Bandwidth traders await catalyst to create viable market
By Janet McGurty
Tuesday December 26, 12:54 pm Eastern Time
NEW YORK, Dec 26 (Reuters) - Much like an understudy hoping to shine on center stage, independent bandwidth traders say its time for telecom carriers to put their talent to use.
Bandwidth -- the transmission capacity of an electronic line used to send data from one point to another as on the Internet -- needs a catalyst to turn it into a commodity as easily traded as gold or oil, said many industry observers.
``Major carriers have little awareness of bandwidth trading at this point. And (corporate) network managers are satisfied now with their capacity acquisition strategies,'' said Seth Libby of The Yankee Group, a consulting company.
Growing use of bandwidth and faltering financial results of some bandwidth producers, due in part to its rapidly falling price, may be the push needed to create a viable market.
According to a study by PaineWebber, bandwidth consumed on the Internet doubles about every three to four months. Among telecom carriers, about 10 to 15 percent of their consolidated revenues comes from providing data services, according to PaineWebber analyst Eric Struminger, with about three-quarters of that from complex data services sold to corporations rather than other carriers.
Telecommunications companies, many of which recently posted poor financial results, buy and sell bandwidth under expensive, individually negotiated contracts. To be competitive, that will have to change, according to many industry players.
``Telecoms produce a product where sales, general and administrative costs take 25 percent of their revenues while the thing they produce goes down in value every few months. They have to accelerate sales and do the whole process more cheaply,'' said Richard Kates, chairman of CommerEx.com Inc., an online exchange that has a pending relationship with a major commodities exchange to enhance their clearing mechanism.
ENERGY COMPANIES BEHIND BANDWIDTH
Online exchanges, which include CommerEx.com and San Francisco-based RateXchange Corp. (AMEX:RTX - news), provide both a bandwidth market as well as standard contracts for trade. However, industry watchers are uncertain how much trading is done over them.
Enron Corp. (NYSE:ENE - news), the Houston-based powerhouse, is touted as the biggest bandwidth trader. Aquila Energy Corp., one of the most active electricity traders, as well as pipeline companies Williams Companies (NYSE:WMB - news), El Paso (NYSE:EPG - news) and Dynegy (NYSE:DYN - news) are other big bandwidth traders. Although the extent of their trading can be speculated on, the true amount remains unknown.
``The exchanges are mostly brokers. Except for Enron, which takes title to its trade. Aquila, Williams and El Paso trade but they are very circumspect,'' said Libby.
Companies comfortable with trading commodities, many with roots in energy like EnronOnline, an Enron unit, have been trading bandwidth actively albeit circumspectly, according to Libby.
Other active bandwidth traders with ties to energy include Kansas-based Utilicorp United Inc. (NYSE:UCU - news), which announced plans for an initial public offering to raise about $425 million for its wholly owned trading unit Aquila.
``Electricity is the most similar analog. You need to optimize it today or else it's gone,'' said Jon Merriman, chief executive of RateXchange, which earlier this year joined forces with Amerex, a large commodity broker.
NEW CONTRACTS NEEDED
Contracts are key to commodization, says Libby. The Bandwidth Trading Organization, which is comprised of carriers, is working on a standardized contract that will provide the framework for commodity-like trading.
But most industry observers say progress toward commodization of bandwidth has been stalled primarily because of the telecom carriers refusal to accept the incorporation of a standard commodities damage clause, which commodities traders say is necessary, into the contract.
The clause, which holds them liable for liquidated damages, is different from the ``best efforts'' clause under which they currently operate.
But in a couple of years, the way of selling bandwidth will have to change, industry observers say.
``There has to be some significant pressure on carriers to adopt bandwidth -- cost savings, strategic advantage. The pressure is not there,'' said Libby.
As new fiber optic technology become operational, telecoms whose systems are comprised of ``old fiber'' -- which include many major long-haul and regional carriers -- will be forced by cheaper prices to to buy and sell bandwidth, Libby said. |
