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Softswitch Economics
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Table 11-34 Costs and benefits when softswitch generates 25% more revenue than Class 4
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Income tax component Gross income Business expenses Taxable income before depreciation and/or capital gains Depreciation Salvage value Book value Difference salvage value versus book value Tax on capital gains (20% of above) Income tax Profit after taxes and expenses Class 4 $29,494,886 ($2,643,000) $26,851,886
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Softswitch $36,868,608 ($2,478,200) $34,390,408
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Table 11-35 NPV when softswitch generates 25% more revenue than Class 4
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Class 4 NPV with OCC at 12%, 10%, and 7% NPV ($17,453,726)(1.6901) $1,085,000 $28,413,542 NPV ($17,453,726)(1.7355) $1,085,000 $29,205,941 NPV ($17,453,726)(1.8080) $1,085,000 $30,471,337
Softswitch NPV with OCC at 12%, 10%, and 7% NPV ($22,330,620)(1.6901) $37,515,980 NPV ($$22,330,620)(1.7355) $38,529,791 NPV ($$22,330,620)(1.8080) $40,148,760 $225,000
$225,000
$225,000
income after access fees and Universal Service Fund assessments have been paid. In this model, the retail rate for long distance is $.08 per minute. Access fees and Universal Service Fund payments take $.02 per minute from the Class 4 service provider. The softswitch service provider then enjoys 25 percent greater revenue in this model. In summary, by not having to pay access fees and Universal Service Fund assessments, the softswitch-enabled service provider enjoys a net pre-
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Softswitch Economics
Softswitch Economics
sent value of over 30 percent more than the Class-4-enabled service provider. This is a compelling reason for long-distance service providers to move to delivering long distance in a phone-to-phone IP service model as an enhanced service provider.
Large Long-Distance Service Providers
The following pages delve into a carrier-grade scenario comparing the Net Present Values when planning for 36,000 DS0s in one location. Telco strategy over the past few decades has centered on concentrating as many DS0s as possible in one location. Table 11-36 outlines the gross revenue for large long-distance carriers with 36,000 DS0s. Table 11-37 provides the purchase cost of Class 4 versus softswitch for 36,000 DS0s. Table 11-38 details the costs of purchasing a Class 4 or softswitch. The total benefits and costs of Class 4 and softswitch when purchasing 36,000 DS0s are shown in Table 11-39. Table 11-40 shows the salvage value of Class 4 and softswitch for 36,000 DS0s at 12 percent OCC. In Table 11-41, the difference in NPV between Class 4 and softswitch is only about four percent in favor of softswitch. This is probably not enough of an advantage, in and of itself, to encourage service providers to select softswitch for their networks. Table 11-42 examines the net present value when the Class 4 solution is $50 per DS0.
Table 11-36 Gross revenue for large long-distance carriers with 36,000 DS0s
DS0s 36,000
Minutes/day 480
Price/minute .03
Days (2 yrs.) 508
Total benefit $263,347,200
Table 11-37 Purchase cost of Class 4 versus softswitch for 36,000 DS0s
Components of cost System Installation Total (P Co)
DMS-250 $6,220,000 $30,000 $6,250,000
Softswitch Convergent Networks $1,332,000 $12,000 $1,344,000
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Softswitch Economics
Table 11-38 Costs when purchasing Class 4 and softswitch
Component of cost Collocation rent (annual) Labor Maintenance contract IP circuits Total For life (j) of 2 years Class 4 DMS-250 $168,000 (14 racks) $170,000 (2 engineers) $622,000 $11,000,000 $12,395,400 $24,354,600
11
Softswitch $12,000 (1 rack) $140,000 (2 technicians) $133,200 $11,000,000 $11,473,360 $22,852,640
Table 11-39 Total benefits and costs of Class 4 and softswitch when purchasing 36,000 DS0s
Income tax component Gross income Business expenses Taxable income before depreciation and/or capital gains Salvage value Resale value Book value Difference salvage value versus book value Capital gains tax at 20% Taxable income Income tax capital gains
Class 4 $263,347,200 $24,354,600 $238,992,600
Softswitch $263,347,200 $22,852,640 $ 240,494,560
$782,040 $600,000 $1,022,120 $2,021,459
$631,540 $332,000 $295,970 $36,030
$404,292 $251,577,080 $88,051,978 $163,120,810 $404,292
$7,206 $252,098,030 $85,713,024.06 $166,385,005.54
Profit after taxes and expenses
Table 11-40 Salvage value of Class 4 and softswitch for 36,000 DS0s at 12% OCC
Salvage value Class 4 (P-S)(A/P, I, N) ($6,220,000 $1,350,000)(.5917) $1,350,000(.12) $3,043,579
Salvage value softswitch ($1,332,000 $332,000)(.5917) $332,000(.12) $631,540
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