1 2005 Level 3 Communications, Inc. All Rights Reserved. Industry At The Bottom? Kevin O’Hara...

1 2005 Level 3 Communications, Inc. All Rights Reserved.

Industry At The Bottom?

Kevin O’Hara

President & COO Level 3 Communications


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

Level (3) Communications 1999


Broadband Growth in the U.S.

0

10

20

30

40

50

2002 2003 2004 2005E

Sources: Deutsche Bank “US Telecom Data Book 1Q05”

Growth in Cable and DSL HouseholdsU.S. households, Million

Cable and DSL PenetrationPercent of total U.S. households

12

236

17

2001 2005E

18%

40%

Cable

DSLCable

DSL


VOIP is Gaining Traction Due to Shifts in Market Forces

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

Opportunity for alternative providers to compete with RBOCs and IXCs for voice services

Traditional Market Structure

VoIP Drivers VoIP Opportunity


0

2

4

6

8

10

12

14

16

18

2004 2005 2006 2007

Consumer VoIP Subscribers (in millions)

Frost & Sullivan:12/03

YankeeGroup:4/04

Gartner: 6/04

Market Size Estimates for VoIP Services are Accelerating

(And may be under-estimated)


What Will It Take To Win In the New Industry Model?

Applications

Access Networks

Backbone Networks

Emerging Horizontal Industry Structure

# WinningPlayers

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.


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


Top 5 Trends of Past Year

1. Consolidation AT&T – SBC MCI – Verizon Sprint – Nextel eBay – Skype



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



1. Consolidation

2. Accelerating VoIP Activity

3. VoIP as A Primary Line Replacement e-911 Security



1. Consolidation


3. VoIP as A Primary Line Replacement

4. Pricing Improvement



1. Consolidation


3. VoIP as A Primary Line Replacement

4. Pricing Improvement

5. Continued Traffic Growth


The Growth Of Broadband and Applications Are Driving Significant Traffic Growth

2005


Top 5 Things To Watch

1. Spot Capacity Constraints


Rapid Traffic Growth Is Likely To Continue

70% CAGR

150% CAGR




2. Further Consolidation





3. Acceleration of VoIP Penetration






4. More “Free” Services






4. More “Free” Services

5. Regulatory Changes

1 2005 Level 3 Communications, Inc. All Rights Reserved. Industry At The Bottom? Kevin O’Hara...

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