TheStreet.com - Enron's Retreat Deepens Internet Gear Glut 11/29/01 by Scott Moritz

Now, as Enron scrambles for survival, observers say the company is looking to liquidate its networking assets. That means sophisticated gear like Ciena's optical transport boxes, which guide laser-borne information down fiber cable, and Cisco's Internet routers, which sort and direct data traffic, will be dumped for less than 10% of their original price on the used market.

Disincentive?
John Lynch, who runs Asset Recovery Center, a used-tech dealership in Eatontown, N.J., is negotiating to buy networking gear from Enron. Lynch says the market is flooded, which has cut the purchase price to between 5 cents and 9 cents on the dollar. This means Enron can expect to get between $1.5 million and $2.7 million for gear it originally bought for $30 million.

Clearly, as communications service providers try to stretch their newly slashed equipment budgets, this used gear offers a phenomenal cost savings over new gear. In fact, the nation's fourth-largest equipment buyer, Qwest (Q:NYSE - news - commentary - research - analysis), has boasted that the market is awash with state-of-the-art gear at dirt-cheap prices.

It seems hard times only get worse for the network gear peddlers. Already suffering from an industrywide spending slowdown coupled with a nasty price war, communications equipment makers now find that the lower demand is doubly troubling with a glut of their own used gear on the market.

Cisco says the used gear won't have an impact on its sales and adds that it was fully paid for gear it did sell to Enron. Other suppliers declined to comment on the effects of the used-gear market.

Northern Exposure
As far as ongoing sales, both Ciena and Sycamore, which sold optical transport equipment to Enron, say they've installed the gear and don't expect any significant impact should Enron become insolvent. Router maker Avici, which listed Enron as one of its top customers in the third quarter, says it has taken future Enron sales projections out of its guidance and lowered its financial targets.

Enron's foray into telecommunications services, starting in 1998, could hardly have been more ill-timed. The venture was a me-too business plan that aped energy rival Williams' (WMB:NYSE - news - commentary - research - analysis) efforts to build a coast-to-coast optical Internet to capture the rising tide of e-traffic. But just as Enron was toggling together its spanking new network, the industry went bust.

Enron broadband's modest operating losses of $24 million per quarter suddenly quadrupled by the second quarter to $102 million, as TheStreet.com's Detox pointed out in July. By the third quarter Enron's broadband unit had negative revenue of $125 million; for the first nine months of this year, the once-promising dot-com-styled enterprise posted a net loss of $494 million.

Notably, Enron's rival and recent suitor Dynegy (DYN:NYSE - news - commentary - research - analysis) also operates a fiber-optic network in the U.S. and Europe. As Friedman Billings Ramsey analyst Susan Kalla said Thursday, it will be interesting to see if Enron's broadband failure spells similar trouble for the same business model embraced by Dynegy and Williams Energy's spinoff, Williams Communications (WCG:NYSE - news - commentary - research - analysis).

Suppliers to these outfits certainly hope not.