Deciding on the right timing of VDSL roll-outs:A real options approach

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. The incumbents in most European countries offer ADSL services to the residential market. However, ADSL does, as opposed to VDSL, not offer the same triple play option as upgraded cable networks. Incumbents only basing their future broadband offer on ADSL in areas with established cable operators are therefore faced with the risk of considerable losses in potential revenue. In addition, the national regulatory authorities have obliged the incumbents to offer unbundling of the local loop giving OLOs the possibility to compete directly with the incumbent not only onADSL market but eventually on VDSL as well. However, the marginal cost of rolling out VDSL is high to even prohibitive in certain geographic areas. It is therefore imperative for the operator to develop methodologies for valuing the flexibility in such investment strategies: which rollout investment projects should be launched in the short, medium and long term and equally important? –Which rollout projects should never be launched? In this paper, we propose the use of a real options option approach widely applied in financial theory as a means to capture the value of flexibility in future VDSL rollout investments. This value is not incorporated in traditional discounted cash flow and net present methodology used ubiquitously. We show, that when uncertainty and the flexibility of timing are taken into account, the impact on the NPV can be dramatic and result in different decisions compared to decisions based on conventional NPV criteria. Introduction Rolling out VDSL implies heavy investments for an incumbent due to the requirement of optical fibre deeper in the access network caused by the shorter reach for VDSL compared to ADSL. A 26 Mbps asymmetric VDSL access connection requires that the total copper line distance to the subscriber does not exceed 1 000 m. The cost levels and customer potential can vary significantly from one central office area to another. The following parameters are key: line density and therefore the number of potential customers within the reach of an optical node, existing ducting/fibre infrastructure as well as the operator’s market share. The focus of this study is the incumbent’s decision whether to invest or not in a VDSL rollout based on remote fibre nodes in suburban areas during a ten year period. It is assumed that the incumbent launches ADSL services from the first year and onwards. In comparison to the dense urban area case, which is the focus of [1], suburban areas are characterised by lower