Valuation Considerations of System Economics Continuing the thread on System Economics, today I will explore the vaulation considerations for technology assets that exhibit different economies (Speed, Scale, Scope & Span)
Economies of Speed, Scale and Span produce increasing marginal returns that can be linearly projected. Take the example of a backbone provider that is considering the purchase of DWDM optical transport system for a single strand of fiber. Different systems will offer different capacities per fiber strand, realizing different throughputs, or Economies of Speed. Different systems will offer different scalability characteristics, realizing a per line card upgrade path for Economies of Scale. Optical to Optical switching platforms can route traffic without sacrificing throughput to realize economies of sequence, or Span. An example of a system that exhibits diseconomies of Span is below. Provided that vendors do not offer free optionality, either in contract or technology, potential returns can be measured with linear discounted cash flow techniques such as ROI.
The only exception to the above is when vendors offer contracts or technology upgrade paths that inherently include free options. For example, a system that provides Economies of Scale from a vendor that requires a minimal initial investment for the base platform relative to the cost of future upgrades makes the upgrade path non-linear. Buyers could purchase the base platform with no intention of upgrading capacity with the exception of an unlikely and signficant change in traffic requirements.
Economies of Scope, however, produce increasing marginal returns that are non-linear. Tunable lasers, for example, are a technology asset that can be repurposed as factors of production, realizing Economies of Scope. Unlike a standard line card in a DWDM system which is built to be red, green or another specific wavelength, a tunable lazer can change wavelengths. This enhanced modularity reduces investment risk and makes it a better choice for spares or systems with a high likelyhood of architectual change.
What makes Economies of Scope non-linear is the options they create. Tunable lazers are purchased almost as insurance. If a system is populated with Tunable lazers it decreases the requirement for capital expenditures in spares and decreases operating risk of being able to fulfill services. Repurposable assets should be valued using techniques that account for different options in use. A Real Options methodology would be more suitable for measuring the value of a technology asset that realizes Economies of Scope.
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