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Accelerating Enterprise Origination

10/20/2014 7:51 AM. CONFIDENTIAL. Accelerating Enterprise Origination. EBS. Discussion document. December 4, 2000.

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Accelerating Enterprise Origination

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  1. txho/enx116/01204 enx116.ppt 10/20/2014 7:51 AM CONFIDENTIAL Accelerating Enterprise Origination EBS Discussion document December 4, 2000 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.

  2. txho/enx116/01204 enx116.ppt EXECUTIVE SUMMARY • The team has partially completed the work laid out in Phase 1 of the project work plan. Specifically, we have begun to test product competitiveness and develop a framework to prioritize customer segments • Most of the current EBS bandwidth are relatively disadvantaged (technically) on a standalone basis. Furthermore, these products tend to be purchased as part of datacom bundles by enterprise customers. As a result, we believe the Enterprise group should take a highly targeted approach to the market in 2001 • On the product side, the initial hypothesis is that bundles involving (i) transport or transit coupled with creative pricing and financing structures or (ii) “virtual data centers” that leverage underutilized EBS POP assets are likely to generate the most significant 2001 margin opportunities • A preliminary assessment suggests that MediaCast will not present significant near-term opportunities, given the underlying size of the market and the EBS product development timetable. However, streaming products are likely to present more significant opportunities in 2002 and 2003 • Given the challenges that EBS will face in generating significant interest in basic transport and transit products, early customer acceptance will likely stem from creative deal structuring involving such attributes as • Innovative risk management tools (e.g., virtual data centers) • Creative pricing (e.g., peak/off-peak) • Cash or earnings management (e.g., blend and extend, monetizations) • Assuming this product hypothesis under further analysis, we believe the Enterprise group should target customer segments that will be most receptive to EBS’ advantages. In particular, the most promising customer segments will likely be those that (i) are willing to buy unbundled telecom solutions, (ii) influence significant datacom spend, and (iii) have financially-focused management. Using this screening logic, target segments include • Large accounts currently targeted (e.g., Yahoo!, EDS, IBM, and others) • System integrators focused on network management (e.g., Telcordia, SHL Systemhouse) • Outsourcers with an exposure to data center buildout risk (e.g., Perot Systems, Unisys) • Publicly-traded, bandwidth-intensive software companies (e.g., Oracle, Siebel)

  3. FOR DISCUSSION txho/enx116/01204 enx116.ppt ENTERPRISE ORIGINATION HIGH-LEVEL WORK PLAN • Phase 1 • Customer segment prioritization • Customer needs and buying patterns • Prioritize customer segments • Competitiveness of EBS’ product suite • Develop product hypothesis • Economic model • Integration with VAR/channel offerings • Customer diagnostic tools • Product acceptance • Required capabilities • Means to fill capability gaps • “Marquee account” customers with a view • Product development • Today • To be completed by EBS • Phase 2 – 4-6 weeks • Go to market

  4. txho/enx116/01204 enx116.ppt TODAY’S DISCUSSION • Product hypothesis • Customer segment prioritization • Next steps

  5. Example • Description • Financial optimization • Intermediation • Telemedicine • Seismic data • Media Cast/streaming • Security • Web hosting • App. hosting • Storage • IP net connect • Transit • Transport • Lamdas • Dark fiber • Co-location • Equipment • Structures that enhance earnings and cash flows • Optimization of existing commercial relationships • Streaming caching and content location intelligence leveraging EBS proprietary software • Managed storage capacity risk management • Managed transport/transit VPN alternative to private WAN frame and ATM solutions • Dedicated, DS-3 and faster, access to the Internet • Point-to-point IP and TDM circuits • Sales of DWDM channels on lit portions of EBS network • Swaps of dark fiber • Rentals of rack space in owned or leased co-location facilities • Server hardware and routing tables Current EBS product offering txho/enx116/01204 enx116.ppt EBS PRODUCT BUILDING BLOCKS • Product type • Finance and structuring • Tailored industry-specific services • Horizontal services • Hosting services • Network management and services • Enhanced transport and access services • Basic voice and data services • Raw transport

  6. txho/enx116/01204 enx116.ppt ENTERPRISE PRODUCT BUILDING BLOCKS ROUGH ESTIMATES Analyzed in following pages • 2001 U.S. market size • $ Billions • Basic blocks • Product • Type • Comments Finance and structuring • Estimated as 1,000 data centers at an average value of $50 million • Monetizations Data centers • Facilities risk management • Virtual data centers • See data centers above • Contract • intermediation • Transit & transport • See transport and transit below • Estimated using forecasted 2001 reviews for Akamai and other streaming players Horizontal services • Media Cast™ • Streaming media • Estimate of addressable remote managed storage services (e.g., NAS, backup, replication, SAN for last half of 2001) • Storage • Managed storage capacity Network management and services • IP Net Connect™ • VPN • Reflects IP-VPN market Enhanced transport and access services • Circuits (transport) • Private lines >= DS-3 Basic data services • >DS-3 connectivity • Dedicated • access (transit) • Long-haul internet/ISP services • Co-location • Rack space • See data centers above Raw transport • Mid-range servers ($3,000-$25,000 price band) • Equipment • Servers Source: McKinsey analysis; IDC

  7. PRELIMINARY txho/enx116/01204 enx116.ppt SUMMARY ASSESSMENT OF CO-LO AND SERVERS • Co-lo • Servers • EBS’ value proposition to the enterprise • Economically priced co-location space • EBS’ value proposition to the enterprise • Creative pricing of servers and related risk management products • Assessment • + Large market ($6 billion in 2001) • + EBS has a large inventory (24 POPs by Q42001) of available co-lo • – Individual sales likely to be small • Assessment • + Large market ($9 billion in 2001) • – Typically purchased as part of a larger decision (e.g., new applications) • – Significant vendor involvement in sales channel (e.g., warranties) • Implications • Sell as part of a larger bundle, not a lead product • Implications • Good candidate to provide risk management products to system integrators

  8. txho/enx116/01204 enx116.ppt U.S. TELECOM SPEND – ENTERPRISE ONLY 2001E EBS addressable segments $ Billions • 0.24 • Transport • 0.22 • Security • services • IP-VPN 0.24 • X.25 0.37 • ATM • 0.02 • 27.9 • 16.20 • 4.00 • Frame relay • OC-3 • 186.2 Totaladdressableenterprisemarket $15.4billionin 2001 • Localdata • 6.20 • DS-3 • Private line • LD data • 5.00 • DS-1 • Internet services • DS-0 • 1.00 • Wireless • 19.7 • Value-added services • 3.3 • 6.1 • Cable <0.1 • DSL 0.1 • Dial up • LD voice • Hosting • 0.8 • Access* • Dedicated connection • 5.0 • Localvoice • Transport** * Revenues realized for services from customer premise to Internet POP ** Revenues realized for services between Internet POPs Source: JP Morgan; McKinsey analysis

  9. txho/enx116/01204 enx116.ppt KEY BUYING CRITERIA FOR ENTERPRISE DATA CUSTOMERS • Definition • Breadth and depth of product offering • Breadth and depth of network coverage (e.g., quality and quantity of connections and traffic) • North America • Globally • Provisioning and other delivery capabilities, including fault notification/repair, directly related to initiating and maintaining service • Sales support capabilities (e.g., engineering) • Standard or negotiated specifications for service quality • Generally measurable statistics to determine compliance • Example metrics include latency, network availability, lost packets, provisioning time • Price per service/volume • Beyond pure price, contract/service flexibility is also a consideration • Brand recognition • Proven track record Product and Network SLA Price Reputation

  10. PRELIMINARY txho/enx116/01204 enx116.ppt SUMMARY ASSESSMENT OF IP TRANSIT • EBS’ value proposition to the enterprise • EBS IP transit products provide Internet connectivity primarily over Level 3’s cloud/peering agreements. EBS also offers/plans to offer much more significant flexibility in price/volume terms (e.g., peak/off peak, etc.) Similar to Level 3, EBS prices at a significant discount relative to standard pricing levels of incumbents/leading providers • Competitive assessment of key product attributes • Implications • Challenges like network, footprint and operational credibility will likely continue in the the next 12 months • As a result, EBS has a challenge in distinguishing itself from incumbents and other discounters like Level 3. Differentiation will likely depend on • Innovative price terms • Bundles including finance and structuring • Product/ • network • SLA • Price • Reputation • Limited reach and limited peering relationships relative to leading players • Longer provisioning lead-times • Unable to provide bundled solution (hosting, network management services) • By definition, close to parity with Level 3 • Level 3/EBS lag behind industry leaders on relative performance metrics • Discounts of up to 50%relative to leading provider pricing and 30% to Level 3 • Wide range of price/ volume flexibility (peak/off-peak) • EBS lacks reputation as trusted provider and is unlikely to gain one soon, given its reseller position

  11. PRELIMINARY • 3.88 • 2.35 • 1.46 • 1.84 • 1.74 • 3.51 • 4.25 • 5.80 • 5.77 • 0.00 • 50 txho/enx116/01204 enx116.ppt TRANSIT PROVIDER LANDSCAPE # POPS • Boardwatch weighted mean performance • Price performance gradient C&W* N/A AT&T 835 136 • Qwest Broad wing 160 • 2.70 • 2.52 • Median Sprint 320 UUNet 600 • Genuity • EBS (58) 70 • Level3 (58) • “Outliers” • 100 • 105 • 125 • 171 • OC-3 access • $ Thousands/month • Source: Bandwidth; JP Morgan, McKinsey estimates

  12. txho/enx116/01204 enx116.ppt TRANSIT PROVIDER LANDSCAPE – VIEW #2 Route miles, 000’s • Price OC-3 access • $ Thousands/month • AT&T • 41 • UUNet • 48 • Genuity • 18 • Tier 1 provider are able to charge significant price premiums reflecting broader network reach, more complete service offering, and established brand/reputation • Global Crossing • 20 • Sprint • 24 • Williams • 23 • Broadwing • 16 • Qwest • 19 • Level 3/EBS • U.S. POPs Source: JP Morgan

  13. txho/enx116/01204 enx116.ppt SUMMARY ASSESSMENT OF POINT-TO-POINT CIRCUITS • EBS’ value proposition to the enterprise • EBS provides point-to-point connectivity, specifically TDM circuits to enterprises managing/operating their own private line WAN • Competitive assessment of key product attributes • Implications • EBS will likely continue to face significant competitive challenges in offering circuits to enterprises as a stand-alone product as customer seek bundled data serves • 2001 target customers should be those who manage own communications infrastructure and discretely purchase private line circuits • A compelling value proposition will likely depend on a tie-in with other products/ services or a finance/structuring lead • Product/ • network • SLA • Price • Reputation • TDM circuits available for limited city pairs • EBS lacks ability to sell the “bundle”, which many customers seek • Off-net provisioning unclear • North America footprint has limited POPs to connect customers • Wasabi I/II efforts currently underway will improve ability to provision circuit by early 2001 • EBS has been underbid (Cisco-deal) recently (by as much as 50%) • Illiquid books for city pairs may impair pricing • Limited ability to price competitively as a reseller • EBS not viewed as leader in delivery or price in the marketplace

  14. PRELIMINARY txho/enx116/01204 enx116.ppt SUMMARY ASSESSMENT OF IPNet Connect • EBS’ value proposition to the enterprise • IPNet Connect provides WAN connectivity and a “platform” for IP-VPN services to enterprises via transport over EBS’ private IP network. EBS can connect enterprises to branch offices, suppliers, and other dedicated sites. Over the all-IP network, EBS will enable prioritization of traffic by the customer. EBS offers managed (where router/CPE is upplied and operated by EBS) and un-managed service • Competitive assessment • Implications • Network • SLA • Price • Reputation • Reach limited to 20 U.S. cities • Internet remote access not supported (Internet access to WAN) • Platform offering forces customer to source evenly IP-VPN functionality • Priority routing of on-net traffic (2 priorities only) • Tunneling/security not supported • To be determined by EBS • Several providers have 1-2 year lead on EBS in IP-VPN • Customers that manage own security are attractive • “Platform only” offering disadvantaged versus turnkey IP-VPN solutions offered by competitors • Limited footprint significantly decreases product attractiveness/applicability • Mark-to-market opportunity may be limited as service runs on EBS network • May be a small opportunity in 2001 given overall IP-VPN • Customer traffic destined for non-WAN IP addresses “surfing” • Public Internet cloud • CHI POP • EBS private IP cloud – 20 U.S. cities • LA POP • NYC POP • >DS-3 • Local loop from RBOC/other • >DS-3 • Local loop R R R R • Enterprise HQ • POP • Branch office • Existing/planned customers • DFW POP • Andersen Consulting and i2 to go live 1Q01 • Both deals connect limited sites (2-4) initially • i2 to bring on European/Asian sites by 2Q01 • EBS private IP network • carries all customer traffic destined for WAN IP addresses R • Supplier • Remote access user not supported for IP-VPN solution

  15. txho/enx116/01204 enx116.ppt IP-VPN LANDSCAPE Primary consideration slowing adoption of IP.UPN • Key factors driving IP-VPN replacement of legacy data services* • Differentiating criteria for IP-VPN offerings • SLA • Security • Legacy data • Network availability • Encryption security/IPS • Authenti-cation • IP-VPN • Latency • Firewall • Applications supported • WAN remote access • Security • Scaling/ flexibility • Different applications better suited for specific services • ATM for video • Private line for voice • Traditional PSTN-based solution • Dial-up to modem bank-server • Well-established/ trusted security protocols • Security handled in the network • Long lead times/ costs associated with adding sites/ capacity • All applications treated equally (as IP packets) • Traffic prioritization/ labeling enables service levers • Access through ISP (DSL, cable, dial-up) • “Tunnel” through Public Internet to access WAN • Lack of standards for security • Network and client -based options for security • Relatively simple and inexpensive provisioning of sites and capacity • UUNet • Sprint • Qwest • PSINet • Genuity • AT&T • 99.9% • 100% • 100% • N/A • 99.9% • 99.9% • 120ms • 75ms • 25ms • N/A • 125ms • 80ms • Xedig • Check Point • Raptor • Check Point • Raptor • Check Point • Watch guard? • Site Patrol • Check Point • Watch guard? • Firebox • Check Point • DES • Triple DES • Not supported • DES • Triple DES • Not supported • Triple DES • Digital/ certificates • IP See • Yes • No • Yes • Yes • Yes • Yes • Leading players offer IP-VPN security in the form of firewalls, encryption (IPSec) and authentication * Legacy data services include ATM, Frame Relay, and Private Line networks Source: IDC

  16. PRELIMINARY txho/enx116/01204 enx116.ppt SUMMARY ASSESSMENT OF STORAGE • EBS’ value proposition to storage customers • EBS, in reselling managed storage capacity, provides flexibility in terms of quantity and length of contract, and competitive pricing. In addition, EBS further provides distinctiveness by structuring and bundling additional EBS products (e.g., bandwidth, finance) • Primary target is the SI channel , since these companies buy at sufficient scale to meet EBS target deal size and will likely see a position to value in EBS price terms. In addition, SI storage spend estimated to be 4x the size of SSP market in 2001 • Business model • Description • Product offering • Managed storage capacity with flexible quantity and length of contract terms • Risk management and structuring with other EBS products (e.g., bandwidth, finance) • Primary target customer: system integrator channel • SIs already own enterprise customer relationship • SIs managed storage spend for 2001 is estimated at $2.6 billion in the U.S. (vs. SSP market estimated at $0.6 billion) • Implications • SSPs serve as enablers, of sales to enterprises • Systems integrators could be leveraged as a channel to enterprises for “pay as you go” storage product • EBS’ key distinctiveness is insight in pricing of components that underly managed storage capacity (e.g., forward curves on equipment, storage capacity demand, cost of storage per unit of managed capacity), flexibility in contract terms as well as structuring • EBS must still leverage the expertise and value-added managed storage services provided by SSPs • SIs can tailor and deliver the product to enterprises • SSP managed storage capacity • EBS risk management and structuring • SI • Customer • Customer

  17. $ txho/enx116/01204 enx116.ppt EBS STORAGE PRODUCT OFFERING • Storage deal flow • Comments • Description of offering • Resell managed storage capacity • Provide risk management and structuring • EBS value proposition • Flexible contract terms (quantity, length of contract) as other players reach scale, EBS distinctiveness will evolve towards pricing insight • Competitive pricing, especially on small-volume contracts • Bundling with other EBS products (e.g., finance, bandwidth) • Liquidity for managed storage capacity • Likely customers/customer needs addressed • Companies requiring smaller quantities of storage than stipulated by SSP minimum required (e.g., startups) • Companies needing temporary/burstable storage (e.g., CDN) • Companies with unmet financial need • Issues • Operational risks • SSP S-POP • Commitment for bulk, 10 terabytes, managed storage capacity for 1-3 years (including managed storage services and equipment/facilities) • $ • EBS • SI Pooling point/POPs • Managed storage capacity • Managed storage capacity • Q = 10 GB • N = 1 month • Managed storage capacity • Q = 50 GB • N = 3 months • $ Customer1 Customer2 Source: Interviews; team analysis

  18. txho/enx116/01204 enx116.ppt EXAMPLE EBS STORAGE OFFERINGS ILLUSTRATIVE • EBS value proposition • Vs. SSP • Flexible quantity: EBS provides a smooth cost curve vs. the chunky terms currently being offered by SSPs • Burstable storage**: EBS providers risk management to entities with highly volatile storage needs (e.g., media companies) • SSP offerings • SSP offering • Total cost to enterprise • Total cost to enterprise • Enterprise storage demand/ EBS offering • Enterprise storage demand/EBS offering • 0 • 100 • 1,000 • GB of managed storage capacity • GB of managed storage capacity * Minimum contract teams stipulated by SSP’s storage range from 100GB to 500+GB (with increments of 50 to 100GB) and 1-3 years ** SSPs can potentially vary the quantity of managed storage capacity offered, both up and down, but unclear if this is offered to the market today Source: Interviews; team analysis; e-Week; telecom; onesource

  19. PRELIMINARY txho/enx116/01204 enx116.ppt SUMMARY ASSESSMENT OF MEDIA CAST/STREAMING • EBS’ value proposition • Enable and support streaming media to “Enterprise.coms” and corporate intranets while providing enhanced QoS (on-net only) • Assessment of key product attributes • 2000 content delivery services market share • Percent • Implications: • MediaCast’s product development trajectory may limit immediate opportunity • The 2001 market does not appear to be large enough to create material earnings and Enterprises unlikely to sign longer-term deals until application infrastructure solution is clear • While streaming will eventually be adopted by enterprises, many structural factors must change first: • Lack of bandwidth in the LAN • Legacy integration issues • EBS? • Footprint: EBS has deployed 300 servers (~10% of Akamai) • Product suite (large enterprises): EBS does not currently provide content creation, editing, storage, or distribution • QoS: EBS cannot offer distinctive QOS on public Internet • Market • Top 20 Web sites (90% of market) use Akamai/iBeam • for large enterprises, legacy IT infrastructure and CIO concerns re complexity slow adoption • iBeam • Akamai • Digital Island • U.S. content delivery revenues* • $ Millions • 2001 • 2003 * Excludes hardware/software sales by vendors like Inktomi and CacheFlow Source: IDC; Goldman Sachs; ING Baring; CIBC; Piper Jaffrey; McKinsey estimates

  20. PRELIMINARY txho/enx116/01204 enx116.ppt SUMMARY ASSESSMENT OF VIRTUAL DATA CENTERS AND DATA CENTER MONETIZATIONS • Virtual data centers • Data center monetizations • EBS’ value proposition to the enterprise • Provide on-demand (sell a call option on) data center capacity to mitigate build-out risk • EBS’ value proposition to the enterprise • Provide incremental borrowing capacity above traditional lenders • Assessment • + Short position • + Leverages underutilized EBS POPs • – EBS POPs likely to be smaller than minimum economic facility size (~100,000 sq. ft.) • – Unlikely to be a long term source of value given EBS’ limited inventory of POPs • Assessment • + EBS may have unique insight into data center valuations • – Banks may require that EBS finance a portion of “loan on balance sheet” • Implications • Risk profile will be idiosyncratic to each deal; however, some counterparties are likely to meet all criteria (credit, etc.) • Implications • Most likely to gain acceptance from enterprise.coms and HSPs

  21. Finance and structuring Horizontal services Network management and services Enhanced transport and access services Basic voice and data services txho/enx116/01204 enx116.ppt PRODUCT COMPETITIVENESS IMPLICATIONS • Overall hypothesis • From the perspective of most Enterprise customers, EBS will likely be perceived as narrowly focused and relatively disadvantaged (technically) as a bandwidth and storage provider • EBS’ distinctiveness centers around: • Risk management such as innovative pricing regimes (e.g., peak and off-peak) and optionality (e.g., storage call options) • Structured cash and earnings management (e.g., contract and data center monetizations) • Discounted pricing on transit and transport • Several product hypotheses merit further exploration: • Bandwidth monetizations • Data center monetizations • Virtual data centers • Storage Source: McKinsey analysis

  22. txho/enx116/01204 enx116.ppt PRODUCT HORIZONS PRELIMINARY – FOR DISCUSSION • 2003 • Transit • Storage risk management • Monetizations • Media Cast • Circuits • Others TBD • Intermediation of incumbent bandwidth provider contracts (financial) • Monetizations • Virtual data centers • Storage risk management • Circuits • Transit • Media Cast • Others TBD • 2002 • Intermediation with path to delivery on EIN • Monetizations • Storage risk management • Transit • Circuits • Media Cast • Others TBD • More • 2001 • Customer acceptance • Less • Environment • EBS provides innovative pricing on incumbents networks to overcome concerns about EBS’ delivery capability • Limited customer acceptance of streaming applications • EBS offers risk management; commodity books still developing forward curves • Storage service provider market matures allowing EBS to address more customers with storage risk management products • EBS POPs begin filling up limiting the virtual data center offering • EBS forward curves improve • EBS develops distinctive transit offering through private peering and distinctive routing technology • Streaming applications begin to gain traction in the Enterprise space as LAN/desktops are upgraded and streaming applications emerge • EBS has liquid books and pricing insight across several commodities

  23. txho/enx116/01204 enx116.ppt TODAY’S DISCUSSION • Product hypothesis • Customer segment prioritization • Next steps

  24. Criteria • Appealing characteristics • Buying behavior • Appetite for EBS products • Bandwidth • Financing and structuring • Other (e.g., storage, co-lo) • Size of opportunity • Other • Decision process includes finance group/CFO (gleaned from public companies, earnings sensitive companies) • Engages in longer term (3+ years) contracts • High propensity to switch providers, especially based on cost • Utilizes multiple vendors for datacom needs • Currently buy voice and data in unbundled manner • Bandwidth is fundamental to business model (e.g., e-business) • Cost is key factor in buying decision • Many companies within segment experiencing financial distress or difficulty raising capital • Potential need to enhance earnings and/or cash flow • Storage is significant portion of cost structure • Incremental storage needed for short periods of time • Co-location highly demanded and enabling factor for selling other EBS products • Size of NPV/MTM greater than or equal to $2.5 million • Number of companies qualifying for EBS deal (credit quality and revenues criteria) warrant further exploration of segment • Discontinuities in the industry (e.g., bandwidth-intensive applications driving factor in bandwidth needs of segment) • Extraordinary projected industry/segment revenue growth txho/enx116/01204 enx116.ppt CRITERIA FOR EVALUATING CUSTOMER SEGMENT ATTRACTIVENESS • Segments • SI channel • Network service providers • IT/data center outsourcers • System integrators • Large enterprises • Enterprise.com • LE – IT software • LE – brokers • XSPs • Hosting service providers • Storage service providers • Application service providers

  25. txho/enx116/01204 enx116.ppt SCREENING PROCESS FOR ATTRACTIVE CUSTOMER SEGMENTS INENTERPRISE ORIGINATION • Screen 2 • Credit and • outsourcing profile • Screen 1 • Market size • Screen 3 • Needs and behaviors • Enterprise group verticals • Systems integrators (SI) • Enterprise dot com (.com) • Large enterprises (LE) • XSPs (ASP, HSP, SSP) • SI • Total number of companies: x • SI • .com • LE • XSP • Highly attractive customers by attribute • Product implications • End-user • Factors • Minimum potential deal MTM/NPV of $2.5 million (~$6 million annual spend or ability to influence others spend, e.g., SIs) • U.S. focus • Identify the “inflection point” in datacom relevance to business model, prioritize bandwidth intensive vertical (target 5-10 verticals to put through screen 2) • Factors • Self hosted • Web • Applications • In-house I/T management • Credit of CCC or better • Minimum opportunity set (25 companies meet above criteria) or ability to influence others spend (e.g., SIs) • Factors • Price/performance • Basic vs. enhanced products • Finance vs. telecom products • Bundle vs. unbundled solutions • Centralized vs. distributed purchasing

  26. PRELIMINARY txho/enx116/01204 enx116.ppt ENTERPRISE PRIORITIZATION BY VERTICAL • Minimum target company business revenues* • $ Millions • 2001 addressable datacom budget* • Percent of revenues • Number of • companies • HSP • 6 • SSP • 0 • Enterprise.com • 14 • ASP • 5 • IT – software • 7 • IT – SIs** • 16** • Brokers • 13 • Public administration • 1 • Services • 11 • Health services • 4 • Utilities • 11 • Manufacturing • 29 • Education • 0 • Transportation • 5 • Distribution • 17 • Agricultural • 0 • Petroleum • 3 • Mining • 0 * Addressable datacom spend (IP and circuits). $2.5 million MTM/deal, 25% gross margin, 2 year contract term, assumed 100% EBS intermediation of and 10% discount rate ** Own consumption apply, does not reflect other datacom spend influenced by the SI; # of channel partners is 33 Source: Gartner; Dun & Bradstreet; McKinsey estimates

  27. LE-Other • Brokers • SI • IT • software • Enterprise. • com • HSP • ASP • SSP txho/enx116/01204 enx116.ppt ENTERPRISE CUSTOMER SEGMENT PRIORITIZATION PRELIMINARY – FOR DISCUSSION Sweet spot • Potential deal size • $ Millions • $2.5 • $0 • Physical • (e.g., QoS, security, reputation) • Financial • (e.g., monetization, • earnings enhancement) • Customer needs prioritization

  28. Category • Business model • “Pure play” examples • Network infrastructure service providers • Network infrastructure mgt. services • Network consulting and integration • Information services outsourcing • BPO and similar outsourcing • Systems integration and IT consulting • Provide support and management services for a broad range of network and networked servers applications and clients; assist companies to plan for and/or build data networks • Provide ownership and management of all or part of companies’ information systems operations or department • Provide services to companies, such as • Processing services • BPO (business processing outsourcing) • Application outsourcing • Customer application development and maintenance • Software support and installation • Hardware support and installation • IT training and education • Provides companies with counsel on its strategy, IT and network planning, and other IT/network-related issues as well as planning, design, implementation, and/or project management of a solution targeted to a specific technical or business need • EDS/SHL Systemhouse • SAIC/Telcordia • Getronics • AMS txho/enx116/01204 enx116.ppt SYSTEM INTEGRATORS - LANDSCAPE OF SERVICE OFFERINGS • Telecom-centric • Operations- centric • Strategy-centric

  29. Channel category • Assessment of channel • Network service providers • Network infrastructure management services • Network consulting and improvement • IS outsourcing • BPO and similar outsourcing • System integration and IT consulting + Mainly telecom/datacom focused + Potentially high level of influence on customers’ telecom buying decisions + “Tier 2” and emerging players may need financial products + Balance sheet consists of potentially manageable data center assets – May potentially have existing long-term relationships/ contracts for bandwidth + Providers are ultimate telecom buying decision makers + Balance sheet consists of potentially monetizable data center assets + Providers seeking new lines of services to introduce to customers – Operations not necessarily linked to telecom/datacom products + Providers seeking new lines of services to introduce to customers – Channel customers’ datacom spend is small portion ofoverall costs, thus garners minimal mindshare – Providers have limited influence upon customers’ telecom buying decisions txho/enx116/01204 enx116.ppt CHANNEL ASSESSMENT

  30. txho/enx116/01204 enx116.ppt THE LANDSCAPES OF IT/NETWORK SERVICES IS BROAD AND PROVIDERS OF NETWORK SERVICES AND IS OUTSOURCING HAVE THE MOST EXPOSURE TO CUSTOMERS’ DATACOM NEEDS Potentially attractive target customers; discussed on following page Attractive segment of IT/network services providers • Size of market • $ Billions • Description • Share of market by provider (percent) • Network service providers* • 1.0 • 2.0 • 1.1 • High • Telecom- • centric • 1.3 • 2.2 • $ 17.8 • 4.7 • 6.6 • 4.0 • 3.6 • 3.7 • 58.4 • GE Capital • Entex • Other** • IBM • EDS • CSC • Compaq • Unisys • Unisys • AC • HP • AT&T • Get- • ronics • 3.5 • Attractive-ness to EBS • Operations- • centric • Information services outsourcing • 2.0 • 2.3 • 23.2 • IBM • EDS • CSC • Unisys • SAIC/Telcordia • Other** • ACS • 3.4 Fujitsu • 1.9 HP • BPO and similar outsourcing* • 2.4 Compaq • 0.9 AC • IBM • Other • 0.6 CSC • 94.8 • 1.7 EDS • Strategy- • centric • System integration and IT consulting • Low • 4.4 • 8.5 • 4.9 • 4.6 • 32.4 • Other • IBM • EDS/AT Kearney • AC • E&Y • Deloitte * Share of market by provider extrapolated from 1998 worldwide figures ** Select number of attractive companies discussed on following page Source: IDC; Gartner; Team analysis

  31. txho/enx116/01204 enx116.ppt IT/NETWORK SERVICES – LANDSCAPE OF ADDITIONAL PROVIDERS • Providers • Main drivers of revenues • Channel • category • Network service providers • IS outsourcing • Cabletron • Compucom • NCR • Microage • Network Appliance • Perot Systems • SAIC/Telcordia • Unisys • Affiliated Computer Systems (ACS) • Banctec • Compuware • Computer Horizons • Equifax • National Data Corp • PWC • Teletech Holdings • Holding company with high-tech units involved in networking product solutions and services specializing in networking equipment, software development, consulting and Internet related services • Network integration and support services with specialization in order tracking, EDI, on-line inventory reporting and summary billing to large and medium enterprises • Relationship Technology solutions (includes data warehousing and CRM applications) for retail, finance, communications, travel, transportation and insurance sectors • Equipment, service and solutions for networking applications and e-business support; offerings span 40 countries and most industries • NetApp file servers which store and deliver files over high-traffic, data-intensive networks; NetCache which store information physically closer to users. Customers include Yahoo!, America Online, Motorola, Siemens, and the UK's #1 ISP, Demon Internet. • Technology consulting and services with emphasis on financial services and health care sectors • SAIC: Systems integration, R&D, and other services to the U.S. government (mainly the Department of Defense) and software and systems implementation for the petroleum and health care sectors • Telcordia Technologies (subsidiary of SAIC and formerly AT&T’s Bellcore research arm); telecommunications networking, operations software, consulting and training services; approximately 80% of the public telecom networks in the U.S. rely on the company’s expertise • Systems integration and technology support services targeted at financial, government and other niche markets. Customers include Banamex, Eli Lilly, and the Kellog Company • Professional services and business process and technology outsourcing to commercial clients. Customers include Motorola and the U.S. government • Electronic processing systems, software, and services for entities that do high-volume financial transactions; 95%-owned by investment firm Welsh, Carson, Anderson & Stowe • Testing, development, and management of software for programs running on corporate networks. Customers include Ford, FedEx, and Hewlett-Packard. Future plans to include expanding presence online through acquisitions, and offering remote testing and performance monitoring services over the Internet • Application implementation, network engineering, systems management, and other services for the insurance, telecom, and banking sectors • Credit rating services with database of 400 million credit holders worldwide, check authorization, credit card processing, and other consulting services. Customers include banks and retail stores in the US, Canada, Latin America, and the UK. • Information systems, services and e-commerce support to the health care, financial, government, and retail sectors. Plans to expansion through acquisitions • Information technology and human resource consulting, and business process outsourcing; operations span 850 offices in 150 countries • CRM services; assets include 35 "customer interaction centers" across the globe; customers include American Express, Blockbuster, Citigroup, GTE, and Microsoft Founder and chairman Kenneth Tuchman owns nearly 60% of the company. * Providers noted above may have additional services that span to other SI channel service offerings

  32. Area of interest txho/enx116/01204 enx116.ppt SI CHANNEL • Credit quality • AAA • 1. • 2. • 3. • 4. • 5. • 6. • 7. • 8. • 9. • 10. • 11. • 12. • 13. • 14. • 15. • 16. • 17. • 18. • 19. • 20. • 21. • 22. • 23. • 24. • 25. • 26. • 27. • 28. • 29. • 30. • 31. • 32. • 33. • Affiliated Computer Systems(ACS) • American Management Systems • Andersen Consulting • Banctec • Cabletron Systems • Cambridge Technology Partners • Comdisco • Compucom • Computer Horizons Corp • Compuware • CSC • Deloitte & Touche • E&Y • EDS • Equifax • First Data Corp • GE Capital Info Tech Solutions • Getronics • IBM • Keane • KPMG • Microage • National Data Corp • NCR • Network Appliance • Nova • Perot Systems • PWC • Renaissance • SAIC/Telcordia • Sykes • Teletech Holdings • Unisys • AA+ • AA • AA- • A+ • A • A- • BBB+ • BBB • BBB- • BB+ • BB • BB- • B+ • B • B- • CCC+ • CCC • CCC- • CC+ • CC • CC- • C+ • C • C- 18,000 90,000 • Revenues ($ Millions) Source: S&P; Dun & Bradstreet, Compustat; IDC; Gartner Group; Interviews; Company 10-K’s and annual reports; Analyst reports; McKinsey analysis

  33. Area of interest txho/enx116/01204 enx116.ppt IT SOFTWARE SEGMENT • Credit quality • AAA • 1. • 2. • 3. • 4. • 5. • 6. • 7. • Microsoft • Oracle • Computer Associates • SAP • Silicon Graphics • BMC • Peoplesoft • AA+ • 1 • AA • AA- • A+ • A • 2 • 4 • A- • BBB+ • 3 • BBB • BBB- • BB+ • BB • BB- • 5 • B+ • 7 • B • B- • 6 • CCC+ • CCC • CCC- • CC+ • CC • CC- • C+ • C • C- • Revenues Source: S&P; Dun & Bradstreet, Compustat; IDC; Gartner Group; Interviews; Company 10-K’s and annual reports; Analyst reports; McKinsey analysis

  34. Area of interest Segment assessment txho/enx116/01204 enx116.ppt IT SOFTWARE SEGMENT (CONTINUED) • Criteria • Overall assessment • Appetite for EBS products • Bandwidth • Finance and structuring • Other (e.g., storage, colo) • Size of opportunity • Rating • (L/M/H) • L/M • L/M • L • na • L • Rationale • Limited number of players qualify given EBS’ deal size and credit quality criteria • Some emerging software applications will be bandwidth intensive • EBS’ discussions to date express uncertainty in companies interest in EBS product • IT industry segment top 3 in terms of bandwidth spend • Players generally buy telecom in bundled solutions making it difficult for EBS to intermediate • Limited monetizatable assets on balance sheet • na • Limited number of companies qualify for EBS deal given size and credit quality criteria Source: S&P; Dun & Bradstreet, Compustat; IDC; Gartner Group; Interviews; Company 10-K’s and annual reports; Analyst reports; McKinsey analysis

  35. Area of interest txho/enx116/01204 enx116.ppt ENTERPRISE.COM SEGMENT • Credit quality • AAA • 1. • 2. • 3. • 4. • 5. • 6. • 7. • 8. • 9. • 10. • 11. • 12. • 13. • 14. • E-trade • Amazon • Buy.com • Yahoo! • Talk.com • Priceline.com • Datek • E-bay • Hotelwork.com • 1-800flowers.com • Beyond.com • Ventro • Ask Jeeves • VerticalNet • AA+ • AA • AA- • A+ • A • A- • BBB+ • BBB • BBB- • 13 • BB+ • 5 • BB • 9 • BB- • B+ • 6 • 11 • 7 • 2 • 3 • B • B- • 1 • 8 • 4 • CCC+ • CCC • 10 • CCC- • 12 • CC+ • CC • CC- • C+ • 14 • C • C- • Revenues Source: S&P; Dun & Bradstreet, Compustat; IDC; Gartner Group; Interviews; Company 10-K’s and annual reports; Analyst reports; McKinsey analysis

  36. Area of interest txho/enx116/01204 enx116.ppt ENTERPRISE.COM SEGMENT (CONTINUED) Segment assessment • Criteria • Overall assessment • Appetite for EBS products • Bandwidth • Finance and structuring • Other (e.g., storage, colo) • Size of opportunity • Rating • (L/M/H) • L/M • M • L/M • L/M • L/M • Rationale • Several companies with significant telecom spend, but many are hosted, eliminating most of EBS’ opportunity • High bandwidth requirements, but require high quality connectivity as web site performance is crucial to business models • Recent market downturn increases need for financial statement enhancement as well as alternative source of capital. However, few assets in place to collateralize EBS capital • Limited use for commodities other than bandwidth/transit • Adoption rate slow; not large in 2001 • Size limited, as many enterprise.coms source telecom commodities through hosting provider Source: S&P; Dun & Bradstreet, Compustat; IDC; Gartner Group; Interviews; Company 10-K’s and annual reports; Analyst reports; McKinsey analysis

  37. Area of interest txho/enx116/01204 enx116.ppt HOSTING SERVICE PROVIDER SEGMENT* • Credit quality • 1 • AAA • 1. • 2. • 3. • 4. • 5. • 6. • Exodus** • Digital Island • Interliant • USI • Globix • Navisite • AA+ • AA • AA- • A+ • A • A- • BBB+ • BBB • BBB- • BB+ • BB • BB- • B+ • 6 • 3 • B • 1 • B- • 2 • CCC+ • 4 • CCC • CCC- • CC+ • CC • 5 • CC- • C+ • C • C- • Revenues * Companies listed do not include carriers who operate large hosting centers (e.g., Genuity, Qwest, UUNet) ** Exodus recently completed deal to buy Global Crossing Co hosting business. As a result, Exodus will be largely captive to Global Crossing bandwidth Source: S&P; Dun & Bradstreet, Compustat; IDC; Gartner Group; Interviews; Company 10-K’s and annual reports; Analyst reports; McKinsey analysis

  38. Area of interest txho/enx116/01204 enx116.ppt XSP: HOSTING SERVICE PROVIDER SEGMENT* (CONTINUED) Segment assessment • Criteria • Overall assessment • Appetite for EBS products • Bandwidth • Finance and structuring • Other (e.g., storage, colo) • Size of opportunity • Rating • (L/M/H) • L • M • M/H • L • L • Rationale • Overall segment is interested in bandwidth, but large share of segment is captive to own network (e.g., Qwest) • Highly interested in IP transit, but need high quality, on-net reach, which EBS cannot currently provide • Independent hosters recently hit hard by markets yet still need capital for build-out/growth • Limited need for colo/storage beyond their existing data centers • Hosting market dominated by large carriers, who likely are not potential customers • Very few companies meet minimum criteria * Companies listed do not include carriers who operate large hosting centers (e.g., Genuity, Qwest, UUNet) ** Exodus recently completed deal to buy Global Crossing Co hosting business. As a result, Exodus will be largely captive to Global Crossing bandwidth Source: S&P; Dun & Bradstreet, Compustat; IDC; Gartner Group; Interviews; Company 10-K’s and annual reports; Analyst reports; McKinsey analysis

  39. txho/enx116/01204 enx116.ppt SUMMARY ASSESSMENT OF SWEET SPOT CUSTOMER SEGMENTS • Attractive as both customer and channel • Second tier and telecom – centric players appear worthy of additional focus • Attractive as customer but limited number of targets meeting minimum size-centers • May also “pull through” bandwidth by developing new distributed applications • Attractive as customer but limited number of companies meeting minimum size criteria • Most companies meeting screens, are already targeted • Attractive as a customer • Limited number of non-wholesale pureplays passing screen • SSI • Software • Enterprise.com • HSP

  40. txho/enx116/01204 enx116.ppt 2001 GO TO MARKET PRIORITIZATION PRELIMINARY – FOR DISCUSSION • Continuum of focus • Customer segment • Comment • Systematic • Opportunistic • Large “named accounts” • SI’s focused on network management • Outsourcers with data center build-out risk exposure • Publicly-traded software companies • Customers in high potential verticals but with MTM of $1-2.5 million • Start-ups with potential for large future bandwidth consumption • Most currently in discussion with EBS today (e.g., Yahoo!) • Not currently being targeted but likely to be seeking “a competitive edge” • Learnings from larger customers will inform discussions and pricing here • Minimize focus unless compelling reasons to the contrary

  41. txho/enx116/01204 enx116.ppt TODAY’S DISCUSSION • Product hypothesis • Customer segment prioritization • Next steps

  42. txho/enx116/01204 enx116.ppt NEXT STEPS • Complete customer prioritization and product development • Confirm preliminary product assessment and revise product hypothesis • Develop economic model for attractive deal structures • Confirm initial customer prioritization and develop diagnostic tools • Develop go-to-market strategy • Test acceptance of product hypothesis with customers • Revise product attributes/deal structures as needed • Identify capabilities needed to deliver products • Fill capability gaps as needed • Prioritize origination teams on highest potential customer segments • Target marquee accounts • Carefully monitor any resources dedicated to nascent startups or companies with a small chance of contributing to 2001 margins • As the Enterprise team further develops its priorities for 2001, we recommend that you continue to analyze the following questions: • Which customer segments will likely be most responsive to EBS’ relative advantages (creative pricing and deal structures for transit, transport, and storage products that are not part of a broader, bundled service package)? • What deal structures are generating the most interest within these target market segments? • How will the EBS’ network capabilities and product suite change during 2001? What influence will this have on the relative attractiveness of EBS’ transit/transport and other product offerings? • Are the potential markets for streaming/MediaCast and storage large enough in 2001 to justify significant effort to sell these products? • How can EBS best communicate and leverage its price/performance story? • How can origination best influence product development and network capabilities? • Is there a need for a new product management function that spans trading/origination/network?

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