Level 3's IP Services Pricing Positive for Internap (LVLT, IIP)

We had a chance to quickly read through Level 3 Communications' (LVLT) 10-K this weekend. Below are some quotes from the 10-K, which we think are positive for Internap Network Services Corporation (IIP).

It appears as if IP services pricing is rising as excess bandwith has been reduced dramatically in the last few years and at the same time demand for bandwith is increasing exponentially as new uses of the Internet emerge (e.g. VOIP, Video etc.). Our feeling is that this could be the start of multi-year double-digit revenue increases for IP services businesses, following many years of unremitting pricing pressure. If that proves to be the case, clearly the stocks in this industry can move alot higher from current levels. We're not sure these companies, like Internap, have ever really operated (other than in the brief bubble years) in an environment where supply/demand favored their business. It should be interesting to watch this play out.

Below are the relevant quotes from Level 3's 10K:

The conversion from narrow band dial-up services to higher speed broadband services is expected to increase demand for the Company's IP and data services. Revenue growth in this area is dependent on the continued increase in usage by both enterprises and consumers and the pricing environment. An increase in the reliability and security of information transmitted over the Internet and declines in the cost to transmit data have resulted in increased utilization of e-commerce or web based services by businesses. The Company, however, continues to experience lower revenue growth due to price compression for its IP and data services. These declines were partially offset by an approximate 90% increase in IP and Data traffic for 2005. Current high levels of available capacity and the numerous companies competing in this market have resulted in a very competitive pricing environment.

The Company experienced price compression in the 25% to 45% range for transport and IP services in 2004. Level 3 believes that industry-wide, excess network inventory has been significantly reduced and pricing pressures are beginning to moderate as evidenced by the Company's improved pricing and increased traffic volume. For its IP services, the Company's average price per megabyte declined approximately 30% in 2005. In addition to pricing pressures, the decline in the Company's average price per megabyte is attributable to higher traffic from larger customers and customers moving to higher speed services with a lower price per megabyte. The larger customers have a lower price per megabyte due to higher volume commitments.

The Company also continued to see pricing pressure in 2005 for those transport and infrastructure customers that require simple, low quality, point-to-point services, as competitors aggressively pursued this business. However, Level 3 believes that competitors are less willing to discount these services if it requires investment in incremental capacity to meet the customer's requirements. For those customers that provide high quality content or require a combination of transport, IP and voices solutions on a regional or national platform, Level 3 is seeing some indications that price compression is starting to moderate and, in many cases, prices are starting to increase as confirmed by research performed by industry analysts. Independent industry reports indicate that wholesale pricing of long-haul wavelength and private line services have been stable in North America over the last 12 months and, in some cases, have started to rise again. Level 3 intends to remain disciplined in its approach to pricing for its transport and IP services.