Investment decisions in the wireless industry applying real options

Authors:
Fotios C. Harmantzis;Venkata Praveen Tanguturi
Affiliations:
Stevens Institute of Technology, School of Technology Management, Telecommunications Management, Castle Point on Hudson, Hoboken, NJ 07030, USA;Stevens Institute of Technology, School of Technology Management, Telecommunications Management, Castle Point on Hudson, Hoboken, NJ 07030, USA
Venue:
Telecommunications Policy
Year:
2007

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Abstract

The wireless industry is one of the most capital intensive high-technology industries. This paper applies real options techniques to estimate investments under uncertainty in two new ventures: (a) deferral of the expansion from 2.5G to 3G networks; and (b) expansion of a 2.5G network using Wi-Fi as an alternative technology. The cases are examined and analyzed both qualitatively and quantitatively, using realistic assumptions and parameters. Investment cost, number of subscribers, pricing of services, and risk are at the core of investment decision processing. In both cases, sensitivity analysis of the value of the (real) option considering the above key parameters was conducted, to extrapolate useful findings that should be taken into consideration by the decision makers in wireless companies.