Valuing flexibility in telecom infrastructure projects.

The rapid technological change and uncertain future evolutions have a large impact on the investment projects in the telecommunication sector. When new infrastructure networks are rolled out, the initial assumptions can prove to be untrue, severely impacting the economic viability. It is therefore extremely important that projects offer flexibility to allow the management to react to unforeseen changes. Management must, for example, be able to decide to speed up the project, slow it down, or even completely abandon it. However, the standard method used to evaluate investment projects, the Net Present Value (NPV) analysis, is unable to capture the value of these different flexibility options. The Real Option (RO) concept, derived from financial literature, was proposed as a solution and allows implementing this flexibility in the standard calculations. However, Real Option Thinking (ROT) is only slowly getting accepted within the telecommunication sector. In this tutorial, we will indicate why the characteristics of this sector make it very well suited to apply real options to investment projects. In addition, we introduce the basics of real options theory and provide a practical methodology to apply real options to realistic telecom business cases. The rollout of fixed next-generation access networks offers a broad range of growth options to the operator, e.g. additional network upgrades or the introduction of new services. Using real options allows comparing the flexibility value of all these options. We provide a practical approach that can be seen as an extension to the standard techno-economic planning process of network deployment or migration. We indicate the essential requirements for the application of real options (uncertainty, flexibility and phased decision) and describe the four methodological steps: executing a standard NPV analysis, identifying the uncertainties, identifying the flexibility and calculating the option value (see figure below). To indicate the strength as well as ease of application of real option valuation, we will walk through a realistic techno-economic case, the migration from copper-based access based networks to more fiber rich and (eventually) fiber to the home networks.

The slides of the tutorials are free to download for own use! You can also read our related paper