Intellectual Capital - Ken Rice

Posted: 06/2001

Intellectual Capital

Ken Rice
Raises Trading Stakes with Focus on IP, Storage
By Bruce Christian

Within the next two to three years businesses will make decisions based on bandwidth prices, just as they consider energy costs today.

At least that is what Enron Broadband Services Inc. (www.enron.com) CEO Ken Rice opines, when he looks into his crystal ball of the bandwidth trading market.

“Our position is that (telecom services) really already are a commodity. They are not a liquid commodity with transparent pricing, but we think that liquidity will evolve over the next two years.

“I think we will be watching bandwidth markets, similar to how we watch equity markets and energy markets,” says Rice. “We will be watching bandwidth prices on a real-time basis.”

Corporate financial officers will be able to make economic decisions based on the forward price of bandwidth, he adds.

Enron was one of the early utility companies to move into the bandwidth trading market. Rice, who has an undergraduate degree in electrical engineering, expects bigger and broader things to come.

“I think that it will very much be a real-time market, where applications, like videoconference applications, will automatically schedule bandwidth based on price and availability,” Rice says. “We are already doing a little of that. We have a software application that allows a Microsoft videoconference server to go to Enron online and check for bandwidth prices. If it likes the bandwidth prices, it goes ahead and configures our network to make that conference happen.”

In other words, the future for bandwidth could become automatic, because the price and availability can be programmed into the applications that actually use the bandwidth, he explains.

Rice has been with Enron Broadband for about 18 months. The company began its leap into telecom in 1996, after it had bought Portland General Electric, an Oregon energy utility.

When the purchase was made, Portland General Electric had begun to use its rights-of-way to build fiber around Portland. It also had begun working on long-haul projects.

“So when it became part of Enron, we began looking at the telecom business,” Rice says.

Before it would get into telecom, however, Rice says Enron had to ensure the foray fit its method of operation, which is to “totally understand the business and be able

to deliver.”

“While on paper it was already ‘deregulated,’ it still operated very much in a regulated type of fashion,” Rice recalls, adding that most bandwidth deals were long-term, point-to-point and capacity-based. Enron believed it could do better.

“We felt we could buy and sell bandwidth, begin trading it, and provide liquidity and price discovery just like we do with gas and electricity,” Rice says. This would allow customers to buy bandwidth as they needed it.

In 1998, Enron created a model patterned after its natural gas and electricity businesses. It finished building an 18,000-mile fiber optic network, which Rice says gave Enron Broadband the credibility it needed. It also allowed Enron to demonstrate to its potential customers and trading partners that it could deliver an ordered circuit, and to show it could connect to other networks.

To develop a telecom model based on its gas and energy model, Rice says it took key contributions from Kevin Hammon, Enron’s president and COO; David Cox, “the deal guy, who can sell ice cubes to Eskimos;” and Jim Fallon, who operates the bandwidth trading operation.

“Our objective was to really get this merchant business around bandwidth up and running,” Rice says.

Enron had to show it could buy, sell and provision circuits quickly and seamlessly, he adds.

“But that capability really didn’t exist within the industry, so we began to develop pooling points, which really are switches that interconnect our network with other networks. This enables us to buy excess bandwidth between two cities, or between two points, and provision a circuit within 15 minutes, deliver that circuit to the customer and then de-provision it when the customer is done.”

In its trading, Enron Broadband buys everything in the wholesale market, breaks up its bulk purchases into different pieces and re-

bundles those pieces into different types of service offerings for reselling, Rice says.

With more than 200 trading transactions last year, and an average of between 30 to 40 transactions per month this year, the concept of treating telecom services as a commodity continues to convert original skeptics.

And the growing market of available value-added services is expected to boost the bandwidth market even more.

According to Rice, Enron Broadband already sees great potential within IP Transit and the data storage markets.

“We have executed a number of trades for IP transit and a number of trades for storage,” Rice says. “The model essentially is the same for storage. And we are creating a market for storage that will enable us to do the same thing we do with bandwidth, natural gas and electricity.”