Liquidity concerns over bandwidth trading - Global

Telecommunications International, Feb, 2002 by Matthew Secker

The high-profile collapse of Enron Corp is another sign that the bandwidth trading market is drying up. Despite the efforts of the US energy company to branch out into bandwidth trading, one of the reasons it failed was a lack of liquidity in the marketplace.

"I don't see it [liquidity] being achieved for a long time to come because the market conditions are completely against them [dealers]," says Tom Wright, managing consultant for PBI Media. "Less and less [bandwidth] is being sold, and traders are looking at risk management plans and price review structures in order to find new ways to bring in business. Overall, it is too much of a buyer's market far liquidity to realistically occur."

Wright adds that aggressive over-expansion in 2000 (and in the tail-end of 1999), and the smaller-than-anticipated growth of telecoms, are to blame: "Demand has never been as high as the industry originally anticipated and because of this, there's been a huge over investment in infrastructure. I also believe that it's almost impossible to achieve commoditisation of bandwidth within a market where prices are consistently falling and there's no unified set of QoS [quality of service] standards. How bandwidth trading can exist in this environment -- let alone reach liquidity -- is beyond me."

A lack of customer demand for speed enhancements is another worrying sign for the market: "We thought that customers would today be requiring STM-16 [2.5Gbps] but that hasn't happened -- even though it's now the same price that STM-1 [155Mbps] was a year ago. In the end, customers would much rather pay consistently less for STM-1, be charged more for additional bandwidth with STM-16 that they don't need."

Bandwidth trading for Enron was something of a poisoned chalice with many citing it (in the largest bankruptcy filing in US legal history) as the principal reason for the company's demise. In fact, its bandwidth trading unit was the first major division to fall. This contrasts markedly with original company statements -- most notably from CE Jeff Skilling -- that it would overtake Enron's core gas and power trading operations as the major revenue generator for the company. However, in reality it never made a dollar and cost more than US$2 bn ([euro]2.3 bn) to build and operate.

Enron's top officers and directors have also been embroiled in recent allegations from US federal court lawyers that they inflated the bandwidth trading division's stock value improperly by unit trades, which were in fact shams designed to hype the venture and create short-term revenue on the company's balance sheets.