With expenditures of $3.5 billion this year and $2.5 billion in 2001, Level 3 plans to build a new high-speed undersea network connection between Hong Kong and Tokyo, Japan, by the second quarter of 2001. Discussions for a shared-cost partnership agreement with other carriers are ongoing, according to Level 3.
Level 3's vast network expansion marks the latest salvo in an escalating race between the new fiber-optic network builders. Even as companies such as Level 3, Qwest Communications International and Global Crossing scramble to finish building their state-of-the-art networks in North America, the companies are looking for new sources of revenue in overseas markets, managed hosting and outsourced services, and other new businesses.
Level 3 said it expects telecommunications revenue to reach $750 million in 2000 and $1.7 billion in 2001 as a result of the expansion.
The company said it plans to significantly increase its number of data centers in which the company houses its customers' network equipment. Level 3, which operates 27 data facilities in the United States and Europe, will immediately add locations in New York, London and Silicon Valley.
Despite the company's big plans, Level 3 still trails Qwest, which completed its network last year, and Global Crossing, which is building several trans-oceanic international network connections and has a significant hosting presence. The competitive nature of the industry, coupled with falling profits in the market for voice and data delivery, have prompted many analysts to question the long-term viability of many of the new players.
Similar to earlier concerns about the installation of too much fiber-optic capacity, some analysts believe a glut of hosting and co-location space will lead to a tough fight for profits.
"I have some (concern) as to whether there will be demand to fill all this space and real estate they're building," said Courtney Munroe, program manager for business network services at International Data Corp., a market research firm.
"There's always the question of whether you're overestimating customers' demands or underestimating capacity. Either one will kill you," said Insight Research president Robert Rosenberg.
Level 3 is not alone in its quest to quickly build hosting, or co-location, centers. According to analysts, AT&T plans to operate between 17 and 26 data centers by the end of the year while PSINet expects to have 20 centers, up from five now, by year-end. Qwest Communications International, UUNet and Intel all expect to double their hosting square footage in 2000.
Additionally, Nextlink's recent acquisition of Concentric Network was based in part on its need for hosting space.
"The question is in the next year or two, as all of these centers come online, who is going to be strong enough to be competitive," Munroe said. "Right now we're still on the upswing, but will it be sustainable in a year or two?"
Level 3 also said it expects to complete construction on both its U.S. and European networks on time, if not ahead of schedule. The company now plans to complete its domestic network by the end of the year, one quarter earlier than expected, and said its European network construction remains ahead of schedule.
More than 9,300 miles of the planned 16,000-mile U.S. network have been completed with 2,100 miles of Level 3's 4,750-mile European network completed.
Insight Research's Rosenberg said Level 3's Hong Kong-Toyko undersea network proposal is a good one because international markets, which have seen annual service revenue growth rates of 15 to 20 percent, continue to remain up for grabs. The market for serving mid-sized international companies is wide open, he said.