1 2004 Level 3 Communications, Inc. All Rights Reserved. Kevin J. O'Hara, President & COO Level 3 Communications

1 2004 Level 3 Communications, Inc. All Rights Reserved.

Kevin J. O'Hara, President & COOLevel 3 Communications


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


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’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



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



(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

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


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

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


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


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


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


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


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

Documents

1 2004 Level 3 Communications, Inc. All Rights Reserved. Kevin J. O'Hara, President & COO Level 3 Communications