Posted: 05/2001

Trading Desk

Trading Post
This month’s telecom Q&A, with
Derrick Parkhill, vice president of Amerex Bandwidth.

Q: What Is the Role of Telecom’s Large Debt Obligations in Bandwidth
Trading Development?

A: The looming debt issue is perhaps the one single thing that may
force the hand of the telecoms that have, to date, refused to enter into the
standardized bandwidth commodity market and continue to transact business on a
"best efforts" basis.

The rumblings of creditors and shareholders are growing louder by the day.
With the current downward trend in capacity prices and the market perception of
excess capacity supply, the investment community has begun to ask how their
investments are being protected and grown. Investments analysts are readily
familiar with tools of trading and are–with increasing fervor–asking,
"Why are you not using these tools?"

Q: What will happen to those carriers that do not adapt to bandwidth
trading?

A: Some carriers that do not adapt to a standard product and bandwidth
trading business model may find continued survival in niche second- and
third-tier markets, much like high-end buggy whip manufacturers did at the turn
of the 20th century.

The vast majority will see continued erosion of its client base and revenue,
eventually leading to its acquisition by a stronger, more adaptive market
player.

These acquisitions will not be the high profile "marriages" of the
past, but rather "asset garage sales," where more savvy competitors
can acquire assets for pennies on the dollar.

Q: Why do energy companies want to enter into the telecom space?

A: The answer is clear–synergy! Energy companies have natural gas
pipeline and power line right of ways, incumbent customers, similar products,
and most importantly, deep pockets.

Additionally, utility companies are being impacted today by the large amount
of energy that telecommunications infrastructure requires. The growth in telecom
infrastructure has lead to shortfalls in load projections at many utilities, and
subsequently requires them to purchase power at higher market-based rates to
meet their demand.

By entering the telecom space, the energy utility companies have more control
over how this energy is consumed within their system. These traits, in
conjunction with well-developed trading, risk management knowledge and
infrastructure, make their migration into the telecom community a snap.

Q: Who will succeed at the end of the day?

A: When we ask ourselves this question, we also wondered. As we
thought back to the successes in other commoditized markets, the answer became
clear. Those companies that realize early that trading is a tool to protect and
improve revenue will ultimately succeed. The current denial campaign by many of
the telcos is impacting their revenue severely, revenue opportunities and, in
the end, shareholder value.

Wall Street will reward those companies that embrace trading as a tool, and
after all, this is the primary measure of success for most company executives.

This month’s Trading Post was written by Derrick Parkhill, vice president
of Amerex Bandwidth. Founded in 1978, Amerex is one of the world’s largest
over-the-counter energy brokers, providing customers with voice and electronic
brokerage services, market liquidity, price discovery, and data services around
the globe. Amerex clients comprise the world’s energy markets and include the
major oil companies, natural gas producers, electrical utilities, natural gas
and electrical power marketers, pipeline companies, institutional banks,
multinational corporations, independent refiners, and sovereign states. He can
be reached at [email protected].

Got a Question?

All the talk and press about trading telecommunications capacity is sure to
raise questions. That’s why PHONE+ has introduced a new column to address reader
questions about this new market model. E-mail your questions to [email protected].
Answers will appear on our website and the most common will be reprinted in a
subsequent issue of the magazine.