Transcript Industry At The Bottom?

Industry At The Bottom?
Kevin O’Hara
President & COO Level 3 Communications
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
2005 Level 3 Communications, Inc. All Rights Reserved.
The Shift From Utility to Technology Model Has
Significant Implications For The
Communications Industry
 Rapid technical change has significant implications for the
relationship between supply and demand
 New network designs are required to deploy the right
combination of rapidly changing network components
 Rapid technical change has significant implications for the
structure of the communication industry
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Level (3) Communications 1999

2005 Level 3 Communications, Inc. All Rights Reserved.
Broadband Growth in the U.S.
Growth in Cable and DSL Households
Cable and DSL Penetration
U.S. households, Million
Percent of total U.S. households
40%
50
40
17
DSL
30
18%
20
6
Cable
10
DSL
Cable
0
2002
2003
2004
2005E
23
12
2001
2005E
Sources: Deutsche Bank “US Telecom Data Book 1Q05”
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2005 Level 3 Communications, Inc. All Rights Reserved.
VOIP is Gaining Traction Due to
Shifts in Market Forces
Traditional Market
Structure
VoIP Drivers
 Broadband adoption
 Improvements in
technology
 Lower cost
 New features
 Voice as digital
media, separate
from the network
 Local voice
services
dominated by
RBOCs, due to
“last mile”
 Long distance
market dominated
by IXCs and
RBOCs
VoIP Opportunity
 Opportunity for
alternative
providers to
compete with
RBOCs and IXCs
for voice services
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2005 Level 3 Communications, Inc. All Rights Reserved.
Market Size Estimates for VoIP Services
are Accelerating
(And may be under-estimated)
Consumer VoIP Subscribers (in millions)
18
16
14
Frost & Sullivan:
12/03
Yankee
Group:4/04
Gartner: 6/04
12
10
8
6
4
2
0
2004
2005
2006
2007
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2005 Level 3 Communications, Inc. All Rights Reserved.
What
Will It Take# To
Win In the
New Industry Model?
Emerging Horizontal
Winning
Attributes of Winners
Industry Structure
Players
■ Many
 Best brand, content and end-user experience
 Services tailored to varied customer needs and
channel preferences
 A few players are likely to dominate in each
application (similar to non-network-based software)
■ Few
 Large scale to cover high fixed capital and operating costs
 A number will exist in each market given varied customer
preference for price points and capabilities (eg. bandwidth,
QoS, mobility)
■ Few
 High fixed capital & operating costs lead to few, large scale
networks
 High traffic growth favors those with low cost, scalable
networks and the financial flexibility to invest
 Growth in Applications favors backbone players with the
network intelligence to distinguish between classes and
quality of service.
Applications
Access Networks
Backbone Networks
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2005 Level 3 Communications, Inc. All Rights Reserved.
Summary
 Voice as digital media, separable from the network, is a
critical industry phenomenon
 Cash Flow impact to incumbents will cause structural
change
 Individual winners and losers are hard to predict
but…
attributes for success in the future will be different
from yesterday
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2005 Level 3 Communications, Inc. All Rights Reserved.
Top 5 Trends of Past Year
1. Consolidation




AT&T – SBC
MCI – Verizon
Sprint – Nextel
eBay – Skype
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2005 Level 3 Communications, Inc. All Rights Reserved.
Top 5 Trends of Past Year
1. Consolidation
2. Accelerating VoIP Activity
 MSOs: Comcast, Time Warner, Cox,
Charter, Cablevision
 ISPs: AOL, EarthLink
 Carriers: Verizon, Qwest, SBC, AT&T
 ESPs: Skype, Vonage, 8x8, Primus
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2005 Level 3 Communications, Inc. All Rights Reserved.
Top 5 Trends of Past Year
1. Consolidation
2. Accelerating VoIP Activity
3. VoIP as A Primary Line Replacement
 e-911
 Security
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2005 Level 3 Communications, Inc. All Rights Reserved.
Top 5 Trends of Past Year
1. Consolidation
2. Accelerating VoIP Activity
3. VoIP as A Primary Line Replacement
4. Pricing Improvement
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2005 Level 3 Communications, Inc. All Rights Reserved.
Top 5 Trends of Past Year
1. Consolidation
2. Accelerating VoIP Activity
3. VoIP as A Primary Line Replacement
4. Pricing Improvement
5. Continued Traffic Growth
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2005 Level 3 Communications, Inc. All Rights Reserved.
The Growth Of Broadband and Applications
Are Driving Significant Traffic Growth
Level 3 IP Backbone Traffic (Gigabits)
400
300
200
100
0
1998
1999
2000
2001
2002
2003
2004
2005
2005
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2005 Level 3 Communications, Inc. All Rights Reserved.
Top 5 Things To Watch
1. Spot Capacity Constraints
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2005 Level 3 Communications, Inc. All Rights Reserved.
Rapid Traffic Growth Is Likely To Continue
Actual and Potential Future
Level 3 IP Backbone Traffic (Gigs)
6,000
150% CAGR
4,000
2,000
0
1998
70% CAGR
2000
2002
2004
2006
2008
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2005 Level 3 Communications, Inc. All Rights Reserved.
Top 5 Things To Watch
1. Spot Capacity Constraints
2. Further Consolidation
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2005 Level 3 Communications, Inc. All Rights Reserved.
Top 5 Things To Watch
1. Spot Capacity Constraints
2. Further Consolidation
3. Acceleration of VoIP Penetration
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2005 Level 3 Communications, Inc. All Rights Reserved.
Top 5 Things To Watch
1. Spot Capacity Constraints
2. Further Consolidation
3. Acceleration of VoIP Penetration
4. More “Free” Services
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2005 Level 3 Communications, Inc. All Rights Reserved.
Top 5 Things To Watch
1. Spot Capacity Constraints
2. Further Consolidation
3. Acceleration of VoIP Penetration
4. More “Free” Services
5. Regulatory Changes
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2005 Level 3 Communications, Inc. All Rights Reserved.