CONFIDENTIALThisreportcontainsinformationthatisconfidentialandproprietarytoMcKinsey&CompanyandissolelyfortheuseofMcKinsey&Companypersonnel.Nopartofitmaybeused,circulated,quoted,orreproducedfordistributionoutsideMcKinsey&Company.Ifyouarenottheintendedrecipientofthisreport,youareherebynotifiedthattheuse,circulation,quoting,orreproducingofthisreportisstrictlyprohibitedandmaybeunlawful.Montreal,CanadaFebruary25-27,2001LocalExchangeNetworkandCustomerEconomicsTELECOMITP2DCO-ZXD332/010223DjmcpPP1APPROACHINTHISDOCUMENT•Networkcostingmethodologies•ComponentsofcustomervalueEvaluateEvaluateprofitabilityandprofitabilityandimplicationsimplicationsIdentifykeyIdentifykeyrevenuestreamsrevenuestreamsIdentifycostsandIdentifycostsandcostdriverscostdriversReviewobjectivesReviewobjectivesandbasicconceptsandbasicconcepts•Capitalcostsbyelement–Access–Switching–Transport•Operatingcosts•SG&Acosts•Distributionofrevenuesbycustomersegment•Importanceofdifferentproductstorevenuedistribution•Profitabilitybycustomersegment•Importanceofdifferentproductstoprofitability•Subsidyflowsamongcustomersegments•Structuralvulnerabilitiesofincumbentsandattackers3DCO-ZXD332/010223DjmcpPP1CONTENTS•Objectivesandbasicconcepts•Revenues•Costs•Implications4DCO-ZXD332/010223DjmcpPP1CONTENTS•ObjectivesandbasicconceptsObjectivesandbasicconcepts•Revenues•Costs•Implications5DCO-ZXD332/010223DjmcpPP1THEPUBLICSWITCHEDTELEPHONENETWORK–U.S.IXCpointofpresenceLECendofficeLECendofficeLECendofficeLECendofficeIXCpointofpresenceLECtandemswitchLECtandemswitchLocalexchange1Localexchange2IXCbackboneswitches6DCO-ZXD332/010223DjmcpPP1•Localexchange/localexchangecarriers•Longdistance/longdistancecarriers•Costingmethodologies•Allocationissues•Incrementalprofit•RelationshipvalueBASICCONCEPTSINNETWORKANDCUSTOMERECONOMICSThelocalexchangeiscurrentlydominatedbyLECs.Thus,localexchangeeconomicsaretypicallyanalyzedfromtheperspectiveoftheILECandCLECsLDcarriersderiveabout85%oftheirrevenuesfromLDservices.Thus,LDeconomicsaretypicallydescribedfromtheIXCperspectiveTherearemanywaystotalkaboutnetworkcost–elementcosts,servicecosts,embeddedcostandforwardlookingeconomiccost(FLEC)arethekeymethodsTelephonenetworkshavehighfixedcostsandmanycomponentsthatarenotnecessarilyrelatedtoaspecificelementorservice(jointandcommoncosts).AllocatingthesecoststoelementsorservicesissomewhatarbitraryGivenhighfixedcosts,valueisproperlyunderstoodasdirectrevenuesplusavoidedcosts(e.g.,access)lessthemarginalcosttoserveThevalueof“owning”thecustomerrelationship(e.g.,crossselling)shouldbeconsideredwhenthinkingaboutcustomervalueCustomervalueCustomervalueNetworkcostsNetworkcostsProductsvs.Productsvs.providersproviders7DCO-ZXD332/010223DjmcpPP1ProductmarketsharesOthers(CLECs,IXCs)ILECs4ProviderrevenuesbyproducttypePRODUCTSVS.PROVIDERS1Includingbasicdialtone,verticalfeatures,tollusage,accesschargesforLDusage2Includesdirectorypayphone,andotheractivitiesintelcosubsidiary3IncludeswirelessLD,alarmmonitorandothernon-telcoactivities4IncludesSprint’sUnitedsubsidiary5IncludesAT&Twireless,MCImetro,SprintUnitedandSprintPCSSourceJ.P.Morgan;McKinseyTelecomPracticeLocalexchange100%=$106billionOthers(Verizon,SBC)IXCsLongdistance100%=$105billionWirelessandotherLocalexchangeaccessservices1Incumbentlocalexchangecarriers100%=$160billionOthers(wireless,local)5LongdistanceLongdist...
