Level 3 counts on future of IP

BROOMFIELD — Level 3 Communications Inc., a communications and information services company, less than two years ago began presenting plans for the local, long-distance and undersea data transfer and communications network of the future.

Businesses’ needs in 50 U.S.cities and 21 international cities will be served with a network based on fiber-optics and Internet Protocol (IP). At a cost of $8 billion to $10 billion, the network ultimately will include multiple loops in individual cities, a 16,000-mile inter-city network, 16 European cities, 3,500-mile pan-European network, six Asian cities and undersea capacity.

The plan places Level 3’s world headquarters in Interlocken business park. Currently under construction, the four-building campus one day will be Broomfield’s largest employer with up to 3,000 people, including the kind of workers in great demand all over the world — software engineers and network architects.

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At completion of the first phase of the Level 3 plan, scheduled for 2001, 27 cities (including Denver, Chicago, New York, Los Angeles, Washington, D.C.) and five European cities will be connected by the new network. The rest of the network is expected to be complete by 2003.

Company Chief Executive and President James Crowe has said Level 3’s goal is to become the dominant, low-cost player in the business of transporting data. Company publications back up the idea of a grand future. Level 3 say it’s “lighting the way.” The company is “positioning itself to take advantage of what it sees as a fundamental technological shift in communications. This shift from 100-year-old circuit switching technology to newer Internet protocol technology will change the way businesses communicate — the shift is

as important as that from the telegraph to the telephone.”

The end-to-end use of fiber-optics is key to the plan. Level 3 will not build any traditional circuit-based networks.

Industry watchers call the plan somewhat grandiose.

Level 3 was founded in 1985 as Kiewit Diversified Group Inc. The young company’s move into the telecommunications industry means it will be competing with numerous telecom veterans such as AT&T and now what appears to be a combined MCI WorldCom-Sprint.

But interviews in industry publications reveal Crowe as a man calmly certain about the company’s ability to muscle in on these huge competitors. Level 3’s touted advantage over the venerable telecoms is the use of packet switching, a cheaper, faster way than traditional circuit switching, to transfer data and make phone calls. The question, of course, is will it work?

IP technology

Circuit switching works like this: When connecting phone calls (or a bank terminal or personal computer), a fixed amount of capacity — a circuit — is dedicated for the entire duration of the transmission. The information travels through copper wire. Packet switching allows the information to share lines with other transmissions.

Packet switching uses two communications protocols on the Internet — the Transmission Control Protocol and the Internet Protocol. The first divides and reassembles the data into packets. The digital chunks or packets share the same channel at the same time as other data bits. IP ensures the packets reach the correct destination.

The information travels through fiber-optic-filled conduits. Sixty trillion bits of information per second can be transmitted through the fiber in just one pair of conduits. That’s the equivalent of 750 million simultaneous phone calls.

Industry analysis

Industry analyst George Peabody of the Aberdeen Group in Boston sees a few problems with Level 3’s plan. Interconnection agreements are the first.

Level 3 is moving into a competitive market where already a rival, MCI WorldCom (the largest Internet backbone provider that is now attempting to acquire Sprint Corp. in a $108 billion deal) has refused to let it connect to its network. This is on the lists of risks Level 3 shares with its stockholders. Crowe is on record saying that Level 3 will get interconnection.

While Peabody is generally positive about Level 3’s move to Broomfield, he has doubts about how quickly the company will be profitable.

“They are a terrific neighbor,” he said. “They’ll be one of the largest providers of telecommunications services on the planet and will attract highly educated talented people. IP is where all the growth is going to be. But it’s not going to pay off next month.”

Tom Sweeney, Level 3 vice president of strategic alliances, acknowledges the real payoff will come when the network is finished.

“To be the low-cost provider you have to construct a network and operate it at lowest cost,” Sweeney said. “Currently, we probably have people beating our price because we haven’t built out the network. We are currently leasing the majority of our capacity.”

Level 3 uses a combination of company-owned facilities and leased network connections. Leasing space on Frontier Corp’s long-haul fiber lines allows Level 3 to sell to customers before all lines are in place.

The savings promised will happen because the network, once installed, will be constantly upgradeable, Sweeney said. The lines consist of 10 to 12 1/3-inch conduits grouped together. Fiber is drawn through only one conduit. The rest stay empty for future expansion and technology changes. Sweeney said they won’t have to dig again to upgrade. The fibers actually can be blown into the conduits with air pressure.

Another obstacle Peabody raised was the issue of voice revenues. In the telecom world, 81 percent of the $540 billion worldwide annual revenue comes from voice phone calls. “The trick is how they will transfer voice revenues into packet networks,” he said. “IP voice is in its infancy.”

Residential use of this IP technology isn’t in the near future for Level 3, Sweeney said. Homes already “have copper wires running from them.” Still, because the revenue for voice calls is so good, Level 3 is using its executive team’s home phones to test long-distance voice calls and IP technology.

But today’s Level 3 is all about providing data services.

Level 3 is a third-party carrier providing access to its unbundled network — both its services and signaling and control systems. Sweeney said Level 3’s market is large carries, Web host providers, Internet service providers, data storage and Webcentric companies.

“We don’t plan to offer services directly to residential customers or smaller businesses,” he said. “We would like to bring fiber to the big companies and would like to see them offer high-speed services at lower cost.” Level 3 offers a menu of services including co-location, Internet access, managed modem, IP voice and fax, virtual private network, Web-enabling, outsourcing and e-commerce. Other special services such as conduit space is also available.

The technology is there. Level 3 is confident of the demand for services, Sweeney said. The only way the company could fail is if the people fail.

“We have things others don’t have. We have a strong management team,” he said. Eighteen of Level 3’s executives previously worked with Crowe at MFS Communications (one of the first networks to compete with the Baby Bells, it’s now merged with MCI WorldCom). They quit WorldCom to work with Crowe at Level 3.

“If we fail, it will be failing as a management team,” Sweeney said. “We feel confident we can execute our business plan, but that’s not the same as doing it. Until we get it all done, we still worry at night.”