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TheStreet Open House

Level 3's Slip Points to the Turmoil in Telecom

A big contribution to the new wholesale price war, say analysts, is the influx of integrators such as IBM (IBM), EDS (EDS) and Accenture (ACN). These outsourcing firms bargain for the cheapest available wholesale phone rates as they cobble together complete communications plans for their business clients.

The encroachment of service integrators not only adds fuel to the price wars, it threatens to take the prized business network management duties from the big players like AT&T and MCI. As more communications services go the way of low-priced commodities, one of the remaining areas of big profits is helping companies manage their communications needs. It's no longer an exclusive club, and some investors expect the managed-services contracts to follow phone and data services down the price slope.

Down Days for Dial-Up

Level 3's problems don't end there. Most of the company's telecom revenue comes from so-called managed modem or dial-up services for big customers such as AOL (AOL). Ironically, however, broadband services such as cable modems and digital subscriber lines have spelled the end of narrowband.

Even Level 3's software business, the thin-profit cash cow that helped the company stay in good graces with its bankers' revenue covenants, has been in decline. It didn't help that Microsoft (MSFT) changed some of its licensing arrangements. The software giant now bills and collects some of its software payments through licensing programs and Level 3 is given a fee. Previously, Level 3 could book the entire sale as revenue.

Level 3 said Monday that software sales would come in about 7% below previous third-quarter guidance.

And though the company burned through $227 million of its cash supply last quarter, it still has about $915 million on hand. Level 3 says it plans to raise $500 million through sale of a senior note.

Earlier this year, to raise cash, the company sold its Orange County, Calif., toll road business for $46 million, and it recently sold the former Genuity headquarters for $20 million. Last year, Level 3 sold 90% of its stake in Commonwealth Telephone for $325 million.

With rivals slashing prices and Level 3 running out of assets to sell, the financing question will loom ever larger in coming months.

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