Greg Jenkins

If timing is everything, then El Paso Global Networks has it all.

While most of the telecom industry is desperate for cash, the start-up wholesale carrier has the substantial support of El Paso, a $50 billion enterprise with roots in the energy business. And El Paso Global intends to leverage this advantage to control a next-generation network with worldwide reach, says CEO Greg Jenkins.

“We have great cash flow and great earnings that we can deploy into this market without having to go to the capital markets with an IPO,” Jenkins says.

In addition to money, the start-up has the benefit of commodity-trading expertise developed through its parent's activities, says Balu Balagopal, El Paso Global's chief commercial officer.

“Given our merchant skills developed in other portions of El Paso, combined with our M&A experience, we are positioned to build a configuration that makes the most sense,” Balagopal says. “What we are not about is following the model of a few years ago, when there was only one sense of end-to-end connectivity, and that was end-to-end asset ownership.”

Indeed, El Paso Global will not build its network so much as assemble it via purchase, trade or lease, according to Jenkins. While it is building a long-haul route between Houston and Los Angeles with Broadwing, El Paso Global hopes to contract most of its long-haul service through other providers. In terms of network ownership, the company's focus is closer to the user, Jenkins says.

“We have focused a significant amount of our attention in metro markets, where the availability of certain assets are scarce — where either it's difficult to build because of population congestion or permitting restrictions or other barriers — and more valuable,” he says. “We are in a position to get control of those scarce assets at a time when they are not being sold at a premium. In fact, they are going at a discount.”

For this reason, Jenkins says El Paso Global “will be able to assemble much of the network at a much lower cost than we originally contemplated.”

It's a formula that is proving fruitful for other energy companies in the telecom industry, says Mark Easterbrook, principal with Dain Rauscher Wessels. Both Dynergy and Enron are extending their network footprints while reducing their capital-expenditure projections for 2001. “They're saying, ‘Because of the collapse in the telecommunications arena, we can buy what we want for 30¢ or 40¢ on the dollar,’” Easterbrook says.

While it has deep pockets, El Paso Global is a newcomer to telecom. But Jenkins offers no indication that he is intimidated by the prospect of entering a new field. “While this industry has a great deal of technological sophistication and advancement, it has very little commercial sophistication and a great deal of inefficiencies from an operational standpoint,” he says.

Balagopal is similarly dismayed at the willingness of many competitive carriers to make investments in new services without first conducting the market research necessary to know whether customers will pay for them.

“Many of them were motivated to provide a leading-edge service for the simple sake that it was leading-edge and not driven by the value considerations underneath that,” he says, vowing that El Paso Global will not mimic these mistakes.

With Cisco as its technology partner, El Paso Global plans to have an IP-centric network. But the next-generation technology is merely the means to an end. “We are not doing it for the sake of doing it — we are being driven by the value considerations,” Balagopal says.

This merchant mindset is at the core of El Paso Global's business plan, which is centered around the philosophy that bandwidth should be a commodity that can be sold like power or natural gas.

“What Enron, Dynergy, El Paso and Williams want to do is open up telecom so that you can have capacity on Level 3 and have capacity on Williams and have capacity on Qwest and get it there in the most efficient way possible,” Easterbrook says. “Nowadays, if you want to get capacity on a fiber optic network, it usually takes two or three months. These guys want to get it down to minutes or seconds. They want to standardize the contract so you can do it very quickly and trade it and commoditize it.”

Easterbrook says there are many parallels between today's telecom industry and the natural-gas industry of the 1980s. Both industries saw network utilization rates of 30% or 40% upon being newly deregulated, he says.

Repeating the success realized in the natural-gas arena would be a huge windfall for energy companies because telecom is almost four times as large as the natural gas arena was upon deregulation, Easterbrook says. But commoditizing bandwidth may be trickier than trading natural gas.

“One molecule of natural gas versus another isn't very different,” he says. “In telecom, you are plugging a little packet into the fiber optic network, and you want that exact packet coming back out. So the logistics are a little bit more cumbersome.”

But Jenkins believes El Paso Global will succeed by establishing interconnection facilities for carriers and “pre-provisioning,” which will allow bandwidth to be used immediately after being traded. The notion is in stark contrast to the status quo, but the time is ripe for change, Jenkins says.

“This market hasn't seen the end of the effects of the capital shock yet, and we are in a position to take advantage of these lower prices and lower costs and the chaos that is in the market. That chaos is not about to end soon.”