TELECOM INDUSTRY EXAMINES STANDARDS FOR BANDWIDTH TRADING.
Communications Daily, March 29, 2000
Telecom industry officials are mulling need for standards for bandwidth trading, with companies such as Enron, Williams Communications and other network operators analyzing issue. CompTel helped organize closed meeting in Washington March 23 to focus on whether broader industry effort is needed to standardize contracts between buyers and sellers of fiber capacity on exchanges and in spot markets. Such systems are run now by operators that include AIG Telecom, Arbinet, Enron, RateXChange and London-based Band-X. Bandwidth trading and exchanges have received increased attention in recent months as FCC Chmn. Kennard has pointed to systems such as Enron's as potential models for eventually making more wireless spectrum available. Although Global Crossing in Dec. conducted first formal trade in bandwidth market created by Enron, few network operators so far have shown high public profile in embracing model.
Participants described last week's meeting, organized by group of dozen companies that included Enron and Williams, as exploratory, although stakeholders indicated they wanted resolution on standards issue soon. Premise of bandwidth trading, for which Enron unveiled plans to create market last year (CD April 19 p3), is that it provides risk management for network operators that already have been signing bilateral deals among themselves to buy and sell network capacity on less formalized basis. Market that trades or allows exchanges of bandwidth as commodity permits carriers to avert long-term commitments of purchasing capacity that may be in larger increments than they will need, said Thomas Gros, Enron Broadband Services vp-bandwidth trading. Amerex, El Paso Energy and Enron have established telecom trading departments focusing on bandwidth as commodity. Other companies, such as Band-X, are using auction model that targets individual buyers and sellers among multiple bidders. Arbinet and RateXchange are focusing on exchanges in which traffic is traded at same time among multiple buyers and sellers.
As $31 billion company with 20,000-mile fiber network, Enron is among largest players in all-out push for jump-starting spot market for telecom capacity. On standards front, "need is driven by market efficiency," said Gros, noting that oil industry has benchmark against which 300 grades of crude oil trade. Last year, Enron proposed N. American benchmark of N.Y.C.-L.A. city fiber pair at speed of OC-12. Among rationales behind Enron proposal is that route is among most traveled in N. America and N.Y.C. "represents a wonderful launching point to Europe," he said. Industry also will need to develop technical specification for bandwidth trading, Gros said. "A failure on the part of the industry to actually reach a standard would be a temporary stumbling block to the establishment of a more efficient market," he said. "We are anxious to promote that standard as quickly as possible. "The worst case scenario is simply a delay in the industry's benefits from it." Enron has dedicated 65 traders on one floor at its Houston hq to bandwidth trading, for which company projected "handful" of trades in 1999, 100 this year and significant takeoff in 2001, Gros said.
"Williams's position was the fact that we have a $5 to $8 billion investment in the ground so for our part we need a level of standards that addresses the industry where it is today on the technological side, not necessarily looking at standards that address a market that we will soon grow out of," said Sharon Crow, Williams vp-broadband trading. Among issues that make standards- setting process somewhat complicated for telecom industry is differences in transmission type, reliability and classes of services, she said. Successful commoditization relies on standards based on expectations of quality of service, reliability, measurements and default liquidated damages, Crow said.
Williams named Crow to post in Feb. as part of company's plans to "formalize a strategy for bandwidth trading." Among her responsibilities is standards development. Other institutional exchanges such as N.Y. Mercantile Exchange, Chicago Board of Trade and Kansas City Board of Trade use standardized contracts that address those issues and set price benchmark with base level of zero, she said. "Anything that is a value-added service or a diminished service trades at a premium or discount," Crow said.
"I have not yet heard a clamor in the marketplace for a standard," said Eric Raab, managing dir. of AIG Telecom (AIGT). "Usually, vendors try to avoid standards because that commoditizes their product. What these meetings are trying to achieve is to convince everybody that there is an economic benefit to creating and holding themselves to a standard." AIGT runs marketplace for wholesale telecom capacity, including international wholesale minutes. Company describes itself as facilitating trading and delivery of network capacity through anonymous transactions to which AIGT is neutral intermediary. Raab said company uses its own standards system for transactions that includes quality parameters such as "what a telephone call sounds like to a person actually making the call -- the perceived quality of the user."
Companies so far have received relatively warm reception from Wall St. Williams shares have jumped 18.4% since Jan. 1 to reach $44.56 Mon. on N.Y. Stock Exchange. Enron, one of largest energy companies in U.S. in addition to its trading operations, saw shares rise to $72-13/16 on Tues., significantly higher than 52- week low of $30.50. Shares of NetAmerica Inc. (NAMI), which is being subsumed by bandwidth exchange subsidiary RateXchange, have risen in over-the-counter trading to $34.44 Mon. from $7.125 at start of year. First Security Van Kasper last week began coverage on NAMI, which is expected to be renamed RateXchange pending shareholder approval, with 12-month price target of $79.
But skeptics remain among analysts and some in telecom industry. At Credit Suisse First Boston conference in N.Y.C. earlier this month, Qwest Chmn. Joseph Nacchio said his company didn't think bandwidth trading had very bright prospects. "We are very cold to the idea," said Forrester Research analyst Jeanne Schaaf, who wrote bearish report on bandwidth trading prospects in Jan. Factors needed for futures trading of bandwidth commodity don't exist in telecom market, including sufficient market liquidity and "very little standardization," she said. "Not that you can't write standards in a contract," she said. Problem is that "one minute is not like another," Schaaf said. In oil industry, for example, "every drop of crude is like the next one in the barrel." For telecom, unit continually changes as carrier moves from circuit-switched to IP-based min., she said. "Is it the same kind of minute? Maybe, maybe not," she said. Schaaf, like others, has noted that Enron has long expertise in conducting largest trading operations for commodities such as oil and gas in U.S. With telecom, "perhaps they will do it again," she said. "The model is just so clunky I just can't imagine carriers signing on to the Enron model."
Ross Mayfield, CEO of RateXchange, said he doesn't "see the purpose" of broader industry effort to move toward standardized contracts, mostly because RateXchange doesn't disagree with Enron's bilateral model. "I agree with it in principle," he said of Enron proposal. RateXchange uses multilateral model by providing business-to-business online marketplace in which buyers and sellers of telecom capacity can trade one-month spot and one- year forward contracts for bandwidth. "We have an open price discovery process," he said. "Everybody who trades on our centralized exchanges has access to the same information that everybody else has." While Enron believes spot market already exists in telecom market through its bilateral trading system, he said, RateXchange believes "the spot market exists but there's so much market friction that it's a broken market," he said. Markets "clearly are going to reward carriers" that embrace bandwidth as commodity, he said. "What will propel the next phase of growth will be the convergence of finance and communications," he said.
Still, concept of bandwidth trading has gained broader attention in recent months with FCC Chmn. Kennard expressing interest in model as potential way to avoid "drought" in wireless spectrum. At CTIA show last month, he said he has directed Commission staff to convene forum to explore secondary markets for underused spectrum (CD Feb 29 p1). He said forum would focus on rules and policies that would permit secondary market for spectrum to be treated as commodity. Enron's Gros said his company potentially is interested in treating wireless spectrum as commodity, although model would be very different from that used for wireline networks. In case of wireless spectrum, "scarce public resource" is at issue rather than bandwidth trading in which companies have sunk investments into fiber networks. He likened wireless spectrum to sulfur dioxide trading, in which SO2 allowances are traded by industry players that are mitigating their air pollution output and sell credits they receive for that effort to other companies. AIG Telecom also has expressed interest in secondary market for wireless spectrum. -- Mary Greczyn |
