1 2004 level 3 communications, inc. all rights reserved. kevin j. o'hara, president & coo...
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1 2004 Level 3 Communications, Inc. All Rights Reserved.
Kevin J. O'Hara, President & COOLevel 3 Communications
2 2004 Level 3 Communications, Inc. All Rights Reserved.
The Information Technology Marketplace
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
Cost Index1980=1 Billion
0
19901980 2000 2010 2020
1
10
100
1000
10,000
100,000
1,000,000
10,000,000
100,000,000
1,000,000,000
Computing
Communications
InformationStorage
Level (3) Communications 1999
3 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
Level (3) Communications 1999
4 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
Level (3) Communications 1999
5 2004 Level 3 Communications, Inc. All Rights Reserved.
Softswitch Services
Graphic
Addresses $700 billion voice market with IP economics
Softswitch architecture enables rapid, long term cost and price reductions
Services include (3)ConnectSM Modem (3)VoiceSM
Level (3) Communications 1999
6 2004 Level 3 Communications, Inc. All Rights Reserved.
(3)ConnectSM
Modem Illustrates The Advantages Of The Level 3 Softswitch Network
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%1998 1999 2000 2001 2002 2003 2004 2005
WorldCom
Genuity
Sprint
ICGAT&T
Other
Level 3
Source: Level 3 Estimates
%MarketShare
Level (3) Communications 2001
7 2004 Level 3 Communications, Inc. All Rights Reserved.
Level 3
Genuity
ICG
Sprint
Other
Qwest
AT&T
MCI
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1998 1999 2000 2001 2002 2003 2004
%MarketShare
Source: Level 3 Estimates
Impact Of Disruptive Technology/Economics Is Greater Than Anticipated
8 2004 Level 3 Communications, Inc. All Rights Reserved.
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
9 2004 Level 3 Communications, Inc. All Rights Reserved.
0
5
10
15
20
25
30
2001 2002 2003 2004E
Sources: J.P. Morgan; UBS; Morgan Stanley; Leichtman; Gartner; Citigroup; Sanford Bernstein; FCC; Company SEC filings
Growth in Cable and DSL Households
Broadband Growth in the U.S.
U.S. households, MillionCable and DSL PenetrationPercent of total U.S. households
6.5
18.53
9
2001 2004E
9.5%
27.5%
Cable
DSL
Cable
DSL
10 2004 Level 3 Communications, Inc. All Rights Reserved.
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
11 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-the-top” of existing broadband connections Vonage and Skype IXCs ISPs
RBOCs are deploying VoIP services as a defensive measure
12 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
13 2004 Level 3 Communications, Inc. All Rights Reserved.
02
4
6
810
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)
Millions
Of
Subscribers
14 2004 Level 3 Communications, Inc. All Rights Reserved.
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.
15 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