The paper is organised as follows. In section two we give a brief overview of regulation
and investments, notably by providing stylised facts for the next generation networks and a
review of the literature. In section three we explain how real option theory works. Section
four describes the model employed to test the impact of different regulatory regimes on
investments in next generation network and discusses regulatory options. Section five
provides our conclusions.
2 - Regulation and Investment
2.1 - The next generation networks
In the OECD countries (OECD, 2007), investments in telecommunication networks has
been characterised by a record growth in the period up to 2000 and by a subsequent strong
decrease, from a value of USD 243 billion in 20001, which includes investment in tangible
infrastructures2, to below USD 160 billion in 2005. Such a decrease was mainly due to two
factors: i) the end of the massive initial investments in access and backbone infrastructures,
both fixed and mobile, by new entrants in the telecommunication market, led by over-
optimistic expectations on the pick up of Internet services; ii) the end of the financial
bubble in the telecommunication industry, that pressed operators and capital markets to be
more focused on obtaining an adequate return on investment3.
1 Corresponding to more than three times the total investment in the sector a decade earlier. The figure
includes auctions for licences to spectrum allocated for 3G (UMTS, IMT-2000) services for most of the
European countries, with the exceptions of Denmark, Greece, Luxembourg, Poland and Sweden.
2 Following OECD (2007), the main drivers for this raise in investments were construction of second
generation wireless networks, the entry of new competitors into local access markets for fixed networks, and
very large commitments by new entrants and incumbents in national and international backbone
infrastructure.
3 As one of the typical problems during the financial bubble was the funding of business plans in terms of
coverage and demand, nowadays new entrants tend to be more focused on a local or regional level (e.g. fixed
wireless ISPs) rather than trying to become a national service provider. The bubble in financial markets was at
least partially caused by the same over-optimistic expectations on the future of Internet which lie at the heart
of the massive build -up of capacity (on this see Gavosto, 2003).