Crowe: mixing management know-how and new technology

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Level 3 Communications is deploying a state-of-the-art IP network that will be cheaper to use and improve than other networks owing to conduits that allow for continuous fibre upgrades. It also benefits from an experienced management team responsible for the success of MFS. The operator's president and CEO James Crowe talks to Mark Holmes about the company's plans.

Level 3 Communications is building an IP-based network, which can be constantly upgraded. It has already managed to raise $6.5 billion so far to fund its network and is clearly one of the best capitalized start-up businesses. It has been able to raise these funds owing to an original business plan and the experienced management team led by the president and CEO, James Crowe.

Crowe has virtually rebuilt the management team behind the success of the competitive access provider MFS Communications, which was eventually sold to WorldCom for $14.3 billion in 1996. The company had only started up in 1989. Investors clearly believe that Crowe can repeat that success with Level 3 Communications and attract a significant share of large enterprise clients that benefited from previous contacts with MFS.

According to Stephanie Comfort, principal telecoms analyst at Morgan Stanley Dean Witter, Level 3 can leverage two main advantages: "Level 3 has two really key assets. In an industry where management and execution are critical, they have a top notch group of people with a proven ability to execute and an ability to learn from their mistakes. They have gone through the education process with MFS and come out of that with a renewed perspective and can apply that to the new company. From a management and execution perspective, I think that they are top notch. That is critical.

"The other critical part is the business plan, which is really creating the state-of-the-art network: an IP-based network with just significant capacity to handle what they believe is going to be an exponential leap in demand, driven by data, Internet and all those video and broadband applications. So I think that the plan makes a lot of sense. I would say that they are the telco for the next century in terms of where they are going. The management provides you with greater confidence that they can actually execute that plan."

Market expectations for Level 3 Communications are high, but with Crowe's track record, few would bet against Level 3 Communications. According to Comfort: "He has such a large market capitalization which is a blessing and a curse in some ways to live up to, because clearly a lot of expectation is built into that evaluation."

However, despite the optimism about Level 3 Communications, there are a number of risks. To date Level 3 Communications has only completed the build of 400 miles of its 16,000 mile pre-funded inter-city network and still needs to obtain development rights in many parts of Europe. Similarly, IP-based voice telephony has so far failed to gain market acceptance, owing to doubts about its ability to deliver the requisite quality that businesses require. Clearly improvements in voice-over-IP quality will be crucial to the company's success.

Level 3 is also likely to face competition from new entrants leveraging new technological advances. It is perfectly feasible that a Level 3, mark 2 or a "Level 4", as Crowe calls it , may emerge and seek to usurp Level 3 Communication's position.

Comfort adds: "I think that the other issue is actually going to be building out the network, in terms of the following: Is the technology really there?. The way I describe it is are they on the leading edge or the bleeding edge. Are they so far ahead that they are taking that risk, in terms of putting a technology in place that may be just way ahead. Is it just a way to high cost something that in five years somebody can come in and implement at a lower cost. I think that is the real issue. That sort of fine line between being leading edge and having the advantage to become the low cost provider based on all of the advents of technology or to be on the bleeding edge where they are the only ones out there who are implementing this stuff and you know, either they don't get the right costs in terms of the cost of the equipment or the technology gets eclipsed."

Level 3 Communications is indicative of an industry that is moving away rapidly from traditional models. In an exclusive interview with Global Telecoms Business, the president and CEO of Level 3, James Crowe, outlines his vision of the future.

How many cities does Level 3 currently offer service to? How many will you be offering services to by the end of this year? Is the network build-out on schedule?

We are offering services today in 19 cities. That is 17 in the US, London, the UK and Frankfurt, Germany in Europe. By the end of the year, we aim to offer services to 33 cities, 27 in the US, six in Europe. The network build-out is on schedule. In February we actually announced an acceleration of the completion date. We announced for our US inter-city network that we were going to be completing 50% more of the network in 1999 than we thought we were.

How much is the network costing to build? How has the network been funded? What suppliers have you been working with? How much do you spend annually on network build-out?

Let us define the network. That includes 50 US city networks, multiple loops in individual cities and a 16,000 mile inter-city network. It includes 16 European cities and a 3,500 mile pan-European network. It includes six Asian cities and then the undersea capacity. That network is going to cost, including the development expenses and the operation expenses to get to cash flow break even, about $8-10 billion. It is funded in phases.

We break that entire build-up into five individual phases. Each of these are stand-alone. In other words, we can do one, but not two-five. We can build one-three, and not the following two phases. Three of the five phases are pre-funded. We have raised about $6.5 billion. Approximately, $5.2 billion of that is in cash. The balance has been spent on the operations and network today. So we have an additional $2-4 billion to raise to finish phases four-five. Our capital expenditures are at about $2 billion a year. Then we have another half a billion a year or so on operating expenses.

We have not announced and do not intend to announce individual suppliers, in the belief that we will be working with many of them and that sometimes we will shift from one particular provider of a component, to another. So it is something that we tend to shy away from. We have publicly said, if you are interested, that we are buying Alcatel Cross Connects. We are buying Nortel optical fibre. We are using Fore ATM switches. Of course, we work with Cisco on core routing. But we have not said any more than that.

Level 3 has come to the industry's attention by building the first digital all IP network. In your opinion, what is so unique about your operations?

Let us answer that question first from a high level. Then we will provide some of the specifics. I would say that we are the first carrier to fully leverage something that we call "Silicon Economics", which may not be a familiar term. However, I guess that the dynamics are familiar. By "Silicon Economics", I simply mean a very rapid price performance improvement for a service or product, but in our case a service, which is price elastic. To put those two thoughts together, you end up with very rapid decreases in unit costs and unit prices and very rapid increases in demand, just as we saw in the microprocessor industry.

It is now apparent that Internet Protocol, as well being a technology, is also a new kind of economic model for developing new technology. Traditional telephone technology is centrally planned, if you would. It has been controlled by government bureaucrats around the world for 80 years. One of the major virtues of IP is that the technical direction and development is set in the market.

In fact, if you were to look today at the components of a modern IP network, you would find that if demand was sufficient, you could drop your costs: that is your prices to your customers; 30, 40 or 50% a year, if you build the network properly. That is the rate at which the underlying technology is improving. The second part of it, is it price elastic? That is, if you drop the price more than 1%, is demand going to go up more than 1%?

We think that the answer is pretty resoundingly positive. So our goal is to couple very rapid price improvements with very rapid increases in demand. That is a new thought for the industry. We think that we are building a network to do just that.

What are the differences between you and carriers such as Williams and IXC?

Specifically, we are building a network that we think is continuously upgradable. I mean a network that can capture the underlying price performance improvements in the network's components. In our case, the most obvious example of that is building a network that has multiple conduits, so that we can accommodate each new generation of fibre, when that new generation allows us to drop our costs and prices. That also means building flexibility into things, such as the electronics that drive the optical fibre and spacing there. It means building operating support systems that can scale rapidly. It involves literally all parts of the organization: real estate acquisition, procurement of parts and electronics and components from vendors. All of those have to be developed to rapidly change and evolve. We have taken that approach much further than our competitors. We are also end-to-end.

That is not the approach of the two companies that you mentioned. To see the reason, you have to understand the concern of AT&T and Sprint and other long-distance operators, who simply have long-distance only networks, as they contemplate the entry of local providers into their business. Obviously, customers want end-to-end service. The mere fact that we have moved to IP doesn't mean that we expect dynamic changes. So we are end-to-end. We are building local and long-distance networks. We are also building simultaneously in the US and internationally. That is a differentiator. Finally we don't deploy any circuit switches. This may be the best way to illustrate the difference between ourselves and other players.

Today all our competitors, without exception, deploy circuit switches, because voice is where the money is. In fact voice networks still account for 90% of the revenues associated with communications.

Admittedly, data represents 50% of the traffic flow, but only 10% of the revenue flow. We will address that issue by offering a voice service that is a new technology that we have jointly developed with a number of others, including Lucent, Nortel, Cisco and Ascend, which allows you to offer public telephone quality voice. You simply pick up the phone, dial "1" and make your call, but still use IP technology. I think that is a key matter, since it keeps us from having to deploy circuit switches, which have a very slow price performance improvement and lock you into the technology of the past.

What makes you believe that the cost of packet-switching technologies will decline in the same way as computing technology? What impact will Moore's Law have on telecoms?

I think that the past is our best guide to the future. To date, the kind of developments that make up the modern IP network have been doubling in price performance about every 20 months, which is not too dissimilar to Moore's Law. You should look at optical technology, which is a combination of optical fibre and WDM. That has actually been doubling in the amount of performance you buy for each dollar about every 10 months.

We spend a fair amount of time with the technology providers. You can see in the labs the technologies that are going to continue and perhaps accelerate that kind of improvement. So we are not going to speculate as to whether something similar to Moore's Law is operating in the technologies that constitute modern networks. We can demonstrate this factor with data. The question is, how do you build the network that can bring that kind of price performance improvement to the buyers of communications services.

Once you have built your network, in view of rapid technological advances, surely there is a chance that you could discover that you may be outpaced by another upstart telco?

That is our biggest single worry. We don't want you to do an interview with a Level 4 in another year or two and have them explain why they have a better network than us. In fact, that answer I gave you earlier about why we think we might be approaching the business a bit differently than our competitors gets the same answer.

We think that we are the first communications company to build a network that can continuously adopt new technology at a lower price than our competitors. We are building into the network the assumption that technology will change and change rapidly, and not just the electronics but the fibre itself.

Could you tell us about Level 3's IP Voice Service? What level of revenues do you expect to come from voice services? Could you tell us about the IP voice demonstration that you gave in February at an analyst and investor conference?

Sure. The service that we demonstrated in February and are testing commercially as we speak, is voice of the kind that you are used to and businesses around the world are used to and have been for a long time. It requires you to do nothing more than choose us today as a long-distance provider. In about another year, the software will be released to do local calling, but today it is long-distance.

So you simply elect us as your long-distance provider. You pick up the phone and you dial, nothing more. It doesn't require any additional equipment and doesn't require you to dial long strings of digits. It has the same perceived quality as the telephone network. That is what we showed a very large group of analysts and investors in New York on February 2. We used in that case both our own soft switch technology, as we call this, and soft switch technology from Lucent Technologies. We have the soft switches from Cisco and Nortel in-house now and are testing those. Simply put, it works.

Without getting into all the technical underpinnings of the service, it works for the following reason: for the first time IP networks and IP voice service are inter-connected fully and completely, instead of partially as was the case with previous solutions: all the signaling and databases that run the phone system are inter-connected. In terms of the kinds of revenues that we would expect, we have not publicly made a statement on that issue. I think that we will leave it there for the time being.

Why do you think that you have gained so much media attention? Do you think that it is down to the scale of ambition of Level 3 or more to do with your personal background at MFS and WorldCom?

Well I tend to think that any time a start-up announces a business plan and backs it with $4 billion to start with, that gets attention. I don't know if we are the best capitalized start-up in business, but we have certainly got to be on the list of candidates. I also believe the fact that we started life with a complete senior management team with two-three exceptions and that the senior management team had worked together, many of them for ten years or longer, is a bit different. I think that certainly causes some media attention. I think the fact that the same team built the company MFS, literally from zero, achieving a value of $14.3 billion within five years of our IPO, probably receives some attention as well.

When analysing the history of MFS and the current situation with Level 3, many use the term: "history repeating itself". Is that how you view the situation? What are the main differences between MFS and Level 3? How did your experiences at MFS prepare you for the challenge at Level 3?

MFS was founded to take advantage of two inter-related trends. The first was the shift from copper analogue technology to optical fibre technology. The second concerned the shift from central control and monopoly regulation to competition. Both of those are one-time events: we viewed them as such at MFS. We viewed it as a historic opportunity: we think that we helped shape some of those trends, particularly in the regulatory arena. Fortunately, it paid off for both our employees and stockholders.

At Level 3 we are trying to capitalize on something much more fundamental. That is a shift from an industry that has literally been frozen in terms of the kind of pricing and demand that customers deal with and frozen by monopoly regulation, to an industry that is going to be market-based and resemble much more every other technology-based industry with very rapid performance improvements and very rapid increases in demand.

So we think that the opportunity with Level 3 is much greater and is infinite: there is no one-time shift that creates this opportunity. There are challenges associated with capitalizing on this opportunity. They are, of course, similar to what we saw with MFS, specifically growing a business very, very rapidly and having experience with all the challenges that come from rapid growth. But there are some major differences. They lie in the nature of the kind of people that we have with us. We have many more software engineers, network architects and we focus much more on the technology than we did with MFS.

A number of telcos are building high-capacity fibre-optic networks. Do you believe that demand will match the bandwidth that is coming on-line? What do you believe to be Level 3's competitive advantages?

I think this question is clearly on many people's minds today. I think that you can't give the answer without expanding the question a bit and saying: "What do you think that the demand will be at a particular price?" I think that if we were to introduce an enormous amount of capacity into the market and prices were likely to stay at the level they are today, we would most certainly have a glut. But as I said earlier, in a properly built network, the potential to drop unit prices at a very rapid rate is clearly there. The emphasis is on a properly built network.

It is a little like asking if, at the time, Intel was producing 286 chips and they continued to produce 286 chips for ever and never changed the price, whether there would be sufficient demand for computing, given all those chips that were being produced. It is an interesting theoretical question, but has nothing to do with the market, as Intel continues to improve and introduce the 386, the 486, the Pentium, each of which had very large price performance improvements. As the price dropped, demand went up even more quickly. We think it is clear that if you drop price rapidly and build a network which allows you to drop your costs even more quickly, demand will certainly appear at those lower prices. It does not mean, though, that all fibre and all networks are created equally. There will be winners and losers in this process. Those who have networks, which are tied to the past and are not upgradable, will be in the position of someone producing 286 chips and competing with Intel, when Intel introduced the 386 and so forth.

In a recent interview with Global Telecoms Business, Bernard Ebbers said that new entrants such as Level 3 may find it extremely expensive to acquire business by pricing products at substantially less than market levels to obtain that business. How much are you prepared to pay to acquire such business?

Given my answer to the last question, hopefully my answer to this question will be pretty obvious. If we believed that we were introducing the same products with the same underlying costs at the same price and that we would only gain market share by dropping prices far more rapidly than our costs, then the issue of how much we would pay for the business would make sense. What I have said, of course, is that we think the right approach is to drop your costs even more rapidly than your price. In this case, we are not paying to acquire the business: we are creating value.

Can you explain how you intend to invest the proceeds from the offering of 25,000,000 shares of common stock underwritten by Salomon Smith Barney, Goldman Sachs, CSFB, Merrill Lynch, Fenner & Smith, JP Morgan and Morgan Stanley?

We have already announced that we are using those proceeds to fund the third phase of our business plan. Prior to this offering, the phased approach that I spoke about earlier was in place and we had funded phases one and two. The offering funds for phase three are largely aimed at developing our network in Europe and Asia and building out the US city networks. It has a substantial European focus.

When do you expect the share offering to be completed? How will the additional shares dilute current dividends? How would Level 3's plans be affected by a market recession?

The offering was completed less than two weeks ago. As we don't pay dividends, we certainly won't be diluting any current dividends, as long as we use the money to invest in expansions that create value. We view this as a way of adding to shareholder wealth. If there was a market recession, I don't believe that it would affect us. If access to capital dried up for a period of time, we would simply wait to fund phases four and five at a later stage than we otherwise would.

How do you view Qwest? What is behind Level 3's decision to move its corporate headquarters to Denver from Omaha?

I view Qwest as a well managed organization and I have great respect for them. I have already spoken about the ways in which I think we are different. As to why we are moving to Denver, it is pretty straightforward. I mentioned that we are hiring technology workers, in particular software engineers, network architects, people who are in great demand, literally around the world. When we entered the business here, we knew that we needed to attract and retain more than our fair share of these vital technology workers. We literally built an entire programme to try to accomplish that goal - one of the features of which was to hire a polling firm and actually poll the people with the necessary talent as to where they would like to live. Denver topped the list.

What was the significance of being able to lure away 18 executives from WorldCom to Level 3, who had previously worked with you at MFS? What do they bring to Level 3?

A slight correction. It should say 18 executives who previously worked with us at MFS. All 18 did not work for WorldCom. That is a smaller number. It is true that it represented 18 of the top 20 executives at the time when that statement was made: it might be now 17 or 18 of the top 21. In any event, it is true that we have hired a large number of individuals who have worked together before. Anyone who has ever attempted anything knows the importance of working with a group you enjoy being with and with whom you have experience together. That is pretty straightforward. As we did with MFS, we had very low turnover at MFS compared to the industry. I think that we may have even less turnover here, because everyone of those individuals chose to be here.

All of the individuals were fortunate. They had done extremely well through the success of MFS. Many, of course, would never have to work again if they chose not too. They came together to form Level 3. That is a powerful force when people are there, because they want to be there, rather than to meet their day-to-day needs or day-to-day living expenses.

Do you think that this situation has created lasting ill feeling with MCI WorldCom? Do you think this is one of the reasons why they won't peer with you? What are the ramifications of this situation?

Well let me speak for our side. At the time we merged MFS with WorldCom, I said that it was the only communications company large enough to buy MFS whose stock we would want our shareholders to accept and whose management we would want as stewards of our shareholder's money. I am happy to say that Bernie Ebbers and his team have proved that statement absolutely correct. They have done an outstanding job.

I would hope and I believe that WorldCom operates their business as we do ours, as a business. I think the issues of peering are business issues, rather than personal issues. I think that as soon as WorldCom thinks it is a good business idea to peer, they will do that in an instant. In fact, I am certain of it.

And I think that as we go forward, we will continue to do business. We do business across the US. We buy service from them in certain areas. Like other every other carrier, I suspect that we will have multiple relationships. We will compete and we will co-operate wherever that creates value for the shareholders.

What was the significance of the acquisitions of XCOM Technologies and GeoNet Technologies? Do you think that you will need to make further strategic acquisitions to accelerate your competitive position?

Cisco is one of the organizations that we have the greatest respect for. In some ways we model large parts of our operations after Cisco. Specifically, I guess that we view mergers and acquisitions in the same way as Cisco. We have learned from them. Their CEO John Chambers would say it better than I do. But effectively they believe in a very fast moving industry: you don't make large acquisitions in an attempt to purchase large amounts of market share. The integration costs are just too high. They slow you down too much. Cisco buys individual smaller companies to accomplish the strategic, targeted technology acquisition with some very precisely focused goal. We have tried to do the same.

XCOM Technologies was acquired to get the initial framework for our soft switch technology. That has been successful in allowing us to move quickly with the soft switch which I described earlier. GeoNet and additionally BusinessNet in London and miknet in Frankfurt are tenant service providers who sell to larger businesses and who had, most importantly, a cadre of talented individuals with the kind of skills that I mentioned earlier. So they are small and targeted. I expect that we will continue to pursue that small targeted approach. I think that it is much less likely that we would do some kind of large strategic acquisition because that simply slows you down too much.

You have been very scathing about monopolies in the past. Do you think that the RBOCs and AT&T will be able to compete on a level playing field with Level 3? You said in a recent interview that: "Monopolies offend you". Why?

There are an awful lot of companies that would be dangerous to generalize about. I think that as a generality it is much easier when the game changes as it has in communications, when we see a whole new economic model developing: it is much better to have a blank sheet of paper and a good team of people and sufficient capital, than to try and change a 70-80 year old company. However, it only takes a small group of people, perhaps one, the CEO, who are visionary and dedicated and driven enough, to change a whole company. We have seen examples of that. Jack Welch at GE completely redid the company. Mike Armstrong at AT&T is a pretty unique individual. So it is entirely possible that one individual can change the corporation and re-format it around a proper model, but as I have said, I would rather be in my own shoes.

Obviously these companies have large customer bases and global reach and are spending vast sums to upgrade their networks. How are you going to attract the key corporate clients away from the big players?

I would have said that they are big, slow and saddled with a high dividend pay-out. They have got 100,000 or 200,000 or 300,000 individuals, who are trained in older technologies and who have investments in the past. They have got stockholder bases that don't tolerate a reduction in dividends and the kind of major investments it takes to completely redo their network.

How are they going to compete? I would have said that history teaches us that when major changes occur in the economics of an industry, it is almost always the newer competitors, unfettered by all the shackles of the past, that create value, rather than the major players who have invested 70-80 years in an old way of doing a business. I guess that I would have a different perspective. I believe that history would support my perspective.

For a new entrant such as Level 3, marketing is obviously going to be a key differentiator. How much do you spend annually on the marketing of services? How are you marketing Level 3?

We view marketing slightly differently than some of our competitors. The best way to describe the difference might be to draw an analogy to what happened in computing. IBM was vertically integrated 20 years ago. It did everything from bending metal to the construction of processors, operating systems and applications.

At the time observers would have said that they are a marketing powerhouse and asked how any new entrant could take customers away from the kind of dominant provider that IBM was. If you were a new entrant and if your model was to be just like IBM - in other words a vertically integrated mainframe supplier- and you believed that you were smaller, faster and more fleet of foot and therefore could take customers away, the question of how you spend enough marketing dollars certainly would be right on point. However, we now know that this would have been the wrong approach to compete with IBM.

Under the forces of what I would call again "silicon economics", the old model, which was vertically integrated, broke apart. New companies did not think about competing with IBM at every level, supported by enormous SG&A infrastructure. They took one component of IBM's operations. Instead of trying to obtain 3-4% market share of IBM's whole market, they went after the 40-60% market share of an individual component.

We now know that this model created enormous value and didn't require those new entrants to build huge sales forces. They sold through others. We adopted the same approach. We don't intend to hire thousands of salesmen. We don't intend to market to the consumer and small business where the costs are high. We intend to distribute our rapidly falling cost and price product through others. We intend to leverage the power of the web, which is clearly a disrupting force in marketing and sales.

Many believe that Level 3 will be at the forefront of offering new value-added applications. What new services do you intend to offer customers? In your mind, which applications will be most popular?

As I said in the answer to the previous question, I think that our model is slightly different. We would see ourselves selling to others, maybe hundreds of others, who would develop new applications and services to sell to customers. Certainly, some of those new applications, if they are widespread and have appeal throughout our market, might be incorporated in our services.

But in general we expect the market, rather than one company, to test thousands of new ideas and applications. While many of those applications won't succeed, some of them will be developed into all those new applications. If you went to our gateway facility in London, you would see a very large facility connected directly with our broadband facility, aimed at allowing anyone with a server and a good idea to co-locate with us and offer their applications to the market.

It has also been claimed that the Internet is still too slow for effective business to switch to e-commerce. How will Level 3 seek to obtain market share in this area and how will you reduce delays in use of services?

Today we deal with that issue by building a much more complicated network than we may have to in the future. Today we are resolving this problem by building our own network end-to-end, where we can control delays and insert a layer of technology called ATM: ATM among other functions allows us to control delays through the network. As technology improves, we believe, along with many others, that IP will gain new functionality which will allow us to control delays through the network. But today we need to do that with ATM.

Level 3 has a market cap of over $15 billion. How will you manage to live up to market expectations, given that it will take a while before you have accrued significant revenues or acquired major customers? Are you benchmarking Level 3's progress for investors?

Let me make a couple of points. I think that our market cap is maybe over $20 billion. Your second point is certainly true. The market expects a lot from us. I would say that I hope it won't be a while, before we obtain major customers. Our investors should be disappointed in us, if we did not make announcements concerning major customers on a regular basis in the future.

But fundamentally our investors expect a lot: if we can pursue the plan successfully, I have articulated to you that we are in fact undervalued, cheap. The key is in implementation. It is a huge market: our goal, as I mentioned earlier, is not to get 2-4% of the traditional vertically integrated telephony market, but rather a very large percentage of a narrower set of services: if we are successful there, our current market value will seem very, very inexpensive indeed. Yes we do benchmark.

If you were go to our web site or check our public releases, we publish regularly a long detailed set of metrics and expect that we will be judged by our ability to achieve those benchmarks. We owe it to our investors to set those kinds of goals so that they can judge whether or not we are implementing properly and in accordance with what we said.

How do you plan to keep down overheads and SG & A costs? Will this involve outsourcing?

The answer is "yes". Any part of our business that we do not consider key is a candidate for outsourcing. But more importantly, for any communications company, the big expense is the marketing and sales expense. As I mentioned earlier, we are not attempting to duplicate the enormous SG & A that our larger competitors have. Instead we are distributing our products through others. So we are dis-intermediating, component by component, market by market and piece by piece the old distribution channel. You can see it happen as we speak.

The AOLs of the world, if they are anything, are taking direct aim at owning the relationship with the consumer that traditionally has been held by the telcos. E-commerce and many of the web hosting companies and ISPs are doing the same. So we are not going to try to duplicate that big infrastructure in-house. We are going to take advantage of the 6,200 ISPs that are already in place and many, many web hosting companies, portal companies and on-line service companies and let them distribute the products.

Can you describe your debt repayment plans? When do you expect to become EBITDA positive?

Our debt repayment plans are pretty straightforward. They are part of the covenants and the terms and conditions of the debt that we have issued. It is public debt and is in two pieces. The first piece was a $2 billion offering that is publicly traded that we completed in spring last year. That pays interest currently. We start paying the principal in May 2008. The other offering, of $500 million more recently in the fall, pays no interest for five years and then it pays interest only with a balloon at the end. We have not commented yet on going EBITDA positive. We think that analysts generally have assumed that we will go EBITDA positive in 2001-2002.

How do you view the recent era of consolidation in the US? What are your opinions on the SBC/Ameritech, Bell Atlantic/GTE mergers? Do you think that these mergers will allow the RBOCs to stem the tide?

I think that the natural reaction of dominant companies in the face of major changes and competition from others, who are growing their revenues rapidly, is to merge. Because if you can't respond by growing your revenues - in other words the larger providers cannot compete by growing their top line rapidly - the next alternative is to merge and cut costs. That at least gives you profit enhancement in the short term. But at the end of the day, if you hook two slow-moving large organizations together, it doesn't seem realistic that you are going to get anything except a much bigger, even more slow-moving company.

How do you view the regulatory environment in the US? Do you think that the FCC is doing a good job in opening up telecoms markets? How do you compare the regulatory situation in the US and Europe?

I think that in general, when viewed over a reasonably long period of time, say over the past 10-15 years, the combination of the FCC, the courts and legislatures have dropped barriers to competition. Certainly there have been some mis-steps. There have been some policies that didn't work as they should have, because they didn't recognize the realities of competitive markets. There has been an occasional time, where there has been a reliance on managed competition or duopoly. But overall there has been clear and direct progress.

Perhaps the challenge for the next ten years is even bigger though. Right now the FCC and others are wrestling with what to do with so-called converged networks. Networks such as ours that are IP-based can offer all the same services as networks and companies that have been traditionally regulated. This is a tough one and getting that right is going to determine the pace that communications improve over the next decade. That is a big deal.

In Europe the regulators have moved much more quickly than I would have ever expected over the past two-four years. As we talk with regulators in Europe, both in the EU and the individual countries, there is a clear recognition that there is not a choice as to whether to introduce competition, if you want to have a modern communications infrastructure. What has happened in the UK and the US is too compelling to ignore.

In fact, the UK may in some way be the best example world-wide, where barriers have dropped rapidly. The amount of investment in the UK communications infrastructure is incredible and the improvement rate in the UK has been nothing short of incredible.

So I also believe that Europe - and this applies more to Europe than the UK - in theory has dropped all the barriers. There are many practical barriers that still have to be dealt with. It is not enough when you have a large dominant monopoly to say: "OK, let the competition begin", if competitors can't for instance inter-connect with existing providers and choose whether to do nothing or instantly build to every customer within a country. That is not real competition. But I trust that the issues related to unbundling and access to the dominant provider's network will be sorted out. I think they are being resolved as we speak.

What are your opinions on the recent Vodafone/AirTouch merger? Were you surprised that MCI WorldCom considered AirTouch? Do you believe that the paradigm has shifted to wireless? How does the huge demand in wireless services affect Level 3?

As I mentioned earlier, we can learn from history: when industries are affected by the kinds of forces we see in communications, where the pace of change accelerates, technology improves at an incredible rate and customer demand for new applications is seemingly insatiable, it is not realistic to expect that customers, and more importantly companies, will be able to simultaneously offer the best services in multiple industry segments. That is a clear lesson in history.

Quite simply it is impossible to be everything to everybody and put it all on one bill. I think that is a competitive advantage. I expect that you are likely to see that wireless will improve at an incredible rate, but I think it is unlikely that the big bundled service providers are necessarily going to be the only providers who create value.

As to how wireless demand affects Level 3, every antennae that is erected requires more fibre and a carrier such as Level 3 to provide inter-connecting services. We view wireless as completely compatible. At the end of the day, wireless is a fairly narrowband distribution system, while we are a wideband trunk line, a water main if you would, to the wireless garden hoses.

Finally, what are your hopes and ambitions for the company over the next five years? In your view how will the telecoms landscape change?

I think that five years from now we will look back and discover first of all that the changes have been incredible. I think that we will find that IP-based networks are carrying 90% of the traffic on global networks and maybe 50% of the revenues. It doesn't mean that the whole circuit switch network will go away. But that is not where the value creation and the excitement and the fun will be. That will be an IP-based network.

We will see e-commerce as an accepted normal way of doing business, simply because it is a less expensive way to distribute than the old model. We will see that the notion that "bigger is better" is no longer accepted. I think that we will find that a number of companies, whose names we didn't know only a few years ago, have created enormous value. I believe that Level 3 will be one of those companies.