to solving some of the large enterprise IT and infrastructure
problems, he says.

In October, Level 3 introduced a remote access service for
businesses. The service, called eRAS, allows businesses to connect employees,
customers and partners to corporate intranets, extranets or the Internet. Level 3 said it planned to market eRAS through channel
partners.

In September, Level 3 unveiled hosted IP voice services called
(3)Tone designed for large enterprises after purchasing Telverse Communications.
Level 3 said it had agreements with SBC Communications Inc. and more than 20
other service providers and VARs to market the service. Level 3 also said it was
in talks with U.S. and foreign carriers, CLECs, systems integrators and other
potential resellers to market (3)Tone. Two Level 3 partners are The Sentient
Group Inc. and ObjectMania! Consulting Inc.

Terry Carpenter, CEO of ObjectMania!, said in late November,
he could not comment on the IP voice service because he was just set up with
Level 3 and was courting some potential business customers, including a small
college. Asked why the company selected Level 3, Carpenter says, They have
put a lot of thought into the customer interface [both the sales partner and
enterprise] component.

SBC announced a hosted VoIP offering for businesses that
initially will run over the Level 3 network. The new, nationwide hosted VoIP business product which
effectively replaces the IP Centrex SBC has been selling over the past few years
now is available in select markets and will be available in cities
nationwide by the end of 2004.

Transformation Timeline
Oct. 20, 2003 Level 3 announces
remote access services for U.S. businesses. The company says it plans to market
the service through channel partners.
Oct. 1, 2003 Level 3 says it has
repaid senior secured credit facility in full.
Sept. 22, 2003 Level 3 announces
new voice service for businesses, (3)Tone. Says it has marketing agreements with
SBC Communications Inc. and about 20 other service providers and VARs.
June 19, 2003 Level 3 announces
institutional investors, Longleaf Partners Funds Trust, Legg Mason and Warren
Buffetts Berkshire Hathaway Inc. have converted $500 million in Level 3 notes
to equity.
April 4, 2003 Level 3 says it
will exit managed hosting business it gained through the Genuity Inc.
acquisition.
Feb. 4, 2003 Level 3 completes
acquisition of Genuity Inc.
June 18, 2002 Level 3 announces
completing acquisition of Software Spectrum Inc., a business software, reseller.
March 14, 2002 Level 3 announces
closing the acquisition of business software reseller Corporate Software.