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THE LETTER: Bandwidth Trading at a Crossroads

Posted: 1/2002

The Letter

Bandwidth Trading
at a Crossroads

In editing this magazine over the years, one of my favorite beats has been bandwidth trading. I don’t know if I feel this affinity because I have been covering its evolution from the beginning, or because it seemed to represent a truly revolutionary step in the telecom transport market.

Nevertheless, some four years later, I am a bit melancholy about its development, or lack thereof.

Bandwidth trading really never found its legs, as far as I can tell. The likelihood it will is further delayed now that it is losing one of its champions, Enron Broadband. This is not so much because there is one less cheerleader, but that its staunchest supporter has failed — not a great advertisement for the discipline.

Of course, bandwidth trading’s fate is not Enron’s fault, although the carrier can be blamed for pushing the concept prematurely.

Says bandwidth broker Ron
Banaszek, the director of TFS Telecom
(www.tfstelecom.com), a division of TFS Energy
L.L.C., “The benefits of bandwidth trading were never really understood by the telecommunications industry and, to be fair, the manner in which they were given the message probably wasn’t the best.

“Bandwidth trading was never about commoditization, trading or alternate sales channels. It is about the efficiencies a risk-management centric point of view can bring to the telecommunications industry, and how it gives them a different way and, in my opinion, a better way of looking at their business.”

Bandwidth prices follow a cycle much like any product, explains Probe Research
(www.probe.com) analyst Tony Marson. “The cycle starts with an investment in infrastructure in the form of network
buildouts. As service providers expand, overbuilding occurs. Margins begin to decline as prices are dropped in an effort to attract customers.”

Marson says the bandwidth market now is in this part of the cycle, and many operators are focused on just surviving. As profits fall, service providers also run the risk of losing their stature in the financial markets, losing yet another avenue for raising capital.

It is just this kind of situation that risk-management techniques honed by commodity traders can hedge against.

News editor Josh Long reports, in his article
(Carriers Seek Rewards of Risk Management), there is some risk-management activity going on among early bandwidth traders, but sources say they are mostly between energy company broadband spin-offs already schooled in managing risk through their
energy parents. Their losses during the last few quarters will do little to earn them
followers into the trading arena.

While carriers may not yet be bullish on trading, some of them are beginning to tout the potential benefits of risk management, saying despite the lack of standardized
contracts and interconnections that have inhibited the trading market, carriers can employ risk-management techniques successfully before the trading market matures.

Once they get the hang of it, demand for more formalized trading mechanisms
surely will rise. 


Khali Henderson
Editor in Chief


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