Bids for the UMTS system: An empirical evaluation of the Italian case

Spectrum reservation options for Mobile Virtual Network Operators

“…The correspondence between financial and real options is complete if we consider the investment needed for the project as the equivalent of the exercise price, and the time at which the investment decision will have to be taken as the expiry time of the option. Real options have been considered for investments in mobile networks infrastructures [20], [21], [22], [23] and licenses [24]. The real options framework has been considered for spectrum trading in [16] and [6].…”

“…a Geometric Brownian motion), with a mean drift µ and a volatility σ, i.e., dS = µSdt+σSdz, where z is a Wiener process (this hypothesis is widely adopted in the context of investments in the wireless industry, see, e.g., [22], [23]); • The risk-free rate of interest r is constant; • The value S 0 of the spectrum channel at the time of the option purchase is the Net Present Value (NPV) of the investment in the spectrum channel, i.e., the present value of the net profits to be obtained by the MVNO during the temporary use of the spectrum channel; • There are no transaction costs associated to the channel purchase. Under these hypotheses the correct price for the option, when the exercise price is Z, is…”

A real options model for the transferability value of telecommunications licenses

“…A case supporting instead the latter hypothesis (prices well below actual values) is provided by the auction for 3G licenses in Italy where the anomalous situation already described in Section 2 brought the auction to a premature conclusion. For that case, Scandizzo and Ventura have proposed a model for the value of the license, based on real options [32]. In that model, the cash flows generated by revenues are modeled through a geometric Brownian motion.…”

“…A similar approach is adopted in [19], where the price of the product (i.e., bandwidth), rather than of the company, is used to evaluate decisions on the purchase of bandwidth. An alternative source of information is represented by accounting statements, as in [32], where the volatility of cash flows based on the quarterly reports of a mobile company is used to evaluate ex-post the value of UMTS licenses. Finally, a completely different approach is taken in [9], where the volatility in traffic demand is estimated, on the basis of daily measurements, and employed to evaluate the price of capacity, with an estimate σ = 0.95.…”

“…The task of assessing the value of licenses, namely UMTS licenses, has been addressed in the past [3,15,32]. Such efforts are reviewed in Section 4.…”