Sinha, Pankaj and Mudgal, Hemant (2011): Valuation of 3G spectrum license in India: A real option approach.
Download (2MB) | Preview
India is about to enter a new technological phase as far as mobile technology is concerned. After almost a decade of existence, Third Generation (3G) mobile technology will be rolled out in India. The licenses for the same were auctioned in April – May 2010 and 3G licenses were allocated to the winners in September 2010. Nine private telecom operators entered the bidding for the license and eventually seven won the licenses. The bidding was intense and eventually the aggregate fees of the license as received by the government were almost twice the expected amount. In the backdrop of experience of 3G auction winners in UK and Germany who paid huge sums to acquire the 3G licenses and later lost their market capitalization as the markets perceived that the price paid for the license was more than the actual value of the license, analysts in India were concerned if the operators had paid too much for the licenses. In this report aggregate value of the 3G licenses is calculated using both traditional discounted cash flow approach and real options approach. We find that the rollout of 3G services gives an internal rate of return of 14.2%over the life of the license. If we assume an internal rate of return of 15% for the telecom operators then the aggregate license value comes out to be INR 594 Billion which is 12% lower than what the operators have paid to acquire the license. We also found out that the value of the license as calculated from the real options methodology is INR 798 Billion which is 17.8% higher than the aggregate value paid by the operators. Hence we see that DCF valuation suggests that the licenses were overvalued while Real Options methodology suggests that the licenses were undervalued. The report discusses the reasons for differences between real option valuation and DCF valuation of the license, the possible challenges that the 3Goperators might face in the short to long term and what are the key enablers for the growth of3G services if they want to extract the maximum mileage out of the 3G technology. The report recommends that in future while allocating telecom licenses or licenses in sectors where high and irreversible investment is required and there is a scope for the licensees to invest in phases or in modules, the government should consider real options methodology for setting the price of the license., or the base price of the licenses in case the government decides to follow an auction methodology
|Item Type:||MPRA Paper|
|Original Title:||Valuation of 3G spectrum license in India: A real option approach|
|Keywords:||3G spectrum, mobile technology, valuation, real options, DCF|
|Subjects:||G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation
G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation
G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General
|Depositing User:||Pankaj Sinha|
|Date Deposited:||05 Jun 2011 15:07|
|Last Modified:||10 Aug 2016 23:20|
Alleman, J. (2002). A new view of telecommunications economics. Telecommunications Policy 26 , pp. 87-92.
Basili, M., & Fontini, F. (2003). The Option Value of the UK 3G Telecom Licenses. Info 5,3 , pp. 48-52.
BDA Connect & FICCI. (2009). 3G & BWA: The Next Frontier. Benaroch, M., & Kauffman, R. J. (1999). A Case for Using Real Options Pricing Analysis To Evaluate Information Technology Project Investments. Information Systems Research, Vol. 10, No. 1 , pp. 70-86.
Brandao, L. E., Dyer, J. S., & Hahn, W. J. (2005, June). Using Binomial Trees To Solve Real-Option Valuation Problems. Decision Analysis, Vol. 2, No. 2 , pp. 69-88.
Chang, J.-R., Hung, M.-W., & Tsai, F.-T. (2005). Valuation of intellectual property: A Real option approach. Journal of Intellectual Capital, Vol. 6 No. 3 , pp. 339-356.
Damodaran, A. (2000). The promise of real options. Journal of Applied Corporate Finance, Vol. 13 , pp. 29-43.
Fichman, R. G. (2004, June). Real Options and IT Platform Adoption: Implications for Theory and Practice. Information Systems Research, Vol. 15, No. 2 , pp. 132-154.
Herath, H. S., & Bremser, W. G. (2005). Real-option valuation of research and development investments: Implications for performance measurement. Managerial Auditing Journal, Vol. 20 No. 1, 2005 , pp. 55-72.
Kemma, A. G. (1993, Autumn). Case Studies on Real Options. Financial Management, Vol. 22, No. 3 , pp. 259-270.
Kumar, A., Liu, Y., Sengupta, J., & Divya. (2010). Evolution of Mobile Wireless Communication Networks: 1G to 4G. IJECT, Vol 1, Issue 1 .
Leslie, K. J., & Michaels, M. P. (1997, Number 3). The real power of real options. The McKinsey Quarterly .
Luehrman, T. A. (1998, July-August). Investment Oppurtunities as Real Options: Getting Started on the Numbers. Harvard Business Review .
Mastroeni, L., & Naldi, M. (2010). A real options model for the transferability value of telecommunication licenses. Ann. Telecommun., 65 , pp. 201-210.
Mkhize, M., & Moja, N. (2009). The application of real option valuation techniques in the cellulartelecommunication industry in South Africa. S. Afr.J.Bus.Manage. 40(3) .
Morgan Stanley. (2010). Internet Trends. Neely III, J. E., & Neufville, R. D. (2001, Vol. 1). Hybrid real options valuation of risky product development projects. International Journal of Technology, Policy and Management, Vol. 1, No. 1 , pp. 29-46.
Sah, V. (2011). Asset Acquisition Criteria. Journal of Property Investment & Finance, Vol. 29 No. 1 , pp. 7-18.
Stille, R., Lemme, C. F., & Brandao, L. E. (2010). Uma Aplicacao de Opcoes Reais na Avaliacao de Licenca de Prestacao de Servicos de Telefonia Movel 3G no Brasil. Journal of Finance, Vol. 8, No.3 , pp. 329-349.
Tanguturi, V. P., & Harmantzisa, F. C. (2006). Migration to 3G wireless broadband internet and real options: The case of an operator in India. Telecommunications Policy , 30 (7), 400-419.