UPDATE: Level 3's Acquisition Of Savvis Will Boost Microsoft's Web Infrastructure

Level 3 Communications' planned acquisition of Savvis' content-delivery network will position Level 3 to cash in on Microsoft's growing Internet search and video business.

While Savvis' content-delivery network unit serves some 100 customers, Microsoft is thought to be the largest customer and the customer with the best potential for growth.

"This is a pretty shrewd move on the part of Level 3," says Stephen Arnold, managing director of IT consulting firm Arnold IT. "Level 3 will participate in the Microsoft money flow. Anyone delivering video has to use services like these."

Arnold notes that Savvis, Akamai, and Hewlett-Packard currently are major providers for Microsoft's Internet infrastructure. "This places Level 3 close to the heart of the new Microsoft," he adds.

Citing the importance of its relationship with Level 3, Microsoft's Arne Josefsberg says: "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." Josefsberg is general manager of global foundation services at Microsoft.

Level 3 already operates one of the world's largest Internet backbones through its fiber- optic network.

Announced Tuesday, the $135 million acquisition -- expected to be completed in the middle of the first quarter of 2007 -- includes network components, customer contracts, and intellectual property. The Savvis content-delivery network, or CDN, operation recorded sales of $15 million for the nine months ending Sept. 30.

"The acquisition of Savvis' 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," Kevin O'Hara, president and chief operating officer of Level 3, said in a statement.

O'Hara noted that Level 3 already has a strong presence in online video distribution though its Vyvx operation. "With native CDN capabilities and with Level 3's highly scalable, industry-leading IP backbone," he said, "we believe that Level 3 will be able to bring additional value to all video-centric companies."

Noting that other services delivered by Savvis' CDN unit include IP transit, wavelengths, metro transport, and collocation, O'Hara said Level 3 will offer a portfolio of end-to-end content-distribution solutions.

Level 3 already has an arm's-length financial relationship with Microsoft. Warren Buffett, a close friend and investment partner of Microsoft chairman Bill Gates, is a major Level 3 investor.

Also on Tuesday, Savvis said it plans to spend $200 million to develop four new data centers for its managed hosting and collocation services. The centers will be located in Atlanta, New York, Washington, D.C., and Santa Clara, Calif.