Vertical, rather than horizontal, integration will define services, and Level 3’s poised to play hard, he says

Admitting his company “stubbed its toe” this year, Level 3 Communications Chairman and CEO James Crowe told the CitiGroup’s 18th Annual Global Entertainment, Media & Telecommunications Conference today that the emerging IP optical and IP wireless markets are what “we’ve been planning on and hoping for, for a number of years” and Level 3 is ready to compete successfully.

So much so, Crowe said, that one of the company’s focuses for 2008 is on becoming free cash flow break-even “as quickly as we can.”

Level 3’s 2007 woes were based solely on its inability to deliver services as fast as it was selling them, Crowe said, and fixing that problem is the other main focus for 2008. In the meantime, the market is moving away from vertical integration--in which applications and devices are tightly knit into the service offering--and toward vertical integration based on standard interfaces. In this market, Crowe said, Level 3 can compete and profit.

“Standardized market-based interfaces are increasingly creating horizontal rather than vertical markets,” Crowe said. “That means content is separating from applications, applications are separating from devices and devices from networks. There are many who would prefer that not to occur, whose models are based on vertical integration.”

In the new realm of “IP-tone” versus dial-tone, Crowe added, “our business is about scope and scale and having superior incremental margins. If you are looking to tax content and bundle device, application and network, it isn’t going to work. You had better be good at moving information if you want to be a network service provider.”

Level 3 was selling at growth rates of 20% in the first half of 2007 but could only activate services at an 8% to 10% growth rate, which naturally led to a slowing of growth, Crowe said. Level 3 is now investing more in the activation process, specifically in hiring and training more engineers to handle the complex process of designing networks for signed customers, he said. To reinforce this point with investors, the company went to the unusual lengths of posting its sales figures for the first six months of 2007 on its Web site.

“Our sales have now dropped to match our install rates,” Crowe said. “The bottom end of guidance assumes we don’t fix the issue until end of 2008. The upper end assumes we do fix and we get to the levels we were at in the first half of 2007. We have proven we can sell at that rate.”

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