Posted: 09/1999
Bandwidth Rates Leveling; Arbitrage Opportunity or Abundant Demand?
In the second month of applying RateXchange's index methodology to U.S. East-West bandwidth rates, the market is betting that prices will be relatively stable over the next year. This is the same trend identified in the last issue of PHONE+, as traded contracts on average have lowered their rates only slightly over the past month.
The Real-Time Bandwidth Exchange*Revealed Price Index (RTBX*RPI), which tracks the current weighted average price, is applied to DS-3 bandwidth for major U.S. East-West Coast routes in the accompanying chart for RateXchange trades since January 1998. For this time period, the average rate for a DS-3 declined by 158 percent to $31,105 per month.
Graph: DS-3 Bandwidth RTBX*RPI and RTBX*RFP-360 Indices
The RTBX*Revealed Forward Price index (RTBX*RFP), which reveals prices the market sets for future dates according to contract term commitments, also is applied to two critical periods. The RFP-360 in October 1998, when the RPI was $54,241, reveals the price the market was betting on a year later to be $38,133. As we come closer to the end of this term, this discounted pricing seems more than reasonable.
The RTBX*RFP-360 slightly declined from $30,121 in May to $29,925 in July. Data from the last two months pushes the window of revealed price stability even further and solidifies our assumption that the market may be creating temporal arbitrage opportunities.
The "No Temporal Arbitrage" principle for a liquid bandwidth market simply states that if the market bets future prices incorrectly it creates arbitrage opportunities. Today the market is betting that rates will not decline significantly in the next year. An arbitrage condition exists in which, for example, a reseller could lock in a 24-month contract to sell, buy two 12-month contracts and even take a loss on its cost of providing the route in the first year to gain a significant profit in the second year.
Of course, the temporal arbitrage condition may not exist and we may be witnessing price stability based upon abundant demand. The much- prophesized "bandwidth glut" has yet to be identified when looking at rates as an indicator. Selling carriers now must speculate if their rate setting is as reasonable today as it was in October 1998 and weigh the potential impact of new supply.
Information is provided to the publisher by RateXchange and is believed to be accurate. RateXchange nor PHONE+ assume any liability for inaccuracies or decisions made by readers based on this information.
