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 timing and capacity decisions to depend on many of the factors included in the analysis with no simple triggers: the details really matter.