Will Level 3 Communications Take Market Share from Akamai?

Mar. 1.07 | About: Level 3 (LVLT)

Level3 Communications (NASDAQ:LVLT) has been selling/leasing its dark fiber to Comcast (NASDAQ:CMCSA); XO (OTC:XOHO) has built a longhaul backbone based on LVLT's fiber; Google (NASDAQ:GOOG), Yahoo (NASDAQ:YHOO) ... everyone has been known to use LVLT's backbone. I don't know if there is any other company in the world that owns as much dark fiber as Level3. When bandwidth demands become so high, Level3's huge dark fiber underground will be the most valuable asset with almost unlimited growth potential.

It is an absolutely great move for Level3's purchase of SAVVIS business and its decision to build a nationwide Content Delivery Network (CDN) backed by Level3's own ubiquitous global networks.

Regarding LVLT's valuation, one has to ask how on earth AKAM, with four hundred employees and annual sales under $500 million, could claim a $8 billion market cap. How high is the entry barrier for a company like Level3 to establish its own CDN business? The hardware - CPUs, hard disks, and memory - are all so dirt cheap that I have been repeatedly and unsuccessfully suggesting that Broadwing do exactly what LVLT is doing now. I posted more than once on SI, and listed the cost for such a CDN to show that with little investment, Broadwing - a company with a backbone and 110,000 enterprise customers - could benefit.

By some estimation, the largest server farms owned by Google - with 50% of search market share - have 450,000 servers. At $2000 each, Level 3 could build its own brand new server farms in the same scale but with much more power with a mere $900 million investment in hardware.

When bandwidth price becomes stable and rising, and when Level3 starts to eat into Akamai's lunch, is Akamai or Level3 a better investment?

Disclosure: Author holds a position in LVLT.

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