This morning, CenturyLink Inc. announced plans to purchase Level 3 Communications Inc. for $34B including the assumption of debt, a deal which will expand the telecom service provider’s fiber optic network and high-speed data services. This acquisition would also nearly double CenturyLink’s share of the colocation market from 6% of North American revenues to just over 11%. One major question that arises in the midst of CenturyLink’s efforts to divest its data center assets is, what will this new acquisition mean for the colocation businesses of both Level 3 and CenturyLink?
CenturyLink currently operates nearly 60 data centers worldwide and has been actively looking for buyers of the business for nearly a year. Last month, the company said that it was “exploring a full range of options including, but not limited to, a partnership or joint venture, a sale of all or a portion of the data centers, as well as keeping these assets as part of CenturyLink’s portfolio.” As IHS Technology has previously written, this does not necessarily mean that CenturyLink will cease offering colocation services, but it may choose to lease back the data centers in which those colocation services are provided – which is not an uncommon practice.
The question is, will (or rather, how soon will) CenturyLink Executives begin reevaluating the colocation business of Level 3? It made sense for CenturyLink to stop investing capital in its own colocation business, a segment that has seen relatively flat growth in the last year. However, Level 3’s colocation business has been performing better as of late, with second quarter Colocation and Datacenter Service revenue growing 12% over the previous quarter. Thus, deciding what to do with Level 3’s data centers with colocation space might be a tougher call. Not to be overlooked is the fact that telecom companies may find it difficult to succeed in the colocation market (a real estate-focused industry) against increasing competition from REIT giants like Equinix, Digital Realty, and CyrusOne.
A major point in favor of the two companies continuing their colocation businesses is that combined, CenturyLink and Level 3 “will have one of the most robust fiber network and high-speed data services companies in the world” according to CenturyLink CEO Glen Post. This is critically important in today’s colocation industry which is increasingly driven and impacted by the ability to interconnect networks, service providers, and enterprise customers. Though these companies may find themselves looking to outsource the actual ownership of their data centers, there is likely a lot to be gained by offering retail colocation in a leaseback scenario.
For more information please contact:
Associate Director of Data Center Infrastructure
+1 512 582 2028
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