Is Level 3 Getting Desperate?

Implications: 1.      Level 3 burned $160 million in cash last quarter. 2.      It has also been selling off assets. 3.      More importantly, it seems to be turning its attention away from its retail business.  

Analysis:  Level 3’s CEO is apologizing to shareholders.  The carrier has in effect been mortgaging some of its future by continuing to sell fiber IRUs.  It sold off the advertising distribution business of Vyvx despite about a year and a half ago touting the uniqueness of its HD offering.  AT&T is increasingly looking like a major competitor in the CDN space.  Plans by both of the large RBOCs to build extensive IP networks could decrease their reliance on Level 3.   The carrier has been making a lot of noise about the relatively small opportunities in going after  “independent cable operators” for wholesale.  In essence, Level 3 is really struggling.  

Statements by the Level 3 CEO are illuminating such as “we should have stuck to some  of our knitting” along with the old rhetoric of “we’re the low-cost provider of a technical commodity.”  Despite the carrier having “fixed most, if not all, of the operation and provisioning problems that plagued it last year,” why is the focus apparently on “increased aggression in the wholesale space” instead of executing more on its enterprise strategy?  It is possible that Level 3 has lost some confidence in its ability to get itself out of the hole with its primary emphasis on retail?  Wholesale still represents the majority of its revenue and there are still way too many competitors in this market.  By applying tremendous pressure on price, it seems evident that it is trying to get more competitors to go out of business or get acquired.  Revealingly, among the future acquisition type of candidates mentioned by Level 3 is in the long-distance space.  

Level 3 built a good, low-cost network.  The problem is that its balance sheet does not fit the network.