Outline Brief overview of the Level Emerging trends in the ISP industry Two examples of how the industry is disruptively changing Economics of wave division multiplexing How the softswitch conquered the modem wholesale industry Open discussion The Level The Level Global The Level Area s City A Gateway Long Distance Transport City C Gateway Physical ring City B Gateway Transport Level s Backbone is a unified global platform that provides the highest quality of performance for delivering services worldwide. Return to Slide Building Building Building Metro Fiber logical loops Japan-US Trans-Pacific and Asian s Japan US Cable Ring protected transport 0Gbps around the ring (Phase ) Level connects at Morro Bay Japan Ring protected transport from Tiger cable landing in Wada to Tokyo Gateway Today Early 00 Tiger Cable Tiger Cable - Asian Infrastructure Interconnectivity between Japan and Hong Kong and Europe/North America Taiwan and Korea will be available in early 00 80Gbps for Tokyo-Taiwan -Hong Kong 0Gbps Japan-Korea-Hong Kong Tiger Japan-US 0Gbps protected capacity around the ring Diverse ducts from Wada to Japan-US cable landing
Emerging Trends in the ISP Industry The Communications Market Key Factors Bandwidth price-performance improvement rates will exceed Moore s law Bandwidth demand is strongly price elastic The combination of rapidly dropping costs and prices, and increasing demand ( Silicon Economics ) is a key dynamic in the communications industry Silicon Economics is disrupting the vertically integrated communications industry 7 8 Computing Prices And Demand Illustrate Silicon Economics Market based technical improvements have rapidly lowered unit cost and price For each % decrease in price, demand has increased over % Silicon Economics Is Disrupting The Traditional, Vertical Integration Model Slow moving vertical companies challenged by fast moving focused competitors Market based standards enable horizontal companies to offer bundled services Horizontal companies rapidly decrease costs and prices, and stimulate demand $ Per MIPS MIPS 988 990 99 99 99 Source: Industry Data 9 0 The Switch To Vertical Integration Has Created Substantial Value In The Computing Industry Disaggregation Market Based Standards And Silicon Economics Are Disrupting The Communications Industry Vertical Integration Horizontal Integration Microsoft Oracle SAP Applications Traditional Communications (Vertical Integration) Today s Communications (Horizontal Integration) IBM Sperry Burroughs DEC Microsoft Dell Sun Compaq Operating Systems Computer Systems Applications Portals Hosting ASPs E-Commerce Apps And Data EMC INTEL Hardware Computers Intelligent Intelligent Distribution Total Market Cap 980 $8 B 000 $7 B Total Market Cap 980 $0 B 000 $,80 B Access Long Distance Access Broadband Backbone
Bandwidth Price-Performance Improvement Rates Should Track Underlying Technology IP Technology Optical Technology Economics of Wave Division Multiplexing Trend Line Annual Improvement Rate (%) Time to Double Performance Per Dollar (mo) % 0 00% Trend Line Weighted Annual Improvement Rate = 8% Percentage of Cumulative Variable CapEx % % () Level 0-year plan Bandwidth Price-Performance Has Been Relatively Static Because Most s Are Improperly Designed The Relationship Between Fiber and Equipment Technology Is A Key Cost Determinant Assumed economic lives are too long Generally voice oriented, circuit based Static, non upgradeable design Dark fiber is not equivalent to capacity Fiber is a rapidly changing network element Optimized deployment of new generations of fiber and equipment results in substantial unit cost decreases Fiber Is Only A Small Part Of The Variable Cost Of Capacity... Opto-Electronics Greater Than 9% Fiber Less Than % Capital costs only Cost of fiber for Level requirements only Does not include cost of fiber for dark fiber sales Gateway /Regen Long Distance Transport Equipment Amplifier site Bi-directional Channels per fiber OC-9/STM- DWDM channels NZ-DSF, Corning E-LEAF fiber -8 Channel Optical Add/Drop DCF for dispersion compensation BER < 0-00 km maximum 80-00km Erbium Amplifiers Optical Add/Drop Waves or Private line services Gateway /Regen Source: 7 Level Business Plan 8 Return to Slide
However, Fiber Characteristics Determine The Cost To Provide Capacity Submarine Cables Illustrate The Importance Of Optimizing Fiber Design To Match Equipment Advances Unit Costs Are Determined By: The distance between equipment required to amplify and regenerate signals The number of colors of light (wavelengths) Each fiber is custom designed and fabricated to optimize price performance As a result, submarine cables span thousands of miles without very expensive electrical regeneration Several companies are bringing this same design approach to land based systems The line speed at which the lasers operate (OC-, OC -8, etc.) 9 0 Proper Fiber And Equipment Selection Over Time Provides A Substantial Competitive Advantage Multiple Conduit Designs Are Required For A To Remain Cost Competitive Year 000 00 00 00 Fiber Generation Gen Gen Gen 7 Gen 9 % Unit Cost Reduction From Gen (SMF) 8% 7% 88% 9% Pull new fiber to enable lower unit costs Continuously upgrade optoelectronics to leverage fiber improvements Decrease unit prices at optimum rate to benefit from increasing unit demand Source: Corning, Inc. Nortel s, Inc. Level Engineering Level Is Positioned To Benefit From Fiber Technology Improvements Numbers of Empty Conduits Level Empty Conduit Miles (%) Level 80% Softswitch Economics Williams 0 to Qwest Williams % Qwest 8% () Assumes,900 empty conduit miles
Voice Proxy RADIUS Server Proxy RADIUS Server DWA RADIUS RADIUS Internet Servers Internet Servers Architecture Options Largest single cost component of modem service: network expenses for Local Exchange Carrier interconnection Traditional Architecture Managed Modem Service Provider is a customer of Local Exchange Carrier (LEC) or Competitive Local Exchange Carrier (CLEC). Managed Modem Service Provider buys expensive ISDN interconnection from the LEC or CLEC. Traditional ISDN Architectures Traditional Architecture Managed Modem Service Provider purchases ISDN Primary Rate Interface trunks from Local Exchange Carrier (LEC) or Competitive Local Exchange Carrier. Trunks plug directly into standard remote access server equipment Softswitch Architecture Managed Modem Service Provider is a peer of LEC or CLEC. Managed Modem Service Provider (MMSP) shares cost of interconnection with LEC or CLEC. Traditional Architecture Call Flow Softswitch Architecture Softswitch Architectures Local Exchange Carrier SS7 Competitive Local Exchange Carrier 7 Gateway Site 8 Site MMSP IP IP MMSP must be a CLEC MMSP orders SS7-signaled inter-machine (peering) trunks from LEC. Trunks plug directly into softswitch-controllable remote access server equipment. SS7 signaling links plug into softswitch Combination of softswitch and remote access server emulate a circuit switch Dial-up User 7 8 Softswitch Architecture Call Flow Costs Compared 7 Local Exchange Carrier SS7 Soft Switch Soft Switch Site SS7 Gateway Soft Switch 8 0 9 Site IP Index Managed Modem Cost Per Port.0 Operating Expenses.00 0.80 IP Backhaul 0.0 0.0 Softswitch Capital (Depreciated 0.0 months) 0.00 Capital (Depreciated Traditional Softswitch months) Cost per Cost Per LEC Trunking Month Month Dial-up User Gateway Site MMSP IP 9 0
Qwest Market History Competitive Environment Level entered the managed modem market in January, 999 Early major wins with Earthlink, Netzero, and AOL were driven by disruptive pricing at less than half the going rate in the market. Early on, the softswitch architecture needed quite a bit of tuning 00% Co-Carrier Trunks Focal Allegiance ICG PacWest Time Warner Telecom Level 00,000 Ports To date, Level has captured % market share Trunk Plant McLeod USA UUNet Level is now processing nearly billion minutes per month. AT&T * Sprint Cable & Wireless In the space of less than three years, Level has become the th largest local exchange carrier in the US, as measured by minutes carried. 00% PRI Trunks 0% Broadwing US Population Coverage Genuity 00% Summary The traditional vertical ISP business model is quickly evolving to a horizontal model Level s niche is to provide the cost effective, scalable broadband services for our major ISP customers We are confident this role will grow significantly over the next few years