Investment in Next Generation Networks and the Role of Regulation: A Real Option Approach



interesting to give a feeling on how simulation can change when a modicum of competition
is included.

5 - Concluding remarks

In this paper we constructed a real option model in order to study the investment
decision of telecommunications operators in next generation networks (NGNs). In
particular we try to answer the question on whether the extension of current regulatory
obligations on dominant companies may hamper the investment in NGNs or not. The real
option model allows to capture the vast uncertainty surrounding the projected returns and
cost savings of services based on NGNs both for established operators and new entrants and
thus to attach an economic value to the option of postponing the investment decision.

We concentrate on the timing of the investment as the relevant variable, thus neglecting
both the amount of the investment and the impact on consumers’ welfare. The latter
omission is of particular concern as, when it comes to assess the different regulatory
regimes, our analysis is
per force limited at best. We hope to include the welfare aspect in
future extensions of this work. Another possible extension concerns the introduction of
more than one players in the market and how does this affect the timing of the investment.

An interesting feature of the real option model regards the so-called truncation issue:
regulatory intervention that caps the total returns affects investments in NGN negatively
only in the initial period; in the long run, according to the real option model, investments
are not affected insofar as the portion of the net present value distribution which lies below
the strike price remains unchanged even after the truncation imposed by the regulator.

We calibrate the real option model with actual data coming from a floated new entrant
operator, Citéfibre, specialised in services based on optical fibre; we make also use of
estimates for incumbent operators (there are not actual data available, yet), based on a
number of studies and reasonable conjectures. The output of the model suggests that the
new entrant was right in undertaking the investment when it did: this is of some comfort as
to the model robustness.

39



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