Invest Today or Tomorrow? A Real Option Approach to Strategic Development in the French DSL Market

Abstract

This paper presents a descriptive case study of the new entrants' strategies on the French DSL market, applying the theoretical framework of real options. It is shown that two main strategies have been built around different analyses of the fixed incumbent operator's wholesale offer. The first is based purely on a classical valuation approach (net present value). The second accounts for an invest tomorrow real option included in the incumbent's wholesale offer. The trade-off carried out by new entrants with the second strategy is then analysed and illustrated with a real option valuation based on the binomial tree method. Consequently, wholesale offer prices could include a mark-up to reflect the loss of a real option value by the incumbent in favour of new entrants.

Keywords: Broadband, DSL, French communications market, real options, DSL wholesale offers, pricing

JEL Classification: L11, L86, G31