Wholesale/transport services

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
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flanker 12/4/2012 | 7:30:26 PM
re: Enron's Empty Bandwidth
They can always auction the company on EBay. Heck, I'll be there are pookie bear dolls selling for more money.
Milano 12/4/2012 | 7:30:22 PM
re: Enron's Empty Bandwidth "Bandwidth as tradeable commodity -- the hype that never took hold?"

The demise of Enron is just market forces at work. With marginal players out, the market is heading for equilibrium between offer and demand - there were simply too many companies fighting for the same piece of cake.

In the long run, it means good news for Williams. And it's certainly does not mean that bandwidth trading is just hype.


Brattain 12/4/2012 | 7:30:22 PM
re: Enron's Empty Bandwidth I've been following Enron for the last couple of months and I've found the best source of info on Enron's lastest problems is nytimes.com within its business section:

Of particular interest to Dynegy watchers is the article:
"Deal Is Over but Not Dynegy's Troubles"

varmint 12/4/2012 | 7:30:20 PM
re: Enron's Empty Bandwidth I agree that Enron's failure had little to do with bandwidth trading. The long term viability of trading bandwidth as a commodity, however, is still very much in doubt.

Trading requires liquidity on both the buy and sell side. While there are numerous players willing to sell their bandwidth through exchanges, I don't think there are many willing buyers.

Smaller carriers are potential buyers, yet there's very little margin to the sell side carriers. Also, most carriers know where to go to get good rates for minutes or circuits, so there's very little transparency value to the buy side carriers.

Enterprises could offer higher margins to the buyers, and will always need help with pricing, but IT managers will never agree to buy services from an unknown entity- that's a sure way to get fired.

Bandwidth exchanges will be able to serve some niches, like excess capacity trading, but beyond that nobody will want to execute trades.
danbroussard 12/4/2012 | 7:30:20 PM
re: Enron's Empty Bandwidth Let's face it Enron had no idea what it wanted to do. In the beginning the folks that walked the halls knew more about natural gas pipelines then they did about DS3s and OC3s. Their POPs were so far from the city centers that what you saved on IXC cost you lost in the 15+ mile local loops.
I also remember going to tradeshows as Enron showed themselves as an "ASP" and then a "Bandwidth trader". No one knew what Enron was, but I guess we know what it is now...bankrupt.
ip-pundit 12/4/2012 | 7:30:20 PM
re: Enron's Empty Bandwidth When you have a company that is barely capable of BEGINNING to fill it's own bandwidth talking about how 'conditions are right' for bandwidth trading, (ie, neither existing supply nor existing demand for bandwidth has a massive diffrence in volume), the ripe smell of 'Believeing my own press' begins to waft through the air, and a wise man runs away from the stench as quickly as possible...

Because of this and other types of hype, we find ourselves in a landscape filled with folks who overbuilt based on hyped up projections of bandwidth consumption... Once enough carriers fail, pricing will go back up for bandwidth to a sustainable price, THEN we can start thinking about 'bandwidth trading' again.

I'm sure we can all think of several companies this applies to.
varmint 12/4/2012 | 7:30:19 PM
re: Enron's Empty Bandwidth "...I'm sure we can all think of several companies this applies to..."

Level 3, Global Crossing, AFN, Cogent...
wdog 12/4/2012 | 7:30:17 PM
re: Enron's Empty Bandwidth If you get right down to it, making bandwidth a commodity is really what optical networking is all about. Just about every technology under development is in some way aimed at making it easier for carriers (both local and long distance) to deliver bandwidth where it is needed, in the amount it is needed, for the time it is needed, quickly and cost effectively. Once this capability is really out there it will stimulate huge changes in the way end customers use bandwidth. At that point bandwidth trading and a whole bunch of new business models no one has even thought of yet will make sense.
Fibre Bundle 12/4/2012 | 7:30:14 PM
re: Enron's Empty Bandwidth
"If you get right down to it, making bandwidth a commodity is really what optical networking is all about."

That may be true, but trading a commodity only makes sense when the commodity being traded is scarce. There is a bandwidth glut, and likely to be one for the forseeable future, so bandwidth trading makes no sense at all.

Trading bandwidth is currently like trading sand on a beach.

Consultant 12/4/2012 | 7:30:02 PM
re: Enron's Empty Bandwidth Guys,

Your knowledge of finance is remarkably limited.
Relative scarcity or abundance of a commodity is not a factor in determining whether it trades on an exchange. A glut of wheat would not slow down trading in wheat futures.

The real issue is whether bandwidth is a commodity. Clearly UUNET has better IP bandwidth than Broadwing. There are real differences among providers on both clear channel (reliability and provisioning) and packet switched services.

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