PAETEC Agrees to Acquire McLeodUSA for a National Footprint through an All-Stock Deal

On September 17th PAETEC agreed to acquire McLeodUSA for $557 million, comprising $492 million in PAETEC stock and $65 million assumption of debt. McLeodUSA contributes switches and other assets in 18 midwestern and western states plus a regional fiber network to PAETEC. The combined carrier would serve 3.4 million access line equivalents and will extend its reach into 82 of the top 100 MSAs – among the largest independent competitive carriers in the country.

Recommended Competitive Responses

► The largest incumbent providers such as AT&T, Verizon, Qwest, Sprint and Level 3 need to be aware of PAETEC's intentions to establish a footprint covering most of the major metros nationwide. PAETEC plans to use its comprehensive footprint to ratchet up sales to regional and national enterprise accounts.

► Qwest, AT&T, cable companies and other providers doing business in McLeodUSA's footprint will have opportunities to take away McLeodUSA customers before and after an acquisition by PAETEC. Pre-acquisition, mid-market McLeodUSA customers may be lured away by the uncertainty about changes PAETEC may make to the service terms that brought customers on board with McLeodUSA.

► For international carriers doing business with global multinationals that have operations in the U.S., PAETEC may present wholesale opportunities to provide services inexpensively to global clients' branch offices.

► It is unlikely but possible that someone in the tier of providers below AT&T and Verizon, on the level of a Qwest or Sprint, may see in PAETEC an opportunity to jump into the nationwide facilities-based access provider market.

Recommended End User/Customer Responses

► McLeodUSA customers can ride out any existing contract with the carrier for now. McLeodUSA has already raised its focus to mid-market customers subscribing to T-carrier services, paying less attention to low-end dialtone and broadband customers. A PAETEC acquisition is unlikely to drop McLeodUSA's service and support levels for low-end customers any further.

► PAETEC should appeal to customers that are looking for a basic portfolio of network and value-added services with a high level of customer support. The carrier does not have the consulting and professional services resources to match an AT&T or Verizon, which is less important for customers that do not need these services from a large carrier. PAETEC already serves metros in the eastern U.S. plus parts of California, and it has some services that it can extend more comprehensively nationwide and internationally.

► The McLeodUSA acquisition is not yet a done deal. Even if the acquisition closes as planned, it will take time for PAETEC to connect the networks and pull together services as a single entity, and longer to synch up internal systems and incorporate corporate cultures. Nationwide enterprises should not add PAETEC to the short list of bidders just yet.

| Client Access - Business Network Services - U.S. |

NaviSite Continues Buying Spree with netASPx Acquisition

On September 12th NaviSite agreed to acquire privately-owned applications management service provider netASPx for $40.5 million. netASPx offers solutions such as Lawson Enterprise Resource Planning (ERP) and Kronos Workforce Management and Business Intelligence Applications as managed applications to their clients.

Recommended Competitive Responses

► Managed application companies in general will need to continue to monitor NaviSite’s efforts. This recent two-for acquisition set gives NaviSite a new set of clients, and that size, and cross-promotional activity stands to help its revenue stream, and general market momentum. Key elements players should watch out for when competing head-on with NaviSite will include global reach, managed services, and multimedia support.

► Verio will need to pay special attention to NaviSite as a growing threat. NaviSite’s acquisitions show the company is determined to be a player in the hosting and managed services markets, and Verio cannot risk missing the bandwagon lest it lose customers to NaviSite.

► AT&T should carefully review its own managed application services efforts in light of this deal. While it has expanded its depth with its USI and Daniel IT acquisitions, AT&T should evaluate what other solutions it wants to support, especially as it moves more down market for customer sales.

► Rackspace will need to look at ways to diversify its services, and determine what managed applications support makes sense for the company and its clients. This could also include making its own acquisitions to expand its customer base and services.

Recommended End User/Customer Responses

► End users on both sides of the merger will find this deal beneficial to them, as netASPx and NaviSite clients stand to gain added resources and services from a single source vendor.

► Prospective clients will want to tread lightly as the company works to merge netASPx, Alabanza and Jupiter Hosting, and may want to wait until the dust settles, and the transitions are clearly finalized until outsourcing key applications. Those proceeding will want to make sure contract language guarantees service levels and penalties for failure to meet. .

| Client Access - Internet/Managed Services - U.S. |

Microsoft’s Silverlight Shines Forth in Official Release

On September 5th Microsoft finally officially released its Silverlight 1.0, offering a multi-browser, multi-platform solution for enterprises seeking to enhance a user’s multimedia experience on the Web. Microsoft also noted that it will work with Novell Inc. to provide Silverlight support for Linux, called Moonlight.

Recommended Competitive Responses

► Microsoft should continue to look at new channels that it can roll Silverlight out to. As the solution extends beyond basic streaming media, the company may want to look at channel-specific solutions that it can market to with specific options. For instance, including bundled code for queries, chat, and surveys for an educational market.

► Microsoft should continue to strategy positioning Silverlight not as a Flash replacement, but as a way for service providers to better get into Web 2.0 solutions for their clients.

► Microsoft needs to highlight how security is included in the solution, and work to shore up any initial release weaknesses that come up.

Recommended End User/Customer Responses

► Adobe and Apple face direct competition from this rollout, given their own streaming media-supportive solutions (Flash and Quicktime respectively). For both of these players, they can tout their experience, breadth and depth in the marketplace over this new entry to the market, while looking at ways to continue to enhance and refine their solutions.

► Service providers will need to determine to what extent they will embrace Silverlight. For most CDN and streaming media players, inclusion of it appears to be a minimal requirement to remain competitive.

| Client Access - Internet/Managed Services - U.S. |