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Enron's Empty Bandwidth

The collapse of Enron leaves serious questions about the viability of bandwidth as a tradeable business

November 29, 2001

4 Min Read
Enron's Empty Bandwidth

Bandwidth as tradeable commodity -- the hype that never took hold?

It certainly looks that way in the case of Enron Corp. (NYSE: ENE). The apparent collapse of the company, which was a major proponent of developing bandwidth markets, may have lasting effects on the intermingling among energy companies, telecom services companies, and networking equipment providers.

As Enron started to unravel in recent weeks, its Broadband Services business was one of the first to go. Two weeks ago, the company determined that the business was a “non-core asset” that would be put up for sale, according to an Enron spokesperson. On Thursday, the entire company was widely expected to file for bankruptcy after the failure of a last-minute rescue attempt by competitor Dynegy Inc. (NYSE: DYN) on Wednesday.

Although Enron's problems were bigger than its relatively small Bandwidth Services division, the history of this effort shows the difficulty the company had in building bandwidth markets as a business in the same league as energy products. And the bandwidth business certainly hasn't been very profitable.

”It’s a lousy business,” said Chris Ellinghaus, a principal with Williams Capital Group, who follows Dynegy. “From a wholesale perspective it’s a losing proposition. Enron was losing hundreds of millions of dollars in it, and Dynegy is probably losing tens of millions."

In a quarterly statement filed for the quarter ending August 14, 2001, Enron listed $1.4 billion in “broadband service assets.” In that quarter, Enron lost $102 million in the business before accounting for interest, minority interests, and taxes.

The plummeting price of bandwidth did nothing to help. According to the last quarterly filing, in Enron's Broadband Services division “gross margin decreased $82 million in the second quarter of 2001 compared to the second quarter of 2000. Weak market conditions in the broadband and communications sectors negatively impacted the 2001 gross margin. Second quarter 2000 gross margin included earnings from sales of excess dark fiber. Operating expenses (including depreciation) increased as a result of depreciation on fiber-optic related equipment placed into service in late 2000.”

Dynegy was unable to respond to questions about the state of its broadband services business by press time. Its broadband services revenues were not broken out separately in recent financial filings.

On Thursday, Enron shares fell 0.25 (40.98%) to 0.36. They have plummeted 99.5% from $80 at the beginning of the year. Although Broadband Services were probably not responsible for the bulk of Enron's problems, many of which were complex and still unknown, the business certainly wasn't helping the company meeting its liquidity problems.

In the late 1990s, Enron was one of several large companies leading a trend of energy companies becoming more involved in telecommunications, and particularly the delivery of bandwidth. Others to have taken part in this trend including Dynegy, Williams Communications Group (NYSE: WCG), El Paso Corporation, and Montana Power. Because power companies supplied utilities through networks of pipes, the idea was that bandwidth would be a natural product for them.

What does Enron's potential bankruptcy mean for the optical networking business -- or specific companies? Well, it means that deals between energy companies and equipment companies aren't likely to have the same allure as they did in the past couple of years.

Enron invested in a number of networking companies, including Amber Networks Inc., Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7), Hyperchip Inc., Telseon Inc., and Trellis Photonics (see Round 4 for Trellis: $25M). It also purchased equipment from several companies, including Sycamore Networks Inc. (Nasdaq: SCMR) and Avici.

Enron's financial problems will likely have minimal affect on Sycamore Networks, where the business was minimal and dried up long ago anyway (see Enron and Sycamore Ink Deal). Likewise, Enron's business has diminished in importance at Avici. Although Dynegy does not appear to be plagued by the same problems as Enron, the turmoil in the bandwidth markets may lead investors to look more closely at the deal between Tellium and Dynegy, in which Dynegy is both an investor in and a customer of Tellum's.

In a recent conference call, Tellium officials stated that Dynegy will continue to account for a large portion of the company's revenues, but that they will be announcing new customers in the near future.

— R. Scott Raynovich, Executive Editor, Light Reading
http://www.lightreading.com

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