Level 3 not seen in Google cards
Analyst says search giant doesn't need fiber-optic network
Jeff Smith, Rocky Mountain News
Published October 11, 2006 at midnight
A Denver telecommunications analyst on Tuesday shot down speculation that Google may try to buy Broomfield fiber-optic network operator Level 3 Communications.
"Level 3 and Google, huh? I think it's ridiculous," said Donna Jaegers, an analyst at Janco Partners in Greenwood Village. "Ever hear of the old phrase, 'Why buy the cow when you can get the milk for free?' "
Jaegers was referring to the fact that Google can buy communications capacity at favorable prices from existing carriers without spending billions of dollars to buy and operate its own backbone.
Speculation about a possible Google-Level 3 alliance has been around for more than a year, and it reignited Monday as Google agreed to buy YouTube for $1.65 billion to get a firm foothold in the Internet video business.
Adding grist to the rumor mill, Level 3 recently won a contract to provide high-speed network services to YouTube.
Sparking the speculation was a note by a little-known independent research firm called Ant & Sons. "Could Level 3 be Google's next acquisition target?" asked Thomas Catino of Ant & Sons. He wrote that "some investors" believe Level 3 "could be a perfect technology fit for Google."
Catino couldn't be reached for additional comment.
Level 3 stock wasn't behaving Tuesday as if investors thought a deal with Google was in the works. Shares closed at $5.20, down 7 cents on slightly above average trading volume.
Level 3 spokesman Chris Hardman and Google spokesman Jon Murchinson both said the companies don't comment on rumors and speculation.
Google has billions of dollars of cash and was reported in early 2005 to be considering plans to build its own fiber-optic network.
Industry trade publication CNet reported then that Google was advertising for a strategic negotiator of dark-fiber contracts. Jaegers said she heard around the fall of 2005 that Google had bought $200 million worth of dark fiber from Level 3.
Dark fiber is fiber-optic cable already in the ground but not lit with the electronics necessary to make it operational as a communications network.
Level 3 is known to be providing communications services to Google, but it won't comment on what those are. Murchinson said he couldn't comment on specific dark-fiber purchases but said Google uses fiber to interconnect its data centers.
In June, the industry trade publication Light Reading reported that Google was rethinking its strategy to build its own fiber backbone and was deciding instead to lease capacity from existing carriers.
Jaegers said she thinks Google most likely will continue buying communications services from existing carriers or gradually add electronics to its dark fiber rather than buy another fiber-optic network like Level 3. Jaegers noted that prices for long-haul communications capacity are still declining some, making such purchases favorable for a buyer.
Experts also say it's one thing for Google to buy a YouTube, with 67 employees, but another thing to buy and operate a Level 3, which has 5,000 employees and $6.5 billion in debt.
If Google does decide to buy a fiber-optic backbone, Jaegers said she thinks other networks such as Broadwing and XO Communications make more economic sense.
"Broadwing would be a lot cheaper," Jaegers said. "They don't have $6 billion in debt. They have a brand new network, a clean balance sheet."
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