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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: IQBAL LATIF who wrote (28363)	8/24/1999 4:22:00 AM
From: IQBAL LATIF	Read Replies (3) \| Respond to of 50167

Explosive growth in the Internet is fueling demand for telecommunications capacity and giving rise to one of the world's more unusual markets. New cables and satellites circling the earth are adding ever more lanes to the information superhighway while technological advances are squeezing more capacity out of existing routes. But with the high cost of investment and demand varying depending on the route, a commodity market is developing in the capacity ? known as bandwidth ? to carry telecoms traffic. "Anybody out there providing a telecoms product is potentially in the market to buy this product," said Stephen Young, principal consultant at London-based telecommunications and information technology consultants Ovum Ltd. Phone companies have been buying and selling minutes of usage of their networks for several years. Bandwidth is something else, the capacity needed to send voice, data, pictures or nothing at all over a certain route. Bandwidth brokerages are springing up in Europe and the United States, using the Internet as their marketplace. Bandwidth a Commodity Trade is currently in capacity on specific routes but as networks become more closely connected, analysts and market participants see the stream of digitized ones and zeroes ? bits ? that make up modern communications becoming a true commodity. "We are looking at a world in which bandwidth will become a globally commoditized product," said Young, whose company has produced a study of the bandwidth explosion. Within a few years, bandwidth futures and options could be trading along with similar derivatives in commodities such as gold, cotton and hog bellies, analysts say. Young said the seeds for the current market were sown with the deregulation of telecommunications since 1997. In the days of monopolies, there was no spare capacity and no incentive to build more for fear of undermining prices. With deregulation, intermediaries have sprung up, wholesaling capacity between producers and buyers of services. Prices have fallen rapidly. "As soon as you get that kind of complexity in a marketplace, you get scope for arbitrage," he said. Pioneer The London-based bandwidth exchange Band-X is a pioneer in the field. Anonymous bids and offers to use capacity, typically for a year, are made available to the exchange's 6,000 members over the Internet. Director Richard Elliott said growth in the market was driven by the Internet. "The requirement for capacity is growing exponentially," he said. "The underlying growth in the number of voice calls made is 5-8 percent per annum but the growth in demand for capacity for data is in the hundreds of percent," he added. Young said Internet Service Providers (ISPs) would be prime customers in the bandwidth market. "You need a long-run secure supply of bandwidth to ensure that you can carry the traffic you have now and in the future but you also want to take advantage of the falling price. It is a very difficult trade-off," he said. Internet access demand is booming but its volume unknown, he said, and ISPs and others are going to want to hedge. Elliott, whose background is in financial markets, said the emergence of wholesale bandwidth markets will help even out dislocations in supply and demand and make for more efficient decisions on investing in new capacity. He said a key distinction between bandwidth and conventional commodities markets is that with a bandwidth deal, there is no point at which the goods are handed over. It is effectively an agreement to provide a service. "There is no question that a derivatives market will evolve and my guess is it will evolve not in minutes or in circuits between two points but rather in bits ? the ultimate commodity." Elliott saw such trade taking place at the points of connection between the different backbone operators who form the skeleton of the world wide web. Enron The U.S. energy company Enron Corp's Enron Communications unit in May proposed a physical forward delivery market in bandwidth and said it expected a handful of trades this year. "I think we (are) on schedule to do just that," said Thomas Gros, the Enron unit's vice-president of global bandwidth trading. Unlike the brokers, Enron would be a market maker, buying and selling to provide liquidity. It initially proposed two contracts for capacity on its own network, between New York and Los Angeles and between Washington and San Jose, California and said it wanted to work with the industry to develop standard terms and conditions, including a benchmark for trading, comparable to those used in oil deals. "We are proposing standard terms and conditions such that we can trade this commodity in 10 seconds on the telephone not in months or even years closing one-off contracts," Gros said. He said it would be a "natural development" for a financial market to evolve. He expected similar growth to that in the power market, which began in 1996 and now involves thousands of trades a day. Elliott said one possible impediment to the development of a derivatives market and the entry of financial houses was that bandwidth prices were only going one way ? down. "They will see opportunities more easily if they can see volatility," he said. Use of a transatlantic cable for 25 years cost $8 million in the middle of last year. It would now cost about $3 million. However, he said this obstacle may be overcome by the fact that certain events cause spikes of demand and the volatility common in other commodities markets. "It may be that the volatility in data demand occurs over much shorter cycles than that seen in more conventional commodities, where the volatility might be a failure of the orange crop or swine disease," Elliott said.