When I was researching Enron (NYSE: ENE), the management told me that one of the challenges they face is how to package bandwidth. What kind of technology exists to package it? I also talked to Enron's competitor, Williams Communications (NYSE: WCG), and they had the same problem.
Related to this, I read an interesting press release from Nortel Networks (NYSE: NT). On August 29, the press release detailed a new product called Managed Optical Services. This product allows network or bandwidth providers to reduce dependence on the routing layer of networks and allow service providers the control to sell or lease individual wavelengths of light.
This helps solve the problem of how to effectively package bandwidth for different customers. Pooling points -- which we'll define in a second -- are one of the more important areas in bandwidth trading. Enron states that "As pooling points are developed, bandwidth trading will become more efficient and more common." A pooling point is defined as an interconnection point-of-presence at a selected physical location through which:
1) Connections between buyer and seller are reserved;
2) Connections are established between buyers and sellers at specified capacity rates; and
3) The connection (and its quality) is monitored.
I spoke with Don Smith, president of the Optical division at Nortel Networks. He states that, in pooling points, the points are where various networks will interface. At the points, you hand off some unit of bandwidth -- a chopped wavelength. With this managed wavelength service, there is a hand-off needed through a pooling point between networks, and this is one of the focuses at Nortel. The company is creating network environments and appropriate platforms that enable openness and allow "commodities" such as bandwidth to be interlinked between networks.
It makes sense that companies selling bandwidth might buy into Nortel's system. In fact, Williams Communications did just that. The Nortel press release quotes Frank Semple, president of the Williams Communications Network unit, as saying, "Leading technologies like these enable us to provide our customers with the flexibility to add bandwidth and customized services on demand, bridging the gap between the services layer and the optical layer. With aggressive providers like Nortel Networks, Williams [Communications] will continue setting standards and driving new technology in the industry."
Such a system can make it easier for telecom companies to upgrade networks and offer more bandwidth, and should create more of a market for companies such as Enron. Enron can purchase the bandwidth it needs, and sell any excess, lowering the company's risk.
Another item showing up in the news is the extreme competitiveness in telecom, which we all see every day. I switch long distance companies regularly -- to whichever one gives me the best rate. All of these companies are spending significant sums for equipment to upgrade networks and compete.
According to BussinessWeek, telecom capital spending was $42 billion in 1996, rose to $96 billion in 1999, and may exceed $100 billion this year. This is good news for stockholders of companies like Nortel. However, the expensive competitiveness in this market could lead to somewhat of a cash crunch at purchasing companies, and that could lead to an eventual slowing in equipment purchases. We'll have to watch for this.
If you invest in bandwidth-related Drips, expect volatility! We could see periods where there is a glut of bandwidth available, and we may see periods where the supply is not enough to meet demand.
Ultimately, companies that bring efficiencies to the market, such as Enron, will profit. I feel that, long-term, the growth outlook is positive for equipment suppliers such as Scientific-Atlanta (NYSE: SFA) and Nortel Networks. That's why I hold these two stocks, and Enron, in my Pathfinder Portfolio. To discuss these companies, visit us on the Drip Companies board.
