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Sinking Level 3 Seeking FCC Internet Regulation Bailout

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.