Level3 Buys Savvis CDN Business

As we had reported almost two months ago, Savvis had put its content delivery network business for sale. Today Level 3 confirmed that it has bought the business for $135 million in cash. Level 3 says they have bought the business because of the emerging video opportunities. For the first nine months of 2006, the CDN business brought in about $15 million in revenues. It is not clear if that business was turning a profit or not.

“The acquisition of SAVVIS’s CDN services business will enable Level 3 to better address the increasing opportunity presented by rich media applications such as video, Web 2.0 applications, multiplayer online gaming and software as a service over the Internet,” said Kevin O’Hara, president and chief operating officer of Level 3 in a press statement.

In his statement, O’Hara points to the fact that Level 3 owns Vyyx video distribution business, which came as part of the WilTel acquisition. They hope to scale the business in tandem with this CDN purchase. However, Vyvx business accounts for minuscule percentage of total sales and has been pretty flat. On another note, our sources say that Savvis CDN business had one major customer – Microsoft – and a substantial portion of their sales came from Redmond.

Given all the intellectual property that comes with this buy, Level 3 has a good chance of becoming a counterweight to Akamai, which has developed a near monopoly when it comes to content delivery networks. On the flip side, by expanding into the ultra-fashionable CDN business, Level 3 is making a big push into the services business, where it hasn’t traditionally been a powerhouse. Level 3 clearly has its work cut out as it seeks to expand into the Video 2.0 market. Level 3 had made a strong foray into VoIP last year, spending millions though it is not clear how that business has panned out.

Unlike other long haul carriers, Level 3 never filed for bankruptcy, and worked its way through the telecom bust. They continue to be saddled with debt. Their big challenge is to find new sources of revenue to replace the loss of SBC business. (SBC was one of the big customers of WilTel, but now it owns AT&T and doesn’t need WilTel services.) We are planning to talk with the senior management in the New Year, and hopefully will get a clarity on where Level 3 is headed.

Meanwhile, this morning Level 3 shares are trading lower.