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Broadband markets find narrow trader interest

By Dan Roberts – Aug 19 2001 18:00:35

Among the many unexpected casualties from the collapse of the telecoms bubble are a handful of traders who correctly predicted the industry’s struggle with over-capacity.

Nearly a dozen so-called bandwidth exchanges were set up at the height of the boom in the belief that surplus network capacity would become a tradeable commodity like energy or financial instruments.

In many ways they have been proved right. A glut of bandwidth between major cities has increasingly led operators to buy minutes of call time from other carriers rather than invest in new routes of their own.

But the strain of financing those operators who over- extended themselves is beginning to show across the whole industry, including its middlemen.

Enron, the US energy group which invested heavily to develop a high-profile bandwidth exchange, last week parted company with Jeffrey Skilling, group chief executive, after revealing that its telecoms division had lost $102m in the second quarter. The company insists Mr Skilling’s shock departure was due to personal reasons, but many outside Enron believe his gamble on trading broadband telecoms capacity was a major factor.

Kenneth Lay, Enron chairman and the man who will take on the roles of chief executive officer and president vacated by Mr. Skilling on Tuesday points out that Enron had had “very strong results” and that all of its businesses were doing well except for broadband.

He added that problems with broadband were being addressed. But how tough a task that is remains to be seen. Enron built substantial broadband capacity of its own, and was therefore adopting a “long position” in its market at a time when prices were falling.

Enron was not alone in this, and the speed of the telecoms downturn is raising question marks over the whole idea of making money by facilitating trading.

In much the same way as dealing volumes and commissions for stockbrokers drop during a bear market for equities, bandwidth exchanges are finding activity lower than they hoped for as buyers wait for stability to return.

Their caution is understandable. A fibre optic link between New York and Los Angles with enough capacity to carry 2,000 simultaneous voice calls or 135 megabits of data per second costs approximately $20,000 to lease for a month starting from October 1.

But an identical contract for delivery in January can be bought for just $10,000 because of all the new fibre optic capacity that is expected to be lit up in the intervening months.

When the futures market is this volatile, customers are preferring to wait and see if prices will fall any further before committing. The number of telecoms operators going bust also makes buyers nervous and commissions difficult to collect. d3 More than 30 networks in the US and Europe have filed for bankruptcy in the last six months, leaving hundreds of millions of dollars of unpaid bills in their wake.

Financial intermediaries who can insure for default risk are demanding higher and higher premiums or substantial down payments.

Nevertheless, many in the industry believe this is just the type of climate in which bandwidth exchanges will prove their worth thanks to settlement periods that are typically far shorter than contracts struck directly between telecoms companies without an intermediary.

Arbinet-thexchange is a New York-based exchange that concentrates on dealing with carriers that want to buy a few minutes of voice capacity at a time rather than longer contracts for data capacity. It believes the surge of unpaid bills represents an opportunity for bandwidth exchanges, which can offer creditors a way of monetising surplus capacity by placing a sell order on behalf of whichever network operator owes them money.

It is the prospect of sophisticated financial solutions like this that initially attracted energy groups such has Enron.

“The energy companies were not naive to gamble on bandwidth exchanges, they were just off with their timing. It will still become what they hoped it would become,” said Curt Hockemeier, president and chief executive of Arbinet-thexchange. But even if this optimism if justified, by the time the dust settles, many of the fledgling bandwidth exchanges may not be around to enjoy the rewards. Additional reporting by Sheila McNulty in Houston.

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