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To: Frank A. Coluccio who wrote (10649)	4/15/2001 9:25:43 PM
From: Bill Fischofer	Respond to of 15615

Re: Bandwidth trading Thanks for the pointer to an interesting article. However, the fundamental assumptions behind commodity trading are difficult to reconcile with the reality of the bandwidth explosion that is happening all around. Enron and others lubricate an energy market where supply and demand both follow very gradual growth curves of at most a few percent per year. Of course, these are small percentages of very large baseline numbers so at the margin there is significant opportunity for arbitrage. All commodity markets, be it energy, wheat, cotton, hogs, etc. basically assume stable slow growth in underlying supply and demand and seek to profit by smoothing out marginal imbalances. Commodity markets by definition are zero-sum with the only profit guarantees going to the market makers who facilitate liquidity. This, of course, is the same assumption model which undergirds traditional monopoly telco planning which is why the cratering of voice rates has caused so much pain. In an environment of rapid unit price deflation the only way to survive, let alone prosper, is to aggressively exploit technology to drive costs down faster than prices. This is the calculus which drives the semiconductor industry and it is the same mechanism which is now firmly in control of the telecom industry much to the dismay of the traditional PTTs and others rooted in voice telephony. Unlike the stable backdrop that commodity trading assumes, bandwidth supply and demand is experiencing torrid growth rates which if anything are only accelerating. It's more than just shifting decimal points on contracts to accommodate "inflation"--the very nature of bandwidth and its uses is evolving just as rapidly. If George Gilder is correct and lambdas multiply into the millions over the next five years then it is connectivity rather than raw bandwidth which will dominate the economics of telecom. Just as the construction of railroads and highways transformed the economic landscape over the past 150 years, the availability of "real bandwidth" will transform the economic landscape in the early part of the 21st century. In the information economy Company A which is tied up in red tape trying to provision DS-3 circuits in something less than 6 months will simply be unable to compete with Company B which by virtue of its location and/or supply relationships has cheap gigabits flowing through its veins. Unlike electricity, bandwidth "generation" and "tranmission" are one and the same so it is difficult to see exactly what might be traded. Even today, peering relationships between carriers are about connectivity rather than metering. Certainly this is something to watch but somehow I doubt if it will evolve "according to plan".

To: Frank A. Coluccio who wrote (10649)	4/15/2001 10:11:55 PM
From: Theophile	Read Replies (1) \| Respond to of 15615

Bandwith Trading is a great read, as long as relativity to the fundamentals is maintained. I think some of the areas Bill pointed out are intrinsic to my take on this. My views are more simple, certainly less polished. Thanks for the article Frank, I really like this sort of forward-looking thought process to help decipher what may be driving some of the present activity. The bandwidth trading article addresses some very interesting areas. What I detect here is the dissatisfaction of traders trying to make a market in something not yet ready for commoditization. I have seen how ENE works, and indeed, they are possibly fit to be tied that bandwidth is slippery, not yet a commodity. WCG is a player that would benefit from bandwidth as a commodity. What I find unsettling here is the lack of need (as traders only) to support QoS for a company dependent upon connectivity, this would be simply another 'cost'. They simply want to trade the delta and make money. For an enterprise in need of connectivity, having their connection traded around and possibly recoursing to liquidated damages for failure to perform is far less appealing than having the QoS commitment satisfied. The intangibles involved in losing one's connectivity are not necessarily quantifiable in dollars, this not being something understood by an arb. That the author attributes this (reluctance) strictly to the carriers' not wanting to see their offerings commoditized is incomplete. Reputation still counts for something here, not like homogenized pork bellies or petroleum, which all fit a standard measure. That commoditization could eventually define this bandwidth game may be a given, but until the fiber is there, the technology is interchangeable, and the ubiquity of service available, I do not believe much can come of it (not yet, anyway). Certainly on the well-travelled routes we can see this is happening, but will a VPN be reliable in a shuffle for connectivity? I guess this is the real question, "How much tolerance can I expect from my customers when their connectivity fails?" I am cautious here that perhaps the two names mentioned give a flavor of who is driving this game: ENE and WCG. Both are involved in attempts to commoditize the market, and is it possible that much of the open-market exchange we already witness is mostly due to their own involvement? I wonder, is there a source for determining how much of trading is actually due to their activity? Or is this, too, part of the concealment issue? ENE does a great job holding its cards where nobody can see them, especially now with their boy Bush on the end of the puppeteer's strings for Ken Lay, Master Puppeteer. At the end of the article is the comment about adding value onto the commodity in order to maximize the margins involved. We already see this happening, but just how robust to commoditization is bandwidth at this time? I think this is the question which would make me nervous if I were a customer...can this stuff really be traded freely at this time, while maintaining QoS? And of course, with the Giants unable to get out of their own way quite often, they trying to provision while others are already transmitting, well, this would contribute quite a bit to their nervousness, too. The biggest problem (here) is my bias, so please recognize I am not viewing this impartially. I know what I have heard about WCG, but not ever having experience with them I would only say that if they cannot turn a buck delivering, why not try for trading? And Eneron's recent problems with BlockBuster for delivery of videos seems as though perhaps they too are more interested in cornering the spot market with bandwidth (as they have with electrical power in the West) than with delivering growth-invigorating bandwidth products. Kind of reminds me of Cramer at TSC, talks a lot about fundamentals yet only knows how to trade...and talk.<g> I believe this area is extremely important to the futures of MNOs, and considering the expertise in management at some of the newer companies, I expect to see some skillfull bouts while all of this plays out. I believe, but cannot be certain, that TCM is such a play that is predicated upon bandwidth as a commodity, and is of course targeting the subsea arena in this fashion. Great read to see what is being piped into the minds of anals and investors, and why they may be even more shy of investing MNOs... alongside the debt questions, the glut-ghost, along with all the falling-sky narratives, and of course this story is just the first of many more to come. What am I missing here, and what is the timeline to achieve interconnectivity amongst the players such that commoditization could appear? Martin Thomas