And along those lines:
Wall Street pushes bandwidth futures.
Telephony, Feb 28, 2000
Commodities brokers have a dream, and it's about making billions of dollars trading bandwidth as a derivatives product the same way trade do crude oil and electricity.
Until recently, it seemed the dream would take years to come to fruition. But as carriers rapidly build out networks and try to maximize the return on their physical assets while minimizing balance sheet exposure, they are opening up to the idea of standardized bandwidth trading and letting Wall Street in on their traditional backroom deals.
At CompTel's annual convention in Long Beach, Calif., last week, members adopted a resolution to create a task force to develop protocols and standards for bandwidth trading. The competitive carrier organization scheduled a meeting of industry executives and members of the financial community to be held in Washington D.C., on March 23.
Meanwhile, telecom trading departments are popping up at companies such as AIG Telecommunications, El Paso Energy, Amerex and Chapel Hill Brokers, and market makers such as Enron Broadband Services are piloting benchmark contracts to make service providers comfortable with the payment mechanics, software and physical delivery of commoditized bandwidth.
"You first have to create a vibrant underlying physical market and develop the liquidity, and then it's a natural extension to move to the [derivatives] markets," said Tom Gros, vice president of global bandwidth risk management for Enron. "But I wouldn't be surprised to see a number of financial trades occurring this year."
Bandwidth trading, of course, is nothing new. Large carriers have traded capacity through informal relationships for years. In the past three years, online exchanges and clearinghouses such as Arbinet (private), RateXchange (OTC: NAMI) and Band-X (private) have enabled small fry ISPs and start-up carriers to buy excess minutes from owners of circuit-switched and IP networks.
Although online exchanges make the market more efficient by playing matchmaker to buyers and sellers and offering anonymity to both, few facilitate forward-selling and forward-buying trading strategies that hedge against future dips or upswings in a commodity's price.
"The cost of [bandwidth] has a downward curve, and as margins shrink the financial transaction will allow [operators] to increase the profitability of that exact same minute," said Henry Kaestner, a partner of Chapel Hill Brokers, a leading power options brokerage. "Hiring a skilled trader that trades forwards contracts around a position provides another vehicle for a company to add dollars to the bottom line."
Here's how a hedging strategy might work: A constrained carrier is negotiating to provide a customer with a future DS-3 link between Paris and London next year but doesn't want to invest in the physical network build. Through a bandwidth-trading floor, the carrier can buy "spot" contracts for bandwidth on certain routes and at certain speeds.
But suppose as negotiations drag on the carrier sees the price of the standard bandwidth contract for the Paris-to-London pair start to rise on the open futures market. By buying a forward contract on that capacity, the carrier can lock in the bandwidth price immediately.
Of course, the development of such a derivatives market won't be easy. Liquidity - a large number of buyers and sellers - and standard contract terms, including quality of service, physical delivery mechanisms and financial settlement schedules all must be resolved.
But Enron already has proposed a benchmark contract for North American bandwidth built around the New York-to-Los Angeles route on a TDM network at DS-3, OC-3 and OC-12 speeds.
Not every carrier or analyst sees bandwidth as a commodity, because telecom minutes vary widely in quality across service providers, technology, destinations, routing and time of day. In addition, because transport infrastructure technology changes quickly, standardization will be elusive, said Jeanne M. Schaaf, senior analyst at Forrester Research. "We also don't see the volatility of a particular commodities market. We see fairly nullible downward trends in telecom pricing in every product sector, unless it's in short supply." |
