How To Calculate An IRU Price For a 100G Wavelength

The IRU price should reflect your forecast of future lease revenes. If the current MRC is high and prices have been stable and are expected to remain so, then the opportunity cost of selling an IRU is high. You are sacrificing a lot of lease revenue if you sell that capacity. In this case the upfront IRU price should equal the three year MRC multipled by 4 to 6 years. So if the three year Faster cable MRC is $17K, then 48x to 72x times that number is fair value. So 48*$17K=$816K. Plus a standard 4% annual fee to cover the wavelength's share of maintenance and operations.. So strong markets and tight capacity mean that leasing is more attractive than IRUs to the supplier. Vice versa, the buyers will be desperate to lower their long term costs via an IRU. In my example, $816K divided by 15 years equates to $4500 per month excluding O&M. Bad for the seller. Good for the buyer. That's why so many of you are looking for IRU capacity to resell to your clients, but finding few sellers. 

Suppose the contrary. Maybe prices are reasonable today, but have been steadily declining for years due to fundamental factors like chronic surplus capacity. This is what happened on the Atlantic route. Many subsea cables went bust in 2000-2002. They emerged from bankruptcy and the result was 7 high capacity systems fighting over the NYC/London route. Prices steadily fell from $38K for a 10G wave in 2005 to $10K in 2012. So this is a situation in whch a carrier might prefer to take some capacity off the table via an IRU sale. Particularly, if they are relatively pessimistic about the future. I sold one 10 year 10G wave IRU to a large software company in 2010. The O&M alone was greater than the lease price of a 10G by the end of the 10 year term. Hibernia got the better of that deal. Microsoft got the worst. Soft market, sell IRUs. Strong market, lease. 

Remember, an IRU is a capacity sale. It is an asset sale or effectively a change in the balance sheet (more cash and less capacity) with zero immediate impact on corporate income which reflects revenue (services provided in exchange for cash) and operating expenses. If I sell a 20 year IRU at $1 million, then my balance shows a $1 million increase in cash and a corresponding $1 million decrease in the value of my network capacity. Over the next 20 years, I can recognize each year $1 million/20 years or $50K each year as revenue. Also the $40K in annual maintenance payments is considered revenue. I assume in this example 4% O&M or .04*$1 million. Hence there is no great revenue impact from IRU sales. It will not help the carrier's bottom line so the principal reason to do it is more liquidity. Conversely, the buyer sees a big reduction in his/her operating expenses. If the buyer was paying $20K a month or $240K per year in lease expenses, those costs disappear from the income statement. Instead, the buyer has a capacity asset worth a $1 million dollars that depreciates 5% per year (1 year/20 years). So there is $50K in non-cash depreciation addred to the income statement versus $240K previously. So the income statement is greatly improved. The only operating expense associated with the IRU is the annual O&M of $40K. So growing networks often want IRUs because they reduce operating expenses.