Bandwidth Traders Gleeful Amid Gloom

Telephone companies and equipment makers may be gloomy, but bandwidth traders are whistling while they work. Trading outfits including Enron said volumes are increasing, and they are more bullish than ever about the future of bandwidth trading.

Such trading ranges from buying and selling switched voice minutes to swapping raw capacity on a fiber-optic backbone, in a nascent marketplace that some observers predict will grow to rival trading of commodities such as gas. Market research firm Ovum predicts that by 2006 bandwidth traders will swap $20 billion per year in contracts.

"Weve more than doubled in the first quarter what we did in all of last year," said Paul Racicot, vice president of global bandwidth risk management at Enron Broadband Services, a wholly owned subsidiary of Enron. In 2000, Enron handled 321 bandwidth trades, in which it actually took ownership of bandwidth positions before offering them for trade.

In addition, officials at trading firms Arbinet-thexchange, Band-X, Dynegy and The Williams Cos. all said bandwidth trade volumes rose in the first quarter, but none of the companies would disclose the dollar value of the contracts traded.

"We are now processing over 300,000 trades per day, and our trade volume is growing 30 [percent] to 40 percent month-over-month," said Chris Reid, a spokesman at Arbinet-thexchange, which provides a neutral platform for carriers trading wireless, voice-over-Internet Protocol (IP) and switched voice minutes.

Officials at Band-X said the volume of switched long-distance minutes traded on their exchange in the first quarter rose by 30 percent, compared with the fourth quarter of 2000. The company also saw double-digit increases in the amount of routed IP access it sold during the quarter, said Donald Noonan, Band-Xs vice president of networks.

Bandwidth trading is surging due to a number of factors, experts said. Perhaps most important: More companies are trading the commodity. In recent months, energy companies including Duke Energy, Dynegy and El Paso have begun trading bandwidth. As more players enter the market, more trades are made, liquidity increases and, as one trader put it, "liquidity begets liquidity."

Also, bandwidth trading lets companies generate more revenue from their networks without adding more personnel. Finally, in spite of predictions that there may be an oversupply of fiber-optic capacity, traders said prices for data capacity, including dark fiber, are relatively steady.

"We dont see, in our business, an oversupply of bandwidth in the marketplace," said Chris Lemmer, director of bandwidth trading and risk management at Williams Communications Group, a subsidiary of The Williams Cos. that will be spun off to shareholders on April 23. And he believes more carriers are trading to hedge their risks.

Despite the apparent uptick in bandwidth swapping, the business still faces significant hurdles, including the establishment of standardized contracts, real-time provisioning and the creation of neutral pooling points in major cities. In addition, some industry players dont see trading as an essential part of their business.

"We havent felt any impact so far," from bandwidth trading said Shirish Lal, president of broadband services at Broadwing, which recently completed its own 18,000-mile-long fiber network. Although Broadwing has participated in a few bandwidth trades, Lal said, "weve been able to cover the market with our existing distribution, which is one-to-one sales."

While bandwidth traders are happy with the maturation of their market, there is still a whiff of dot-com bubble in the air. Although Williams claimed earlier this year that its bandwidth trading operation is profitable, it didnt offer specifics. Enron said its broadband services unit wont be profitable until 2002 or so.

Earlier this month, Enrons broadband unit cut about 250 positions. The company blamed the reductions on the recent completion of its 18,000-mile-long fiber network, and said most of the workers who lost their jobs were "redeployed" within the company. Enron will report first-quarter earnings on April 17.