How to Incorporate the Value of Flexibility in Broadband Access Network Roll-out Investment Projects

摘要

Incumbents worldwide are faced with increased competition from various sides such as cable operators and other licensed operators (OLOs). Cable operators in Europe and North America have for a while offered broadband Internet service bundled with TV and telephony. In order to be competitive, incumbents face large investments in the coming years. It is therefore imperative for the operator to develop methodologies for valuing the flexibility of optional future investments: which roll-out investment projects should be launched in the short, medium and long term? And equally important: which roll-out projects should never be launched? In this paper, we propose the use of option pricing widely applied in financial theory as a means to capture the value of flexibility in future roll-out investments for very-high-speed digital subscriber line (VDSL). This value is not incorporated in the static traditional discounted cash flow (DCF) approach used ubiquitously. In real-life projects, management will most often have flexibility to make decisions along the way as conditions change. Surprisingly, the use of option pricing or real options in telecommunications is still in its infancy. We show, that when uncertainty and the flexibility of timing are taken into account, the impact on the net present value (NPV) can be dramatic and result in different decisions compared to decisions based on conventional NPV criteria.