An Options Game approach to valuate broadband projects in a smart city context

Abstract

AbstractBroadband projects nowadays represent a valid investment alternative to pursuing smart city goals, particularly considering the rapid development that has affected the telecommunications industry. However, for potential investors, the valuation of these projects is a demanding activity because they are characterized by the uncertainty of future user demands, the competition risk, and the sequential nature of investment. In this paper we propose an innovative methodology to valuate the broadband projects taking into account these three peculiarities. This model consists of combining the compound real options approach (ROA), able to price the sequential uncertain projects, with the Options Game (OG) approach used in the literature to valuate uncertain investments affected by competition risk. This paper contributes to the existing literature by expanding the OG model to fit the broadband characteristics in discrete time. We also propose a case study to implement the theoretical approach. Results show that, despite their uncertain nature and competition risks, broadband investments represent a profitable investment alternative when pursuing smart city goals.