Energy Firms Move Into Broadband Telecoms:
Friday September 1 11:04 AM ET
Energy Firms Move Into Broadband Telecoms
By Andrew Kelly
HOUSTON (Reuters) - Companies that blazed a trail in deregulated U.S. wholesale natural gas and power markets are now pushing new frontiers in broadband telecommunications which they say could eventually eclipse their core energy businesses.
Houston-based Enron Corp.(NYSE:ENE - news) and others believe that the market for trading fiber optic network capacity, or bandwidth, will develop along similar lines to wholesale energy markets, fueled by the rapid growth of video-intensive Internet applications.
Enron expects a liquid market to evolve in which bandwidth will be bought and sold as it is needed, rather than under long-term contracts, allowing it to profit from the marketing and trading savvy it has deployed to good effect in energy markets.
Dynegy Inc. (NYSE:DYN - news) fleshed out its plans to develop a broadband business on Aug. 2 by announcing the acquisition of privately held Extant Inc. while El Paso Energy Corp. (NYSE:EPG - news) has set up a new unit to develop its telecommunications business.
Like Enron, Dynegy and El Paso are based in Houston and have origins in the natural gas pipeline business.
Opinions among telecommunications consultants are divided when it comes to energy companies' foray into bandwidth.
Some say it could turn out to be a lucrative move, but others say they may be making light of technical difficulties. The harshest critics dismiss plans for trading of bandwidth in a similar way to gas or electricity as half-baked.
``There are enormous differences between bandwidth and electric power and that analogy makes me really nervous because if they don't understand that they're in deep trouble,'' said Tom Nolle, President of CIMI Corp. in Voorhees, N.J.
Fiber-Optic Networks
Williams Cos. (NYSE:WMB - news) of Tulsa, Oklahoma, was one of the first energy companies to venture into telecommunications, laying a fiber-optic cable network along gas pipeline routes in the 1980s and eventually selling the business for $2.5 billion in 1995.
In 1998, it set up Williams Communications Group Inc. (NYSE:WCG - news), to develop a new fiber-optic network, selling off 15 percent of the company to investors in 1999. Williams plans a complete spin-off of the unit by the end of 2001.
Enron has built its own fiber-optic network and plans to use it to deliver movies on demand by the end of this year under a deal with Blockbuster Inc. (NYSE:BBI - news). Dynegy plans to invest $400 million to complete Extant's network.
Both Enron and Dynegy are looking beyond sales of bandwidth they own to buying and selling bandwidth owned by third parties, much as they trade in wholesale gas and power markets.
Enron's Chief Executive Ken Lay and Dynegy's CEO Chuck Watson have both said that communications could eventually turn out to be a bigger business for their companies than energy.
Ken Dulaney, a vice president with Gartner Group Inc. in San Jose, Calif., said the energy companies' vision of bandwidth markets may eventually become a reality but that they would first have to solve ``formidable'' technical challenges.
A lack of high-quality local lines for potential customers would probably thwart the concept of bandwidth on demand for several years, said Jeanne Schaaf, senior telecommunications analyst with Forrester Research Inc. in Cambridge, Mass.
``I can't just click a mouse and say give me two megabits for a videoconference this afternoon. The capacity just isn't there and it won't be any time soon,'' said Schaaf.
CIMI's Nolle said some projections of future bandwidth needs were running far ahead of likely demand for content and services that customers would be willing to pay for, in line with an ``overall climate of unreasonable technology expectation''.
If demand for bandwidth fell short of the projections, then an active liquid wholesale market could not develop and there would be no role for pure intermediaries.
``What's at the end of the pipeline? There has to be a consumer.'' he said.
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