Investment Decision in a Broadband Internet Network: A Real Options Approach

This article is a case study analysing the decision of a telecommunications operator to roll out ADSL infrastructures in areas of low population density. This type of investment is characterized by the risk of committing significant sunk costs for a low number of potential subscribers. In addition, the investment decision is complicated by the involvement of local authorities which are interested in offering broadband internet access to the local population, and are prepared to partially fund the project. Real options are used to calculate the project's value and optimal timing of the investment. Particular attention is paid to provide detail on how to perform real options analysis and valuation. The option is evaluated with the binomial model and we explain how to estimate key parameters such as volatility. The case study suggests that real options can produce a more sensible recommendation regarding investment timing than the net present value (NPV) rule. It also illustrates the benefits of real options beyond mere valuation aspects. In particular, this approach can help structure discussions with local authorities and enables the operator to establish a roll-out plan of ADSL infrastructures across the entire network.