Wall Street is jumping into trading bandwidth as the latest commodity to be bought and sold on open markets. Morgan Stanley Dean Witter & Co. and Cantor Fitzgerald both recently entered the bandwidth trading business, and The Goldman Sachs Group may join the fray.
So far, the trading of bandwidth — and the promotion of its benefits — has been done almost exclusively by big energy companies, including Enron and Dynegy, along with some independent outfits.
The recent entry of the Wall Street firms is “a clear sign of maturation of this market,” said James Blalack, director of risk management and trading of Reliant Energy Broadband in Houston. “We are seeing a lot more people showing interest and getting involved, including carriers, investment bankers and other trading firms.”
Jules Putterman, an executive director of Morgan Stanley, said bandwidth trading is “an exciting opportunity to use our risk management techniques in another market.” However, Putterman was less than bullish on the sectors current situation. “The market itself is extremely slow,” he said. “Theres very little going on.”
Pure Folly
In early 2000, Merrill Lynch & Co. Analysts were estimating that Enron could generate $13 billion in revenue per year from bandwidth trading. But Enrons last quarter proved that estimate was pure folly — at least for now. Enron Broadband Services revealed that it lost $102 million in the second quarter on revenue of just $16 million — about one-tenth of the units sales during the second quarter of 2000.
A Goldman Sachs official who asked not to be identified said the firm began looking into bandwidth trading last fall. The telecommunications market “desperately” needs the risk management skills that firms such as Goldman Sachs can offer, she said. Goldman Sachs has not decided when it might enter the market, since the trading of bandwidth faces obstacles, including slow provisioning times, the lack of standardized contracts and a dearth of neutral pooling points where carriers can interconnect their networks.
Despite the challenges and ongoing troubles in the sector, Brent Wilkins, managing director of Cantor Telecom, said the future of bandwidth trading is bright.
“The wholesale telecom market is very inefficient,” said Wilkins, whose company was formed by Cantor Fitzgerald after it bought Chapel Hill Broadband last month. “And the recent downturn will force carriers to participate in the trading markets. The massive layoffs and the hits to bottom lines are forcing the telecom industry to be more efficient.” The telecom companies are “reaching out to Wall Street, not just for capital, but for risk management and trading expertise,” he said.