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Level 3's Slip Points to the Turmoil in Telecom

The bug that laid low Level 3 (LVLT) on Monday is about to take a bite out of the rest of the telecom industry.

After a brief period of stability, wholesale phone capacity prices once again appear to be in free fall. Here's why: A stampede into what was one of telecom's few remaining high-margin businesses has reignited a damaging price war.

It wasn't supposed to be like this. After a three-year plunge in business communications spending resulted in a raft of bankruptcy filings, the industry was finally beginning to breathe easier, its bloodiest battles behind it.

But Level 3's warning on Monday indicates that the plunge continues -- an observation that has some investors worrying again about the creaky foundations beneath the telecom business. On Monday, Level 3 slipped 2 cents, to $4.76.

Disaster Calls

Blaming a weak industry, the Broomfield, Colo., telco cut third-quarter sales projections by 5% Monday while slashing its network spending budget by 14% to $60 million. Level 3 executives didn't need to wait eight more days to confirm what some observers say has been a disastrous quarter in the wholesale phone market.

With its adaptive business plan (most of its revenue now comes from software sales), its seemingly inexhaustible sources of financing, and its vast and technologically advanced network, Level 3 should have risen victoriously from the phone market plunge.

But Level 3's big problem is coming on two fronts: Wholesale rivals are back from the brink, and so-called service integrators have entered its turf. It seems some failed foes have returned with a vengeance: Restructured outfits such as WilTel (WTEL) and ICG have emerged from bankruptcy, wielding a sharp knife on capacity prices. Not to be outdone, AT&T (T), Qwest (Q) and Sprint (FON) have been willing to take lower terms to keep customers.

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