SAN FRANCISCO -- Level 3's (LVLT) CEO James Crowe has a story and he's sticking to it: Long distance communications capacity might be a commodity, but our commodity is better than anyone else's.

At a presentation during the

Robertson Stephens 2001 Technology Conference

here Monday, Crowe likened Level 3's nearly global fiber-optic network to a computer processor that doubles its capacity and efficiency rate every year.

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But this is the

same message Crowe has been delivering for years, and some observers are calling his bluff, pointing to a freefall in prices for bandwidth trading on the spot commodity markets.

Level 3's success relies heavily on its ability to compete and bring in revenue in a market in which it, and probably a couple other mega-networks such as

Qwest

(Q)

and

Williams

(WCG) - Get Report

, helped dramatically push down prices.

Capacity

Level 3 has raised $14 billion and spent three years building one of the nation's largest fiber-optic networks. The sheer capacity of the company's network has placed an enormous competitive pressure on long distance pricing -- witness

AT&T

(T) - Get Report

and

WorldCom's

(WCOM)

efforts to staunch the rapidly declining revenue from their core businesses.

Despite Level 3's claims that it's "prefunded," the company has had to cut back on network expansion in Europe and Northern Asia to conserve cash. The company also surprised some investors last month by filing to raise an additional $3 billion in cash.

A shelf registration was filed with the

Securities and Exchange Commission

to give the company the option to issue stock or debt should it be necessary to fund operations and network expansion. In an interview after his presentation, Crowe said the money could be used for "incremental additions" to the business but downplayed the prospect of using it for current operations or expansions.

Level 3 said it expects to bring in $1.7 billion in revenue this year and $2.9 billion in 2002. Earlier this month, Level 3 lowered its earnings guidance, saying its net losses in 2001 will increase to $7.50 a share from $4.01 in 2000, and a full dollar more than the $6.49 a share analysts had expected.

Rising Margins

Despite the greater distance from profitability, Crowe said gross profit margins this year will improve to 50% from the 25% level last year. Gross margin is the percentage difference between money spent and the money taken in.

Some question whether even the best run networks can successfully compete in a market of rapidly plummeting prices.

One indicator of bandwidth pricing is the third-party commodity market where excess network capacity is sold like cotton or sugar futures. Susan Kalla, of

BlueStone Capital

, has been tracking pricing in this spot market and has found that per-mile costs have dropped through the floor in the past two months.

In December for example, bandwidth, the price of capacity between two cities, was selling for 0.94 of 1 cent. As of last week, that per mile cost dropped to 0.45 of 1 cent.

The concern here is that the rapid fall in year-long contract values, which Kalla said represent about 15% of total bandwidth revenue, serve to undercut long-term pricing. Typical capacity contracts are 10 to 20 years in length.

Low Costs?

But Crowe has been advancing the notion that Level 3's overhead costs are low enough to provide the lowest pricing in the industry. Yet last week, WorldCom on its earnings conference call soundly refuted that premise by saying the equipment and the fiber used in the most recent versions of today's networks were nearly identical and therefore transmission costs are the same.

And all the debate about transmission costs actually ignores the truly inflexible cost of local access. Level 3 and others can very cheaply send lightwaves through the long haul or core of the network, but each call has to start and end in a local network. Local networks are typically owned by the Baby Bells, and the cost getting the local company in on the call is about one half the cost of the entire call.

In other words, Crowe's high-stepping bandwidth revolution comes to a crawl at the local level.

"If you can't control the two ends of the network, then the prices for their overall service is still going to be high," said BlueStone's Kalla. (Kalla has no rating on Level 3. BlueStone has done no underwriting for Level 3.)

"That's the thing about Level 3," Kalla added. "They can deliver you a freight car of grain, but people just want sandwiches."

Winning the Race

Crowe said someone's got to win the bandwidth race and that Level 3 has an edge. "We have a head start, that's all you can ask for in the technology business," said Crowe in a breakout session after his presentation Monday.

To be sure, Level 3 and particularly Crowe, can still elicit "justifiable exuberance" in some investors who still believe.

"He hasn't changed his script," said one attendee after the presentation. "And I still like the story."

Yet it seems the rest of the market is still a little mixed about it. Level 3 shares have been up more than 1% in morning trading, but recently were off about 2%.