Dark Fiber Valuation

Valuation of dark fiber has recently generated controversy, sparked particularly by the large sums booked for swaps of dark fiber between companies. One of the issues raised is valuation: i.e., what is the value of an asset that generates no revenue now and may do so at some unknown point in the future but only after investment, in an uncertain business climate, and where prices are dropping? The picture is further complicated because the result of investing to bring the asset to market (i.e. lighting the fiber) changes the supply and demand conditions of the market itself and hence invalidates price predictions. A realistic and consistent valuation methodology is necessary for increasingly cautious companies, auditors, and investors. In this paper we describe such a valuation methodology for dark fibre based on real options. Publicly available bandwidth price services start to make this practical by providing market price information. For dark fibre valuation the real option to be valued are the lighting decisions. We specifically include the effect on the market of adding new capacity by using the price-elasticity of demand within the stochastic price process itself, conditional on lighting decisions. Prices are generally volatile and decreasing with time. The evolution of lighting costs and maintenance are included in the valuation. The real options technique used here is novel in that it combines economic and market factors explicitly with mathematical finance to arrive at a valuation and optimal decisions. We found that the optimal lighting riming and capacity decisions to depend on many of the factors included in the analysis with no simple triggers: the details really matter.     

Dynamics of Link Failure Events in Network Markets

We present a computational model and simulation results on the dynamics of local link failures in markets with network structure. Bandwidth markets are inherently networked, so we focus on telecommunications here. The objective of this paper is to test whether or not network failures will have serious economic consequences. We measure economic consequences by looking at changes in expected bandwidth prices, changes in value-at-risk (VAR) and in conditional-value-at-risk (CVAR). Bandwidth markets may be particularly sensitive to network failures because bandwidth is a non-storable commodity. On the other hand alternative paths with equivalent quality of service (QoS) are perfect substitutes so this may limit sensitivity. Non-storability has contributed to enormous volatility in deregulated electricity prices and observations of enormous price spikes. Bandwidth is a true network commodity in that links in the network itself are the traded commodities. Thus a local failure can affect alternative equivalent paths and this can have a knock-on effect in turn. We used a spot market model incorporating non-storability and alternative path selection on price grounds and limited by QoS-equivalence. Spike models are incorporated based on empirical data. We found that for a realistic large-scale market topology if there are, say, four failures per link per year, half of which are long enough to affect the market, then: expected link prices are increased 12%; VAR is increased by 30%; and CVAR by 40%. This is even with a spike size (×3) that is modest compared to observations in electricity markets (×10–×100). For market participants with capacity positions in such a market these consequences are likely to be serious. Thus if failures occur at this rate their consequence must be included in planning. Furthermore, whilst at low failure intensities the network acts as a dampening factor, at higher intensities it acts as an amplifier and thus cannot be neglected. We believe this amplification to be an emergent phenomenon of any market with network structure, although clearly more important for markets with no storage.