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

2. 2  2005 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

3. 3  2005 Level 3 Communications, Inc. All Rights Reserved. Broadband Growth in the U.S. Sources: Deutsche Bank “US Telecom Data Book 1Q05” Growth in Cable and DSL Households U.S. households, Million Cable and DSL Penetration Percent of total U.S. households 18% 40% Cable DSL Cable DSL

4. 4  2005 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 DriversVoIP Opportunity

5. 5  2005 Level 3 Communications, Inc. All Rights Reserved. Market Size Estimates for VoIP Services are Accelerating (And may be under-estimated)

6. 6  2005 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 # 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.

7. 7  2005 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

8. 8  2005 Level 3 Communications, Inc. All Rights Reserved. Top 5 Trends of Past Year 1.Consolidation  AT&T – SBC  MCI – Verizon  Sprint – Nextel  eBay – Skype

9. 9  2005 Level 3 Communications, Inc. All Rights Reserved. Top 5 Trends of Past Year 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

10. 10  2005 Level 3 Communications, Inc. All Rights Reserved. Top 5 Trends of Past Year 1.Consolidation 2.Accelerating VoIP Activity 3.VoIP as A Primary Line Replacement  e-911  Security

11. 11  2005 Level 3 Communications, Inc. All Rights Reserved. Top 5 Trends of Past Year 1.Consolidation 2.Accelerating VoIP Activity 3.VoIP as A Primary Line Replacement 4.Pricing Improvement

12. 12  2005 Level 3 Communications, Inc. All Rights Reserved. Top 5 Trends of Past Year 1.Consolidation 2.Accelerating VoIP Activity 3.VoIP as A Primary Line Replacement 4.Pricing Improvement 5.Continued Traffic Growth

13. 13  2005 Level 3 Communications, Inc. All Rights Reserved. The Growth Of Broadband and Applications Are Driving Significant Traffic Growth 2005

14. 14  2005 Level 3 Communications, Inc. All Rights Reserved. Top 5 Things To Watch 1.Spot Capacity Constraints

15. 15  2005 Level 3 Communications, Inc. All Rights Reserved. Rapid Traffic Growth Is Likely To Continue 70% CAGR 150% CAGR

16. 16  2005 Level 3 Communications, Inc. All Rights Reserved. Top 5 Things To Watch 1.Spot Capacity Constraints 2.Further Consolidation

17. 17  2005 Level 3 Communications, Inc. All Rights Reserved. Top 5 Things To Watch 1.Spot Capacity Constraints 2.Further Consolidation 3.Acceleration of VoIP Penetration

18. 18  2005 Level 3 Communications, Inc. All Rights Reserved. Top 5 Things To Watch 1.Spot Capacity Constraints 2.Further Consolidation 3.Acceleration of VoIP Penetration 4.More “Free” Services

19. 19  2005 Level 3 Communications, Inc. All Rights Reserved. Top 5 Things To Watch 1.Spot Capacity Constraints 2.Further Consolidation 3.Acceleration of VoIP Penetration 4.More “Free” Services 5.Regulatory Changes