Application of real options to strategic management of military satellite communications

Abstract

This paper presents an overview of real options valuation techniques, and describes how MILS ATOM projects can be evaluated using real options. Definitions of key concepts involved in real options as well as real options examples from other industries are discussed first, followed by a description of five types of options with each type paired with a MILS ATCOM example. The mechanics of conducting a real options evaluation are explained, including required data and inputs particularly as applied in a MILS ATCOM context. The paper concludes with a discussion of the challenges for the DoD in implementing real options valuation techniques. Budgetary pressures have changed the military space communications philosophy from all communications services, any time, any place to communications service, right time, right place. This new philosophy, described in the current Military Satellite Communications (MILSATCOM) Architecture documents [1], would require a somewhat different approach to MILSATCOM services than has been employed in the past. This new philosophy implies having just enough communications services to meet the need at any given time. Many concepts and systems have been proposed to achieve the communications service, right place, right time philosophy. Such ideas as government anchor tenancy on upcoming commercial satellite systems, commercial leasing of satellite communications services on demand, and Civil Reserve Air Fleet-like arrangements [2] with satellite communications service providers are discussed frequently. But what has been largely absent from the discussion is how to properly value each of these ideas. Real options provides a useful valuation methodology for inherently risky projects such as those being considered to meet future MILSATCOM needs.