What’s Ahead for the Competitive Carriers:

Time Warner Telecom and Level 3 Acquisitions Shifts CLEC Terrain

In 2006, the Competitive Carrier sector (also known as “CLECs”) was afflicted by “consolidation fever”. While the M&A activity was spurred by a range of motives, moves by two service providers, Level 3 and Time Warner Telecom, are worth examining further because of a change in landscape.  Both service providers’ acquisitions were motivated in significant part, by the desire to dive deeper into the metro market with an eye towards strengthening and enhancing overall metro capabilities.

Level 3’s buying spree began with Progress Telecom (March, 2006) followed by ICG Communications (April, 2006), Telcove (May, 2006), Looking Glass Networks (June, 2006) and Broadwing (October, 2006). Two of the five acquired companies, Telcove and Looking Glass Networks, owned rich metro assets and mainly contributed towards increasing the provider’s overall metro presence.

 

Looking Glass Networks and Telcoves’ acquisitions significantly added to Level 3’s footprint and market penetration and enabled the carrier to evolve from a predominantly long-haul provider to a metro-centric operator. Once network integration is complete, Level 3 will possess a metro presence almost comparable to Time Warner Telecom. Although, the carrier is playing catch up with other dominant metro players, the change in its composition has positioned Level 3 to develop a much stronger presence in the metro market space while staying dominant in the long-haul arena.

Next in focus is Time Warner Telecom, which completed its acquisition of Xspedius Communications in October 2006. The carrier’s limited metro presence in the south and southeastern regions in part, initiated its search for a viable merger candidate. Xspedius, with a substantial market presence in these regions, a complementary business model and little network overlap was ideally suited to offer additional footprint and markets. There was only 12 markets overlap between the providers resulting in a net adding of 31 markets for Time Warner Telecom. The carrier, in addition to gaining new markets in the south also expanded its overall metro footprint.

           

Looking Ahead

There is no doubt the acquisition strategy of Level 3 and Time Warner Telecom has enabled both providers to emerge as strong competitors and major metro players. Consequently, both carriers’ acquisitions have significantly shrunk the CLEC landscape. It has taken providers with rich metro assets out of the competitive mix leaving only smaller players with limited metro assets. As a result, CLECs deficient in metro assets, aspiring to enhance metro capability, are now left with only two choices; either exploring partnering opportunities with (i.e. acquisitions of) the remaining smaller players or growing “organically.”