Transcript The Information Technology Marketplace

Kevin J. O'Hara, President & COO
Level 3 Communications
1

2004 Level 3 Communications, Inc. All Rights Reserved.
The Information Technology Marketplace
Cost Index
1980=1 Billion
1,000,000,000
Communications
100,000,000
10,000,000
1,000,000
100,000
Computing
10,000
1000
Information
Storage
100
10
1
0
1980
1990
2000
2010
2020
 Computing and information
storage have improved
exponentially
 Until recently communications
has improved very slowly
 Central planning of key
communications technologies
has stifled innovation
 The advent of market based
technical development has
changed communications from a
utility to a technology business
– IP technology
– Optical technology
2
Level (3) Communications 1999
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2004 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

2004 Level 3 Communications, Inc. All Rights Reserved.
Level 3’s Plan
 Construct upgradeable long haul and metro networks
 Develop industry-leading operational and product capability
 Introduce new technology and lower unit prices at rate which
maximizes IRR
 Seek to achieve substantial market share in horizontal market
segments
 Prefund expected cash requirements to free cash flow breakeven
with appropriate cushion
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Level (3) Communications 1999

2004 Level 3 Communications, Inc. All Rights Reserved.
Softswitch Services
 Addresses $700 billion voice
market with IP economics
 Softswitch architecture enables
rapid, long term cost and price
reductions
Graphic
 Services include
 (3)ConnectSM Modem
 (3)VoiceSM
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Level (3) Communications 1999

2004 Level 3 Communications, Inc. All Rights Reserved.
(3)Connect
SM
Modem Illustrates The Advantages Of The
Level 3 Softswitch Network
100%
WorldCom
90%
80%
Genuity
70%
%
Market
Share
Sprint
60%
ICG
AT&T
50%
Other
40%
30%
Level 3
20%
10%
0%
1998
1999
2000
2001
2002
2003
2004
2005
Source: Level 3 Estimates
Level (3) Communications 2001
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2004 Level 3 Communications, Inc. All Rights Reserved.
6
Impact Of Disruptive Technology/Economics Is Greater
Than Anticipated
100%
90%
MCI
80%
AT&T
70%
%
Market
Share
Qwest
60%
Other
50%
Sprint
40%
ICG
30%
Genuity
20%
10%
Level 3
0%
1998
1999
2000
2001
2002
2003
2004
Source: Level 3 Estimates

2004 Level 3 Communications, Inc. All Rights Reserved.
7
VOIP is Gaining Traction Due to
Shifts in Market Forces
Traditional Market
Structure
VoIP Drivers
 Broadband adoption
 Local voice
 Improvements in
services dominated
by RBOCs, due to
“last mile”
technology
 Lower cost
 New features
 Voice as digital
media, separate
from the network
 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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2004 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
27.5%
30
25
9
DSL
20
15
9.5%
Cable
10
DSL
3
18.5
5
Cable
0
2001
2002
2003
2004E
6.5
2001
2004E
Sources: J.P. Morgan; UBS; Morgan Stanley; Leichtman; Gartner; Citigroup; Sanford Bernstein; FCC; Company SEC filings

2004 Level 3 Communications, Inc. All Rights Reserved.
9
Additional Access Options
Absent alternative access methodologies incumbent
access providers use bottleneck facilities as a governor
on new service introduction
But…
 Consumer broadband penetration approaching 30%
 Approximate 70% non-DSL
 WiMAX and BPL represent additional challenges
to traditional structure
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2004 Level 3 Communications, Inc. All Rights Reserved.
Consumer VoIP Opportunity
 Consumers benefit from cost savings and enhanced features
 Cable Operators are pursuing VoIP as part of a triple play
 Enhanced Service Providers are providing voice “over-thetop” of existing broadband connections
 Vonage and Skype
 IXCs
 ISPs
 RBOCs are deploying VoIP services as a defensive measure
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2004 Level 3 Communications, Inc. All Rights Reserved.
Enterprise VoIP Opportunity
 Enterprises have historically maintained separate voice
and data networks
 VoIP is enabling enterprises to converge these
networks
 Enterprises can save up to 40% with VoIP services
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2004 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)
Millions
Of
Subscribers
18
16
14
12
10
8
6
4
2
0
Frost & Sullivan:
12/03
Yankee
Group:4/04
Gartner: 6/04
2004
2005
2006
2007
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2004 Level 3 Communications, Inc. All Rights Reserved.
What Will It Take To Win In the New Industry Model?
Emerging Horizontal
Industry Structure
# Winning
Players
Attributes of Winners
■ 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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2004 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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
2004 Level 3 Communications, Inc. All Rights Reserved.