Allison, could you please forward to Terry Banks and the F-H guys?  Thanks


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Category:	Enron Broadband Services, Bandwidth Trading
Description:	Is Latest Fiber Optic Play Enron?
Detail:	
Dow Jones News Service  2/3/00

Investors can't get enough fiber. And we're not talking about a bowl of 
Cheerios or Special K. 

 We're talking about fiber optics. 

 Telecommunications companies such as Qwest Communications (QWST), Global 
Crossing (GBLX) and Level 3 Communications
 (LVLT) are racing to build new fiber-optic networks so that high-bandwidth 
applications like video can travel faster and be clearer when
 they reach the desktop. The huge growth of the Internet has increased the 
need for more capacity on old fiber and copper wire
 networks. All sorts of new switches, routers, servers and software are being 
used to build the new networks and beef up the old ones. 

 The need for fiber and gadgets that enhance networks prompted Corning (GLW) 
- that erstwhile dishmaker - to announce Thursday that
 it will spend $750 million to increase its fiber-optics manufacturing 
capacity by 50% over the next few years. And the trend has sent
 stocks like JDS Uniphase (JDSU), SDL (SDLI) and Sycamore Networks (SCMR) 
through the roof. 

 The excitement over fiber optics and increasing bandwidth is also juicing up 
shares of an old natural gas and electric company called
 Enron (ENE). True, Enron isn't a typical energy or utility company: The 
Houston-based company is known for leading the charge of
 wholesale marketing and trading of gas and electricity. But Enron has never 
been considered a telecommunications company. 

 Until now. 

 After trading between $28.75 and $44.875 last year, Enron shares shot up 65% 
to a new high of $73.06 last month, after the company
 held its annual analysts' conference where it unveiled its new 
communications strategy and a surprising joint venture with Sun
 Microsystems (SUNW). Wall Street was smitten. "Although this is still an 
energy company, in our view, Enron fits the description of a
 'new economy' stock" because it has moved its wholesale trading operations 
online and announced a unique broadband strategy, wrote
 Donato Eassey, a Wall Street Journal All-Star analyst at Merrill Lynch. 

 Enron has been building its broadband business since 1997, when it acquired 
Portland General Electric, which started building a
 fiber-optic network. Enron invited both telecom analysts and the usual 
contingent of natural gas analysts to its Jan. 20 meeting. The
 company presented its new network, which is based on fiber; servers that are 
ramps on and off the network; "pooling points," which are
 essentially switches that connect its network to other networks; and 
software to control the transmission of data. The company is using
 networking gear mostly from Lucent Technology (LU) and Cisco Systems (CSCO). 
By the end of 2001, Enron expects to increase its
 network to 18,000 miles from about 13,000 miles now - a sizeable slice of 
the roughly 200,000 miles of fiber in the U.S. 

 The company also announced a joint venture with Sun Microsystems to develop 
a standard technology for accessing real-time
 bandwidth and supply Enron with 18,000 servers. With Sun CEO Scott McNealy 
at their side, Enron executives said Sun will purchase
 broadband video streaming services from Enron. "All we can say is WOW!" 
wrote Edward Tirello Jr. at Deutsche Bank Alex. Brown in
 a note after the show. "Just when we began to ponder the potential with a 
very healthy skepticism, Enron brilliantly anticipated the
 reaction and thrust Sun Microsystems' billionaire CEO Scott McNealy into the 
mix." 

 Fund managers have been intrigued by Enron's transformation, too. Back in 
December, the Janus Fund (JANSX) snapped up 15.6
 million shares of Enron, bringing its stake to more than 25.5 million shares 
and making it by far the largest holder of the stock, according
 to the latest monthly data from Morningstar. And Fidelity's huge Magellan 
(FMAGX) fund nearly doubled its stake in Enron to 4.6
 million shares in December. Says Marion Schultheis, managing director at J. 
& W. Seligman, who owns the stock in two growth funds
 and is looking to buy more: "Now there are real tech people looking at 
Enron." 

 Analysts think Enron's stock can climb even higher. "In January, it was just 
the first step of the market realizing what this company is
 doing," says Erik Ruben, an analyst at Janus Capital. "It is such an 
extraordinary story." Wall Street Journal All-Star analyst Rick Gross
 at Lehman Brothers agrees. The natural gas analyst is quick to point out 
that the stock is also reflecting strength in Enron's wholesale gas
 and electric business and the company's success in turning its energy 
services business profitable for the first time in the fourth quarter. 

 Enron plans to use its network in two ways. The first business is bandwidth 
intermediation, which involves using its own network and
 other networks to provide businesses and Internet service providers with 
full bandwidth needs. Enron aims to lower the cost of using
 networks by charging customers for only the time and space they use on the 
network. Right now, customers that need space on a
 network have to enter long-term contracts for preset amounts of capacity 
with major telecommunications providers such as AT&T (T)
 and MCI WorldCom (WCOM). Enron has also developed a standard bandwidth 
contract that pools existing contracts or unused
 capacity that can be traded in a marketplace (see story for more). 

 Basically, the company plans to make money on the spread between buying and 
selling prices for bandwidth, along with financing
 services. The company has already proved it can profitably buy and sell 
natural gas and electricity contracts in the same manner. Ronald
 Barone at PaineWebber figures that the bandwidth intermediation business 
will generate gross operating income of more than $500
 million in 2004, from an estimated $9 million this year. 

 The second business is providing broadband content services such as video 
conferencing and streaming. The company is using its own
 messaging software (acquired from a company called Modulus), along with 
Inktomi (INKT) caching software to control distribution of
 content across its network and RealNetworks' (RWNK) video streaming 
software. It is also using switch routers that control data flows
 made by a privately held company called Avici Systems. The company expects 
to generate content revenue of $2.5 billion in 2004, up
 from an estimated $45 million this year, according to Barone. 

 The whole broadband services unit is expected to spend $650 million and lose 
$60 million (before interest and taxes) this year, Barone
 says. But right now, the stock is hardly reflecting this business, says 
Lehman's Gross. "The non-broadband business is valued at $55 to
 $60, so there's very little in the stock for its broadband assets," he says. 
Many analysts have raised their 12-month stock price targets to
 $90 to $100, giving Enron's broadband business a value of $30 to $40 a 
share. 

 Enron's broadband strategy is catching a lot of attention, but some of the 
established telecom companies, such as MCI WorldCom
 (WCOM), doubt that it will be successful. Still, Global Crossing, which was 
the first to sell bandwidth between New York and Los
 Angeles to Enron in December, has indicated that it thinks the bandwidth - 
trading concept can work. It's just a question of when.
 "Enron is going to be a winner in bandwidth trading ," agrees Brad Bradshaw, 
senior director at the Yankee Group. "It's going to take
 a while, though." 

 Even if the broadband plans don't work out, Enron has a thriving energy 
business to fall back on. The company owns gas pipelines, sells
 wholesale gas and electricity in North America both traditionally and online 
and manages energy needs for large companies such as
 Chase Manhattan (CMB) and Simon Property Group (SPG). Says Janus' Ruben. 
"Its energy businesses are equally
 paradigm-breaking." 

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