Fw: Re: Fw: Re: IP: Fw: Re: enron bandwith trading

[David Farber <dfarber () earthlink net>]

-----Original Message-----
From: "David P. Reed" <dpreed () reed com>
Date: Sat, 12 Jan 2002 13:49:46 
To: farber () cis upenn edu, ip-sub-1 () majordomo pobox com
Subject: Re: Fw: Re: IP: Fw: Re: enron bandwith trading

The rationale for bandwidth trading in an open competitive market is to 
create accurate economic signals (in the form of price changes, which can 
then fuel options and futures activity) that can be used to guide market 
investment in new capacity.
Otherwise the time constants on investment decisions are too long, and the 
hidden information dramatically increases the investment risk.

This really works in commodity markets with long timing and significant 
uncontrolled (therefore uncertain) demand.

Players who choose to ignore open markets where they exist end up like the 
"family farmers" who finance their investments entirely with 
bonds.  Ignoring the price signals from futures and options increases the 
farmer's risk, leading to short-term ruin that can only be saved by 
government largesse.  It's the key reason why agribusinesses can operate on 
thinner margins without failing.

Given that the biggest bottleneck on demand is the "first mile" whose 
owners completely strangle demand growth to its own ends, it seems to me 
that bandwidth trading (in backbone capacity) serves little economic 
purpose.  But as a bet on the future opening up of new "first mile" 
capacity, it wasn't necessarily wrong.  Hindsight is 20-20, and when 
confronting economic uncertainty, it's important to put yourselves in the 
place of those who made the investment choices, granting them no more than 
the best information they had at the time.

I  remember Ed Juge, the head of Tandy-Radio Shack's personal computer 
division in the early '80's, saying that his experience marketing portable 
computers demonstrated without a doubt that there would never be demand for 
battery-powered portable computers - no one would ever want to use a 
computer on an airplane, for example.  A couple of years later, it was 
impossible to fly on an airplane without seeing several laptops at least.

It's absolutely clear to me that bandwidth trading of some sort will be 
necessary, but I think we will have to wait until the monopolists in the 
telecom markets lose their government-guaranteed free lunches.


(Sent from Dave's Blackberry.)

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