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Broadband Future Looks Dim

Posted on: Tuesday, 18 February 2003, 06:00 CST

Source: Houston Chronicle

Just two years ago, Enron executives were eagerly pitching a vision of the company's future -- driven by broadband trading and videos streaming over the Web.

Today, trading bandwidth on high-capacity lines is a dead business with little hope of revival anytime soon.

And the hoped-for services they thought would create a market for broadband are not the "killer applications" many expected, although video-on-demand has taken off somewhat.

Too many companies built too many miles of fiber optic cable. This glut drove down the price of bandwidth. When the sky-high projections for growth of the Internet fell short, companies relying on online customers for their bread and butter began falling by the wayside.

"None of these companies building networks had any idea about the retail side of the business and what customers really wanted and would pay for," said Tony Marson, an analyst with Probe Research. "They were doing it totally blind. It was bound to end in tears."

The ability to trade capacity also suffered because, with so much capacity going begging, there was no pressure on users to pay a middleman to broker it.

And, risk management techniques to limit the damage from perils such as price spikes were of little interest in a business where prices were steadily slipping.

Broadband trading and brokering have become taboo subjects among companies, according to David Walsh, a former Enron Broadband employee who is now managing director of Houston-based Global Capacity Group.

"Companies are focusing on services, on procurement. They want to keep it simple," Walsh said.

The major catalyst for the creation of a generation of telecom companies was the 1996 Telecommunications Act.

New players, such as Enron Broadband Services, were formed in the late 1990s to take advantage of terms in the act designed to open up local phone service to competitors while giving the regional Baby Bells access to the long-distance markets. The act essentially forced phone companies to open their own voice and data lines to resellers.

Enron Broadband's main goal was to help businesses make the process of buying a data circuit -- an avenue for sending and receiving information -- faster, cheaper and more reliable than it had been when the Baby Bells held a near monopoly. Enron planned to sell access for flexible lengths of time and close the deals within hours, instead of the months usually required.

The idea was that once it became easier to buy and sell broadband using standard contracts, it could be traded as a commodity, like electricity. Enron executives talked about how they could use the expertise gained from building those markets to dominate the new medium; there was little said about the potential pitfalls.

It was trying to force the telecommunications industry to completely change how it did business by sharing more information with customers.

"They were trying to force wholesale cultural changes on the industry that it wasn't ready for," said Ron Banaszek, director of TFS Telecom, a division of TFS Energy.

"When Enron and all these energy companies approached the telecom companies about doing deals, they thought, `Great, here's someone else I can sell capacity to,' " Banaszek said. "But Enron wanted them to buy capacity and trade with them, too, and the telecoms just wanted to sell."

There was also little reliable research on the market for high-speed bandwidth, a fact Enron acknowledges in its internal strategy documents. But one of the few sure facts about the business -- that the price of bandwidth was dropping steadily as more companies installed huge fiber optic networks -- didn't bode well for the business's future.

Despite that, Enron predicted the demand for high-bandwidth applications was going to grow so quickly that the surge in new customers would outstrip the price drop.

Other energy companies followed Enron into the telecom business, including Dynegy and El Paso. These companies were more cautious, but at one point El Paso pledged as much as $2 billion to the business.

In the nine months leading up to Enron's December 2001 bankruptcy, it became clear to Enron Broadband's officials that its original business plan was not going to work.

The centerpiece of its high-speed content business, a deal with Blockbuster Video to provide a video-on-demand service to homes, was called off. That forced the elimination of hundreds of jobs.

And even though the company showed an increase in trading volumes, former employees say much of the volume didn't include actual sales of capacity on data circuits. Rather, they were just swaps between Enron and other energy companies, such as Dynegy, El Paso and Mirant, that amounted merely to paper transactions.

Officials with the companies have denied those allegations.

Even if Enron had not filed for bankruptcy, its broadband business was destined to fade, just as the telecom businesses of most other energy companies have in the past year.

El Paso Corp. still has material about its telecommunications division on its Web site but has significantly reduced its investment.

Even Dynegy, which took a conservative approach to the telecom business, has sold its European operations and is seeking a buyer for its American assets, said Blake Young, executive vice president of administration and technology.

"Technology innovation outstripped one's ability to pay for the last generation of technology, so you were constantly needing to upgrade," Young said. "Add on severe overcapacity and the last mile connection being stifled by the Baby Bells, and you get an industrywide implosion."

Companies have returned to the old ways of securing data lines through negotiations with lengthy service contracts, the analysts say.

There is a trading market for data products such as international long-distance minutes, although limited, but most other types of data will be many years in developing into a viable market.

"In many ways, it's like the old days where if you shopped around, it would usually turn out you weren't getting as good a price for that circuit as you thought you were," Banaszek said. "That salesman you bought the line from would probably buy you a round of golf the next time he saw you at a conference to make up for it."

There is room for companies like Global Capacity Group, however, which was formed based on the business plans that Walsh and others at Enron Broadband were drafting in the days before Enron's bankruptcy.

Global Capacity advises companies on nearly all aspects of their data communications needs, from helping them design networks to negotiating long- and short-term data line agreements.

"No one is trading bandwidth or sharing price information on circuits, but there are a number of us out there that know enough about this business to help companies outsource these services and save some money," Walsh said.

While Enron's broadband trading efforts missed the mark, its bandwidth product efforts were better timed. But they fell short because they picked the wrong path to consumers' living rooms. Enron chose to bring the high-bandwidth services into individual homes through Digital Subscriber Line service.

This approach, commonly known as DSL, is used to move massive amounts of data over phone lines.

In the late 1990s, there were dozens of companies offering DSL. But a combination of unrealistic market expectations and a lack of cooperation from the local phone companies made DSL less than reliable. Many of the DSL providers Enron was working with filed for bankruptcy.

Today, the kind of video-on-demand service Enron envisioned is a reality, but only for subscribers of digital cable television.

Nearly every major cable television network in the country is offering the service as a premium option. For example, Time Warner Cable, the dominant provider in the Houston area, has been the most aggressive with its iControl service. Viewers can use their remotes to rent recent releases and watch them as many times as they wish for 24 hours.

Customers with high-speed Internet access through DSL connections can also rent movies, but there are fewer options, download times can take more than an hour and the movie can be watched only on the PC that downloaded it, not on a television.

"The bottom line is video-on-demand is an important ancillary service for cable TV companies, particularly as a way to differentiate themselves from satellite," said Mike Paxton, a senior analyst with In-Stat/MDR. "But it's not the killer application everyone said it would be, not by any stretch of the imagination. And it's not a great service over DSL."

Despite its failure, Enron Broadband had some impact on the telecom business, observers say.

In the past, telecommunications companies were not using risk analysis extensively, but they have since adopted some of the risk management tools commonly used by the energy companies, said Banaszek.

"They needed to understand operating risk, price risk, credit risk -- which no one paid attention to," Banaszek said. "It was just sell, sell, sell to anyone."

Companies are not going so far as entering into hedging transactions as a way to minimize risks, but they are at least more aware of such issues.

"Bandwidth trading was never about commoditization or alternate sales channels. It was about the efficiencies of a risk-management-centric point of view," Banaszek said. "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 by companies like Enron probably wasn't the best."

Enron Broadband also helped drive down the length of contracts, contends Walsh. While most contracts were for a minimum of a year and usually longer, companies now regularly sign circuit deals for six months or even month-to-month.

"You had these multiyear take-or-pay contracts where you'd be stuck paying the same high price for a circuit, even if the price had dropped by half after a year," said Walsh. "Today, the buyer has a little bit more power than they did in the past."

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To see more of the Houston Chronicle, or to subscribe to the newspaper, go to http://www.HoustonChronicle.com

(c) 2003, Houston Chronicle. Distributed by Knight Ridder/Tribune Business News.

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