Level 3 Acquires Savvis CDN Network

Level 3 Communications, Inc. (LVLT) will acquire the content delivery network (CDN) services business of Savvis, Inc. (SVVS) for $135 million, the two companies announced today. The deal includes network assets, customer contracts, and intellectual property used in Savvis' CDN business.

The move makes Level 3 a more serious player in the content distribution business. Level 3's ambitions in this space have been widely discussed in the past week after the Wall Street Journal's Heard on the Street column (subscription) examined how the growth of Internet video has lifted Level 3' shares and bonds. Longtime Level 3 watcher Om Malik was still skeptical about whether online video can transform Level 3 and other Bubble 1.0 survivors into Web 2.0 winners. Andrew Schmitt at Nyquist Capital noted that a CDN provider like Akamai and a bandwidth carrier like Level 3 couldn't both benefit equally from Internet video. With today's announcement of the Savvis deal, Level 3 now owns an established content distribution network and can offer an intergrated solution including both bandwidth and distributed content caching.

The Savvis CDN services business was initially developed by Sandpiper Networks, and subsequently owned by Digital Island and Cable & Wireless before Savvis acquired it. The business is based in Thousand Oaks, Calif. with 50 employees and over 100 customers, and has infrastructure in more than 20 countries.

"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. "We are looking forward to welcoming the pioneers of CDN to our team."

"The largest customers of CDN services rely on a combination of capabilities to support their businesses," O"Hara added. "These include services like CDN, IP transit, wavelengths, metro transport, and colocation. Upon completion of this transaction, Level 3 believes that it will be the only CDN services provider with a single source, full portfolio of end-to-end content distribution solutions, and will be in a unique position to offer a range of building blocks to meet these customers' needs."

"SAVVIS continues to hone its strategy of delivering IT infrastructure as a service, and our customers are responding favorably," said Phil Koen, SAVVIS' Chief Executive Officer. "We are selling our CDN services business with confidence that those customers will be best served by Level 3's commitment and focus as they integrate CDN as a strategic piece of their business portfolio."

Level 3's announcement specifically addressed potential concerns about integrating the CDN business with its existing network. "This acquisition does not require the type of physical integration associated with the metro and backbone transactions we announced earlier this year," O'Hara said. "We are confident in our ability to incorporate this key capability into our portfolio."

Savvis' CDN business had approximately $15 million in revenue for the nine months ending September 30, 2006, with some of the largest enterprises among its customers, including Microsoft.

"As we grow our online services business, stability and control over our network infrastructure becomes increasingly important to deliver great experiences for our customers, partners and advertisers," said Arne Josefsberg, general manager of Global Foundation Services at Microsoft. "We look forward to a continued relationship with Level 3 as they embark upon this next phase of their network evolution."