Why did AT&T; owe Level 3 (Wiltel, Broadwing) $57 million in Q1 2008?

Even AT&T isn't immune from getting stuck in a bad telecom contract and paying for services they aren't using. As you may know AT&T merged with SBC in June 2005. Prior to the merger SBC was prohibited from using their network to provide long distance service and hence had contracted with Wiltel to provide LD service to their customers. However after the merger it was clear SBC/AT&T intended to move the traffic off of Wiltel and on to the AT&T LD network. However they were contractually obligated to pay Wiltel whether they moved the traffic or not. In fact in Q1 AT&T paid Level 3 (now owner of Wiltel) $57 million.

Now if you were a SBC attorney negotiating the Wiltel LD contract wouldn't the possibility of merging with another telecom company, particularly one with a LD network cross your mind prior to signing a long term deal with Wiltel, then a small player and most likely willing to do anything to earn your business i.e. sign a shorter contract

It's not huge commitment and AT&T probably saves money now that the traffic is on their network rather than being resold by Wiltel but the point is when buying carrier services like voice (local, LD, Cell phones), data (MPLS, VoIP, PtP), and Internet (T-1, DS-3, OC-X, Ethernet) companies need to take extra care and evaluate the benefit of a long term contract versus the potential long term liability should the business change owners, have a slowdown, or need to change technologies (i.e. migrate from frame to MPLS).

Many companies have closed offices and laid off workers the past 12 months. How many employee cell phones, office phone lines, data connections, maintenance contracts are not being used but still being paid for month after month because the company is contractually obligated? A lot. How many companies could have avoided paying for services they aren't using? A lot. How? Using a company like Vocio that specializes in negotiating with carriers to provide long term contract pricing on shorter term contracts with "out" clauses.

If AT&T could end up with an unexpected liability 3 years after a merger it could happen to anyone.

Level 3 Q1 Report 

SBC Contract Services
SBC Contract Services revenue was $57 million in the first quarter 2008, a 31 percent decline compared to the year earlier quarter revenue of $83 million. Fourth quarter 2007 SBC Contract Services revenue was $73 million, which included a $16 million quality of service bonus, the last such bonus for which the company was eligible.

As previously disclosed, SBC announced its intention to migrate the services provided under the agreement to its own network facilities in accordance with terms previously negotiated by WilTel Communications, LLC (WilTel), a company subsequently acquired by Level 3. Under the terms of this agreement, SBC agreed to pay WilTel a minimum amount of gross margin regardless of the actual revenue generated under the contract. Accordingly, while the company expects future SBC Contract Services revenue will be difficult to predict, the gross margin contribution over time is fixed.

As of the end of the first quarter, there was approximately $15 million of gross margin commitment remaining on the contract. The company expects the gross margin commitment to be met in the second quarter 2008 and will evaluate the approach to external revenue reporting under this agreement going forward once the commitment is satisfied.