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Stream This!: Pulling Back the Curtain on Level 3

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Crowe: We will certainly be very competitive on price. However, we have two other major advantages over most of the new entrants: scale and quality. We expect that many of the newer entrants will struggle to achieve a sustainable business model and, at the same time, provide the large and rapidly growing capacity that larger object (i.e., video) CDNs require. The customers we talk to are increasingly concerned about a provider’s ability to scale—today and more importantly tomorrow. We have already answered the question of our ability to scale. With regards to quality, we are use[d] to building and operating very large IP networks. We know how to operate them while keeping the performance and availability levels very high. All of the independent performance measures on our traditional services as well as our CDN places our products amongst the best performing in the industry.

When does Level 3 begin to really attack the market with more marketing and sales specifically around the CDN product, without bundling it into all of the other products and services Level 3 offers?

Crowe: Making a full range of optical and IP services remains core to our strategy. This approach allows us to meet the complete needs of media and entertainment companies who generally purchase a range of services from CDN to waves and sometimes dark fiber for data center interconnection and other facilities.

While we have an advantage in selling to a large, existing customer base, we also have salespeople actively seeking and closing new customers, some of whom may only purchase CDN. Because we have a portfolio of services to sell, we can leverage our ability to sell CDN and internet transit to those customers that need both. We can also provide our Vyvx Broadcast customers with the ability to encode, deliver, and store content. Based on the customer’s solution needs, we can bundle a host of services that we believe no other CDN provider is able to do today. We will continue to increase both the salespeople selling and the marketing effort to raise the profile.

To date, most of your CDN business has come from your current customers for other services. When will Level 3 focus on going after the pure CDN customers who have no other needs like transit or co-location?

Crowe: Clearly you want to sell as many products as possible, but there is a lot of just pure CDN business out there today. We have paid particular attention to our existing customers since we have many long-standing relationships and because many of them had been asking us to enter the CDN space. We also target new customers who we believe will value the scale and scope of our offerings. Funcom is a recent example of such a new customer.

A lot of people want to compare the decline in IP transit pricing to CDN pricing. Since it is not an apples to apples comparison and since most CDNs don’t own the network and you do, what insight do you have on this?

Crowe: We divide the cost of a CDN into four primary elements: the cost to develop and deploy technologies, such as intelligent traffic management and server cluster load management; IP/optical transport (i.e., bandwidth); the cost of CPU/storage in server clusters; and the cost to develop, acquire, and protect intellectual property. Of these, we expect bandwidth and CPU/storage costs to dominate with the former the largest element of long-run incremental cost. Underlying bandwidth costs have been falling quite rapidly, which have enabled a decline in IP/optical transport pricing. CPU and storage costs have a long and generally well-understood price performance improvement rate. These price performance dynamics are a fundamental reason that it [is] increasingly more cost efficient to transport larger objects such as video over CDN networks versus other channels such as optical disc/physical distribution. For a more detailed discussion of these fundamental trends, readers can refer to the "August [Informational] Investor Presentation" which can be found in the Investor Relations, Presentations and Events section of the Level 3 website.

Can you say how much money you will put in the network this year specific to the CDN product, not including any previous acquisitions?

Crowe: I can’t comment on that specifically as we do not break out our financials to that level of detail; however, we continue to make significant investments in our platform. We have expanded into Asia and continue to make capacity augments on all three platforms (streaming, storage, and caching) in North America and Europe. In addition, we have been investing in the infrastructure within our Level 3 co-location space where we locate our CDN nodes so that we can do "just in time" capacity deployments to uniquely serve the growth needs of our customers.

The "From Creation to Consumption" presentation that we spoke of really is at the heart of what we are trying to achieve and why we are different from other CDN providers you comment on. We are trying to simplify the distribution chain associated with using an IP network for the delivery of rich media content. For this part of the market we believe that, over time, the distinction between IP Transit and CDN goes away. We will simply talk about internet delivery of content. It is all about efficiently moving bits increasingly dominated by video and other rich media.

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