Rich Tehrani’s Executive Suite is a monthly feature in which leading executives in the VoIP and IP Communications industry discuss their company’s latest developments with TMC (News - Alert) president Rich Tehrani, as well as providing analysis on industry news and trends.

Rich recently spoke with Level 3 Communications (News - Alert)’ Senior Vice President of Voice Service Provider Markets Myrle McNeal about the opportunities that abound in the flourishing voice services market, and specifically about how Level 3’s acquisitions will benefit the company as it seeks to capitalize on those opportunities.

Myrle McNeal

Level 3 Communications’ Senior Vice President of Voice Service Provider Markets Myrle McNeal

There is no question that VoIP adoption among both businesses and consumers continues to surge. But with all the hype surrounding VoIP offerings and the constant announcements about increasing customer figures, what many might find surprising is that, in terms of pure percentages, the number of VoIP users is still quite low. For service providers, however, that presents an ongoing opportunity, though, which many are taking advantage of.

Among the chief characteristics of a burgeoning industry is a high rate of the birth of new companies, followed by consolidation, which is what the IP Communications space is now witnessing. Level 3 Communications has, with a number of significant acquisitions in the last year and a half, including WilTel Communications and Broadwing (News - Alert) Communications, established itself among the drivers of industry consolidation.

RT: Level 3 has completed a number of large acquisitions in the last 18 months. Has the company’s direction or vision changed during that time?

MM: I’d say generally the vision has not changed. When we started the company, we stated that our goal was to build the most cost efficient network and support it with the most cost efficient operations. Our goal, in that respect, remains the same.

What has changed, perhaps, is the breadth and the capability that we can offer related to that goal. Initially, our core strengths were in IP services, and we’ve developed a great deal of strength in VoIP services. With the acquisitions, we are also a much, much stronger wholesale provider with regard to video and data service as well as metropolitan services. All that said though, the core expectation still remains the same.

RT: How have these acquisitions affected your ability to service your wholesale customers?

MM: In general, our ability to service wholesale customers is better than it has ever been, and there are a variety of reasons for that. First of all, we now have a metropolitan fiber service or lip service in 116 metro markets that serves about 6,100 on-net locations, which is important for a few reasons. As a wholesale provider, it gives us better reach to the enterprises that our wholesale customers are trying to reach, and business VoIP service providers, in particular, are very interested in that metro footprint. For other wholesale customers, it helps us in that it puts us a lot closer to traffic aggregation points, which, in the past, were primarily central offices, but now are increasingly also cable head-ends as well as wireless towers. There are a lot of different places that the traffic is coming in. The depth of the metro footprint is very helpful in that respect.

Also, our voice capability is much, much stronger than it has ever been. As a result of the consolidation of the Broadwing and Level3 networks, we can now offer a network that is on par with the reach and quality of the networks provided by the legacy inter-exchange carriers. The difference is that ours is also very, very capable of handling VoIP and SIP.

RT: As a leader in the VoIP business, where do you see the industry heading?

MM: In the part of the business where you and I tend to live, we take VoIP for granted — it’s what everyone does. But the fact is, that the whole of the telecom industry has still not embraced or fully converted toward SIP, and there are certain parts of the business where TDM is still the primary way of doing business.

The point is that we recognize that and are working very diligently to help customers who are interested in making the transition to so in a deliberate and low risk manner. In certain parts of the industry, like in the contact center space, many customers use IP-based hardware but, for all intents and purposes, are really not extensively using VoIP-capable networks. We’re pushing things along there and helping our customers understand how to implement VoIP. We are also launching capabilities that make that transition simpler. It’s easier if you can straddle the fence, which we’re capable of doing: We can support customers on either platform and make it easy for them to transition.

The other trends that we’re seeing are that the business implementation of VoIP is probably lagging behind the consumer market by a few years. If you look at when Vonage (News - Alert) and the cable companies began their announcements about launching competing voice services, they really began hitting stride probably a year or 18 months ago, perhaps even as far back as two years or further.

On the business side, though, we believe the market is considerably more fragmented. There are not dominant players, which creates a great wholesale opportunity, or for a business- or enterprise-focused VoIP provider to win substantial market share with a great value proposition. What we are finding is that our customers go to small businesses who are used to paying extraordinarily high rates for traditional services, and they are surprised at how much money they can save and how well VoIP services work and how well they meet their needs. There’s a great opportunity and good growth ahead of us in the enterprise space.

RT: What does this growth translate to, regarding your core network, and what is the specific traffic type to which you attribute the growth?

MM: We report our service revenues as core versus non-core revenues, and we expect the core revenues of the company to grow by roughly 17% this year, driven primarily by voice services. While we, obviously, are seeing a substantial uptake in the use of IP-based high bandwidth services, the revenue growth from the company, in the near term, still comes largely from the voice side of the business.

We are also well positioned in the small business space with a very active and established business partner program that helps VARs and our other providers succeed in the SMB market. So, we’re in a good position to continue to drive voice growth there as well.

RT: You’ve also acquired some fiber. How will that particular set of acquisitions help you in the competitively?

MM: The acquisitions of the fiber networks that we picked up from WilTel and Broadwing benefit us in several ways. First, it extends the reach of our network and provides us additional diversity and greater depth. As a result, we simply have just a considerably more in backbone assets allowing us to operate more efficiently. That is also the advantage of combining those networks, since it allows us to operate the three of them much more efficiently than we could separately. So, we’re driving scale and efficiency, which ultimately results in lower costs for our customers.

RT: Speaking of cost efficiency, how is Level 3 helping providers cost effectively deliver voice, video, and data over converged networks?

MM: Many people predicted there would be no more investment in telecommunications, but we continue to invest very heavily in the business. We are investing heavily in technology at the transport layer, at the IP layer, and in the voice network. I would guess that if you compare that to other companies, there are probably not many companies making the same substantial investments in their landline voice networks at this point.

We tend to invest in technology, not for technology’s sake, but because technology ties back to the original goal, which is to drive cost-efficient operations. When we see a new technology that allows us to deliver equal or better service at a lower cost, we are very aggressive about implementing that technology in our infrastructure so that we can continue driving the underlying prices and costs for services down over time. We believe that also stimulates demand and makes the business better for all of us.

RT: Can you give an example of an innovative application that Level 3 supports with its various services?

MM: There are a couple of interesting ones, but let me talk about one that probably is not particularly well known. One of our customers, who uses Level 3’s underlying VoIP capabilities — primarily our local inbound services — where we offer telephone number service and inbound local calling, works in conjunction with a wireless partner to offer a very specific wireless service offer.

Essentially, as a combination of a wireless provider and Level 3, our customer and our customer’s customer are able to offer what amounts to a national wireless offering — basically a cell phone service — targeted at senior citizens who are looking for simplicity in the way that they actually use their cell phone. So they offer a telephone that has special characteristics, like bigger buttons and easier calling plans like prepaid, as well as other services.

I don’t think most folks view Level 3 as a player in that space, but we do have an application where our unique VoIP capabilities fit very well into a specialized application that is being actively and broadly marketed on a national basis.

RT: Where do you see Level 3 in the next three to five years?

MM: I think Level 3 is going to go where we have always predicted it would go; it just hasn’t gotten there as quickly as we would have liked. We continue to see demand for bandwidth growing at a substantial rate, driven by increases in disaster recovery applications and increased video distribution. All of the things that consume bandwidth are on a substantial upward trend. I think that will drive substantial growth for us over the next two to five years.

If you layer on top of that the VoIP business, which, in our estimation and according to various research groups, is growing at a rate of 80-100% annually nationwide, there’s still substantial growth opportunity for us in the voice business as well. We are very well positioned for that as new parts of the market begin embracing VoIP, which is where some of our voice strengths lie and where we think we are uniquely qualified.

Rich Tehrani is President and Editor in Chief at TMC.

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