Real Options and Bandwidth Markets: Dark Fiber Valuation

Bandwidth markets start to make possible a real options analysis of dark fiber value by providing market price information for a related determinant of their value: the value of transmission either through lit fiber on the same route and/or related routes. Whilst a real options analysis of dark fiber may be forward looking with respect to bandwidth markets, the market for dark fiber itself is active, especially in the metro segment. Also, given the indefeasible rights of use run for 20 to 30 years we are not starting too soon. We present a valuation methodology that takes into account the salient characteristics of dark fiber itself and of the stochastic spot price process for bandwidth. We include the decreasing technology cost with time and how this changes when different lighting capacities are considered. We treat the spot price of bandwidth as decreasing and mean reverting. Critically we model the effect of adding additional lit capacity on the bandwidth market: prices drop. We also consider the value of the investment given a pre-existing investment on the same route by the buyer of the dark fiber. We examine the multiple lighting factor, that is, lighting equipment can be replaced later. We find that lighting cost, spot price volatility and the strength of the mean reversion are all important. Demand elasticity is the least significant factor whereas relative capacity added both with respect to existing capacity and to the buyers previous position are relevant over certain ranges.