Level 3 Communications

Level 3 Communications

Don Gips

GVP, Corporate Development and Strategy

TeleSoft's 10th Anniversary 2006 Annual Venture Capital EcoSystem Meeting

Agenda

„

Level 3: Built to meet the needs of the optic nerve

„

The “Blackhole of Cyberspace”

– The implications of IP convergence in video and voice – Key issues and opportunities for emerging firms

Level 3: Built to Serve the Optic Nerve

strongly price elastic

„ E.g., a single 2-way uncompressed telepresence

session (approximating the information gathering potential of our optical nerve) needs ~ 15 Tbps –> ~ 5 times the total Internet traffic in the US !!!

„ While most other terrestrial networks were

designed for speech, Level 3 spent $14 billion building an IP network with the potential to allow people to communicate with their eyes

Assumptions

1 half sphere/per eye 2,400 dots per inch

24 bit color 30 frames per sec.

New

applications will keep bandwidth demand growing rapidly

We can’t predict what new applications will emerge over time – but we believe they will

use a lot of bandwidth !

10.4 billion pixels 7.5 Tbps each way

What Did We Get for Our $14 Billion?

„

Intercity Network in the US and Europe

– ~36,400 route miles, 16 countries

– More than 5.1 petabytes of traffic per day

„

Deep Metro footprint in ~110 markets

– 23,300 metro fiber route miles – 5,300 Traffic Aggregation Points

„

Fully upgradable - can optimally deploy new

generations of fiber and equipment

– E.g. Infinera DWDM PIC technology in intercity network – E.g., Ethernet in Metro and Core networks

Most Importantly, We Built a Fully Upgradeable

Network

„ Going forward we need new

generations of switches, routers, optical transport components etc. that keep improving unit costs

Network technologies that follow “silicon economics” are critical to make

bandwidth growth economical for end users and network providers

„ From day 1 Level 3 bet on disruptive

technologies (IP and DWDM) that had the best potential to bring unit costs down over time

The most improvement potential is in access networks – they are the main bottleneck to deliver rich media to the home

Time Unit Cost OC -48X₈ SM F F iber 2.5G b R_out ing OC -192 X32 10G b R outi_ng NZD S Fi_be r Pho ton ic Int egr ated Circ uits E- L_EA F F iber Eth_ern et R outin_g

?

Level 3 Offers All the Building Blocks Necessary to

Compete in the “Blackhole of Cyberspace”

„

Integrated set of optical and IP

services

„

Basic building blocks to

feature-rich IP and VoIP services

– Addresses full range of needs

from service providers to

enterprises

„

VoIP provided over advanced

softswitch network

„

Proven business support systems

Industry leading customer support

IP Services

Internet Data Services

Transport

Private Line Wavelengths

Transport

Infrastructure

Inter City Fiber Metro Fiber Colocation Voice Termination

Wholesale Switched Services Managed Modem

Local Voice Services

E911 Local

Inbound Local ServiceEnhanced

Toll Free Managed Services

Storage Hosting Email Security

Video Transport (Sports, News, Ads)

Level 3’s Customers

„ Level 3’s Wholesale and Content

Market Groups serve the world’s most bandwidth intensive

companies – including:

– The largest Web properties and Media companies

– The 4 largest ISPs

– The 6 largest cable MSOs

– The top 4 cellular providers

– All 4 RBOCs

– Major IXCs

– Major PTTs

– Major satellite companies „ Level 3 Business Market Group

serves ~13,500 enterprise customers

IP convergence Leads to “Blackhole of

Cyberspace”

Consumer and business sales

Consumer and

business sales Electronic commerceElectronic commerce

Physical software distribution

Physical software

distribution Network based _{software distribution} Network based

software distribution

Enterprise and consumer software applications

Enterprise and consumer

software applications Application service _providers Application service providers

Physical music and video media distribution

Physical music and

video media distribution Network based _{content distribution} Network based content distribution

Broadcast and Cable TV

Broadcast and

Cable TV Streaming audio _{and video} Streaming audio and video

Huge Existing Markets

Huge Existing

Markets Internet Based _Substitutes

Internet Based Substitutes

IP disintermediates supply chains and allows mass customization

Level 3 Wholesale IP Traffic Gigabits at July 05 03 04 01 02 00 400 200

The Blackhole is Finally Coming to Video

ƒ iTunes Video has been growing just as fast since its launch

• 30M videos in first 8 months

ƒ If this trend continues, iTunes traffic could grow to over ~500TB / day by 2008

ƒ In addition Yahoo, MSN, AOL, the major sports leagues, etc. are all promoting Internet video content

ƒ Place shifting: Sling Media lets consumers stream video from home to

anywhere on the Internet

0 0 0 0 0 M

Source: Apple Press Releases, Level 3 Analysis

May 2003 July 2005 30M songs sold in first 8 months after launch 2 years later, 50M songs sold each month

How Fast Did iTunes Music Store Grow?

ƒ Web 2.0 / Social Networking: in 18 months YouTube has

grown to 70+ mil. visitors/month and 110 mil. streams per day, the true beginning of communication with the eyes

…and user-generated video is also seeing rapid adoption

Internet Video In The Living Room Would

Accelerate This Growth Further

„ Even with compression, video on a TV (esp. in High Def) drives much more traffic than iTunes or YouTube

YouTube iTunes Standard Definition

High Definition

„ Economics of delivering movies online are already attractive

Estimated file size for 1 hour of MPEG4 video

MegaBytes

Full TV screen

Total Delivery Cost Of A 1GB Movie

(~2 hours of full screen standard def.)

IP Delivery Store Rental Mail Rental 0.0 0.4 0.8 1.2 1.6 $ 90 270 450 2,700

Challenges For IP Video Service Providers –

And Opportunities For Emerging Companies

„ Need easy way for content

owners to make videos available online in various formats and on various

platforms (TVs, computers, Portable Media Players, Cell Phones…)

Opportunities For: Opportunities For: Challenges:

„ Enabling infrastructure that can

perform on-the-fly content

transcoding, manage metadata etc. in a scalable way with high quality and security

„ Need to contain costs as

bandwidth demand growth

„ Need hassle-free DRM and

seamless delivery of content to Living Room to help spur adoption

„ New generations of DWDM,

routing etc. to reduce costs

„ Hardware and software for

consumer electronics that bridge disparate standards and enable user-friendly, plug-and-play experience

The “Blackhole” has already impacted the

Voice Market but we are still early

VoIP

„ In early stages of mass adoption

„ Enabled by IP softswitches that are ~50-80% less

expensive than traditional circuit switches

Relative Capital Cost

Circuit Switch Softswitch $230 bil./year voice industry is undergoing major disruptions Cellular Wireless

„ Very high adoption rate (70+%, 200+ mil. subs) „ Usage growing rapidly

VoIP over Wireless

„ Metro WiFi and WiMax deployments already underway

„ VoIP cost per minute is significantly lower than circuit-switched voice on cellular networks

VoIP Is Growing Rapidly

„ Analysts expect 46M total

primary line VoIP users in the US by 2010

„ Millions more already use VoIP

as secondary line

– 110+ mil. Skype users worldwide

„ VoIP enables disruptive

consumer and enterprise applications

– Geographic independence

– Arbitrage of Incumbent Provider prices – Unified Communications 0 10 20 30 40 50 '04 '05 '06 '07 '08 '09 '10

Primary Line Subscribers

(millions)

Residential Business

Source: IDC and Frost & Sullivan 55% CAGR

VoIP Will Soon Be Ubiquitous

media embedded in various applications

– Search

– eCommerce

– Social networking websites

„ Like email, voice service pricing to end users

will be increasingly hard to separate from other application costs

„ Legacy phone service will come under

increasing pressure as more subscribers can use IP to IP service

„ VoIP will soon become mobile as WiFi and

VoIP is Also Putting Pressure on Incumbent

Wireless Carriers to Reduce Costs

0 100 200 300 400 500 600 700 800 2002 2003 2004 2005 $0 $10 $20 $30 $40 $50 $60 $70 $80 Revenue ($ per sub per month)

Usage (minutes per sub per month)

Sou rce s: M e rr ill L y n c h, Deut sche Ban k

Threat of VoIP over wireless may soon add to the incumbents’ cost problem

To overcome these threats, wireless carriers will need to:

Ö Bring more, cheaper bandwidth to cell sites with microwave links and fiber Ö Embrace VoIP, WiFi, WiMax themselves?

Carriers are already under pressure as rising usage drives their network costs up while revenue per user remains flat

„ WiFi/WiMax have low cost per bit at the edge − 5x to 10x cheaper than 3G

„ This advantage (and additional savings from

using IP in the core network) should allow wireless VoIP providers to price well below incumbents

− E.g., Skype over mesh WiFi already

allows for free wireless calls anywhere in Mountain View…

Opportunities For:

Challenges For Service Providers – And

Opportunities For Emerging Companies

„ Need to drive cost out

of traditional cellular networks

Challenges:

„ Cheaper backhaul technologies

– Point-to-point microwave equipment that is less expensive and easier to deploy and operate – Inexpensive Fiber ADM’s

„ Cheaper voice transport and interconnections

– VoIP, TRFO etc.

„ Hardware and software that enable end-users to

benefit from “smart” interconnections

„ Convergence - “smart”

interconnections across

„ Extract more revenue

from mesh networks „ Location-aware services: ads, city guides, Web 2.0 (social networks, user-generated content), games, etc.

„ Technologies that increase bandwidth and

range per $, e.g.:

– Cheaper multi-radio access points – Smart antennas (MIMO)

„ Continue to drive

“Moore’s Law” in mesh WiFi, WiMax