Bandwidth trading hopes shatter on fiber optic glut

Nichola Groom

NEW YORK: Hopes that trading of bandwidth could turn out to be the next big

thing have collapsed amid a glut of fiber optic cable and the bankruptcy of

Enron Corp., its biggest proponent. Bandwidth -- the capacity of a fiber optic

line to transmit data from one point to another as on the Internet -- was once

thought to be a commodity as easily traded as gold or oil.

The bursting of the Internet bubble, however, revealed bandwidth trading,

like many of the worst excesses of the dot com boom, to be little more than

hype. "It's never going to be a full-blown liquid market," said Desi

Stoops, director of bandwidth trading for Williams Communications Group, Inc., a

former unit of Williams Cos. Inc. "I think that's something that we are

finally realizing."

Enron's bandwidth trading operations, once touted as the bankrupt energy

trading giant's future, was the first major division to fail, well before the

company filed for Chapter 11 bankruptcy protection last month. In fact, the

unit, which never became profitable, cost Enron more than $2 billion to build

and operate, and critics wonder how much business was ever really conducted.

Several small bandwidth exchanges that cropped up during the technology boom

have all but disappeared, said Seth Libby, an analyst with the Yankee Group.

"It's hard to say what they were to begin with," he added.

Few incentives for standard market

Williams Communications, which has a large bandwidth unit, has shifted its

focus to alternative types of risk management as several key issues, including

the question of universal linkage in metropolitan areas, remain unsolved, Stoops

said.

London-based Band-X, which operates a marketplace for buyers and sellers of

bandwidth, said telecommunications carriers prefer its model to the idea of

creating a derivatives market for one of their major assets.

"I'm not entirely sure it's required," said Richard Elliott,

executive vice-president of global trading development for Band-X. "There

is no shortage of capacity due to the massive over-investment we have seen in

the last few years." Until the overcapacity in bandwidth has cleared and

prices rebound, telecommunications companies have little incentive to create a

standardized contract that would provide the framework for commodity-like

trading, Elliott said.

The Bandwidth Trading Organization, which was comprised of carriers like

Enron, introduced a standardized contract, but the contract never proved to be a

hit with the sellers, said Jerry Samuels, senior vice president of trading for

RateXchange Corp., a San Francisco-based bandwidth broker. Exact numbers are

hard to come by, but industry experts say only about 10 percent, or even less,

of existing fiber optic capacity for bandwidth is lit, or in use in the United

States.

This is a key factor in market liquidity, as connection bottlenecks abound in

cities, despite a glut in long-haul capacity and unused dark, or unlit, fibers.

"Although the demand was growing exponentially, supply was growing

exponentially with new technology which can take the existing bandwidth and

multiply its capacity," said Samuels.

Premature idea

The trading that was happening prior to Enron's collapse was primarily

between the major energy companies themselves, including El Paso Corp., Reliant

Energy, Dynegy Inc., and Aquila Inc., said Samuels. In recent months, such firms

have either been forced to scale down their telecommunications units or change

their direction.

"The idea of bandwidth as a commodity is premature," said Libby.

"I don't see Aquila, Dynegy or anybody stepping up to try to fill the role

that Enron played." A spokesman for energy trader and marketer Aquila, Inc.

told Reuters that although the company is still involved in some bandwidth

deals, "Trading is essentially not happening."

Samuels said RateXchange, which operates as a bandwidth consultant and a

broker for equities markets, is sticking it out as there is hope for a bandwidth

marketplace. "We still have the robust trading system that is up and ready

to go when there is the need for it," said Samuels.

In terms of when to expect a full-fledged bandwidth derivatives market, few

are willing to give a specific estimate. "Everyone always says it's 18

months away, but I think it's quite a bit longer than that," Elliott said.

"Perhaps five years." Others are not even willing to speculate.

"I hate to even say anymore," Stoops said.

© Reuters Limited.