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. 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.
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.
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.