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Sinking Level 3 Seeking FCC Internet Regulation Bailout
Submitted by Scott Cleland on Wed, 2010-12-08 14:31
The extent to which Level 3's business is underwater is the untold story behind Level 3's regulatory "hail Mary" claim that its Internet peering dispute with Comcast is somehow a net neutrality violation.
- Apparently Level 3 has concluded that since it hasn't found a straight-up way to compete successfully in the Internet marketplace on its own, it wants an Internet regulation bailout from the FCC, in which the FCC would: deem Level 3 a market winner; price regulate the Internet for the first time; and force its competitors to implicitly subsidize Level 3 with mandated Internet peering price subsidies.
- (To appreciate how bogus Level 3's claims are, click here for a complete rebuttal.)
Why is Level 3 seeking a de facto Internet regulation bailout from the FCC?
First, Level 3 is a financially-sinking business with no legitimate growth prospects.
- With $6.5b in debt and $3.7b in revenues, Level 3 has long not been able to earn enough to fully pay the interest on its excessive debt.
- With its core Internet business largely flat over the last five years, Level 3 is addicted to serial debt re-financing to minimize the drain on its cash and stay afloat financially.
- Level 3 has a 98 cent stock that's down ~30% over the past year and Level 3 has among the least desirable bonds in the entire sector.
- Prices in Level 3's core Internet backbone business have been falling ~15% annually for many years.
- If Level 3 was a swimmer, they would be underwater slowly sinking, and breathing through a snorkel.
Second, Level 3 apparently has looked around the economy and seen how other heavily-indebted entities have negotiated effective bailouts from the government (in monetary investments and/or in regulatory favors): i.e. GM, the biggest banks, Fannie Mae, Freddie Mac, Sallie Mae, etc.
- Apparently, Level 3 imagined a political opportunity to finagle regulatory subsidies for itself by taking advantage of others' regulatory vulnerability: i.e that Comcast has a merger pending approval at the FCC, and that the broadband industry faces new FCC Internet regulation.
- By using politically-loaded rhetoric that Comcast is demanding an Internet "toll" and "discriminating" against Netflix, a "cable competitor," Level 3 has done everything to politically inflame and little to responsibly inform.
Third, Level 3 has a failed growth strategy via CLEC acquisitions.
- Since fierce competition in the Internet backbone space has prices falling roughly 15% a year, Level 3 has sought to grow its revenues by diversifying its business by using even more debt to buy CLEC local communications businesses.
- Apparently those acquired CLEC holdings, which often operate under telecom interconnection agreements, are agitating for Level 3 to try and transform the unregulated Internet business into a price regulated telecom business using Title II Internet regulation thinking.
- It seems that some of those old CLEC hands also want to try a redo of past FCC regulation of the local telecom business using Title II thinking where the FCC would intervene and effectively subsidize their business using larger competitors' margins.
- Fortunately there are still many on the FCC staff who remember the carnage caused the last time the FCC imagined it could be master of the communications investment universe.
- Last time, fiber optic backbone companies like Level 3, WorldCom, Global Crossing, etc. lost a trillion dollars in market value and virtually all of the dozens of CLECs went bankrupt because they were based on regulatory-dependent, uneconomic business models.
In sum, we have seen this movie before --when the FCC tried to pick winners and manage the marketplace -- and it was an epic disaster.
- The FCC should see the Level 3 claim that Comcast is somehow violating FCC Open Internet rules that no one in industry has ever seen, as a desperate attempt, by a financially desperate company, to change the longstanding rules and economics of the Internet marketplace, in order to bailout a failing business that negotiated a bad contract with Netflix, executed a bad growth strategy poorly, and is now trying to manipulate the regulatory process for its benefit alone.