While Others Flounder, Level 3 Shine

Level 3 Communications, Inc. officials announced Monday
the expansion of its current contract with a major national Internet
service provider (ISP), the second in a week.

Building on its current contract with EarthLink, Inc. ,
in another 18 markets, Level 3 is proving two things: one, that dial-up
isn’t dead (however much broadband providers wish it wasn’t so); and two,
the carrier will be around to see the final days of mainstream dial up.

EarthLink, the fourth-largest ISP in
the U.S. with approximately 4.8 million dial up subscribers, signed the
expanded dial-up agreement (the terms of which were not available) less
than a week after its dial up rival AOL penned a
similar agreement
with Level 3.

More importantly, EarthLink signed an agreement to colocate in 14 U.S.
markets, as the ISP gets onboard with a broadband Internet business
strategy for down the road, according to Steve Dean, EarthLink vice
president of operations.

“These new agreements with Level 3 will enable us to expand and optimize
our broadband infrastructure,” he said. “Level 3 is helping us by
supplying private lines, colocation space and Internet access that will
provide EarthLink with the building blocks we need for improving the speed,
capacity and efficiency of our broadband network.

Level 3 officials look at one key indicator of the importance of an
always-on connection, the Internet connection type heavily-promoted by
broadband providers: call hold times. As dial-up users spend more and
more time online, it’s increasingly clear the only thing holding up
broadband is a “killer app” to get users to switch to high-speed connections.

Marcio Avillez, a director in Level 3’s softswitch division, concurs,
saying the industry will see a couple more years of dial-up growth,
followed by a decline as more and more users switch to broadband.

“I think most of the forecast we see is that subscriber growth will top out
in around 2003 and they will start to decline slightly before a more
precipitous decline thereafter,” he said. “We expect dial-up to peak in
2004 and then maybe start to decline in 2005. I have to admit those
projections are largely based on broadband growth.”

Level 3 entered the industry relatively late in the game, compared to some
of the more recognized names in wholesale dial-up provisioning, though
that’s likely a fortuitous move on the carrier’s part.

Many competitive local exchange carriers (CLECs) entered the fray soon
after the passage of the Telecommunications Act of 1996, which regulated
the telecommunications industry. Companies like ICG Communications, PSINet
and UUNet (a WorldCom subsidiary) quickly built up a
fortune, providing dial-up ports to ISPs at a discount.

With the burst of the dot-com bubble, however, many of these bloated
providers fell by the wayside. ICG filed for
after years of
(though the CLEC is on the mend), while PSINet hastily divests
it spent years to acquire and integrate. Only UUNet has
escaped unscathed, and retains roughly 50 percent of the wholesale dial-up

Level 3 entered as the others were fading away, with the 1998 acquisition
of XCom, a softswitch manufacturer. Software switching is an improvement
on the hardware-based switching technologies used by many carriers today
and more economical to deploy.

With a low-cost alternative in softswitching, Level 3 was able to charge
ISPs $50/port (normally, 10 dial up modem are used per port), compared to
the competition’s $100/port, giving the carrier an immediate boost over the

Dennis Kyle, a vice president in Level 3’s softswitch division, says the
carrier can handle both dial-up and broadband services, so providers that
come to them for support in either is a good thing. The eventual decline
in narrowband service will be more than made up in broadband when ISPs like
AOL and EarthLink migrate its services on a larger scale, he said.

“The dial-up marketplace is finding a better economy than broadband right
now, and until a truly compelling broadband application comes along, dial-up will still (be popular),” Kyle said. It doesn’t scare us, because we
benefit either way.”

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