Posted: 02/2000
Bandwidth Markets Take Off
BY KHALI HENDERSON
As they said goodbye to the millennium, many carriers formally would greet a new era of commodity bandwidth trading. In December, the first forward contracts were traded, routes were cataloged, pooling points were deployed and traders organized.
In a high profile if not significant move, Enron Communi-cations Inc. (www.enron.net) announced it had completed its first forward bandwidth trade under the commodity market model it proposed in May.
"This is 'day one' of a potentially enormous market," said Jeff Skilling, Enron's president and COO, in a statement announcing the trade. "Most companies that need bandwidth today are only able to secure inflexible multiyear deals for pre-set amounts of capacity--just like oil contracts in the 1970s, natural gas contracts prior to 1990 and electric power contract prior to 1994. As was the case in those industries, the market structure for bandwidth is currently inefficient and expensive. We are demonstrating that bandwidth can be traded under flexible, market-based contract structures with the assurance that quality standards are in place and monitored real-time by the buyer and seller."
The trade, between Enron Communications and Global Crossing Ltd. (www.globalcrossing.com), is for a monthly incremental contract for a DS-3 circuit between New York and Los Angeles. Global Crossing is the seller.
While many carriers have been dubious if not reticent about moving toward a commoditized bandwidth market, Global Crossing--a young, aggressive submarine cable builder that acquired the extensive North American terrestrial assets of Frontier Corp.--is among the transport business' progressive thinkers.
"As a large-scale builder of network infrastructure, we are always interested in developing new, creative ways to bring bandwidth to market," says John Tingley, president of Global Crossing Services.
Now that it has recruited Global Crossing to the cause, Enron's goal of establishing a commodity market for bandwidth is inching closer to reality, says Carl Garland, principal analyst-network services for Current Analysis Inc. (www.currentanalysis.com).
One study by The Phillips Group (www.phillips-infotech.com) suggests: the telco revenue model is disappearing. The study offers the observation that telecommunications service providers need to change their entire organizations to become net focused and exploit revenues from content.
"It is no longer possible to be simply a carrier of minutes or bandwidth," says the study's author David Prior, a senior consultant at The Phillips Group. Net players must successfully occupy one of the positions emerging, but not be tempted to revert to the telco model. Future value lies in content, not who is carrying."
In addition, there seems to be developing a critical mass of interest to warrant organizing interested parties into an association. The founders meeting of the Association of International Telecom Dealers (AITD, www.aitd.org.uk) convened Dec. 1 in coincidence with Risk magazine conference, "The Next Stage in Forward and Derivative Trading of Telecommunications Bandwidth."
The group's charter is to be a global membership organization for international telecommunications traders and service providers. It aims to define and establish a common platform for international telecommunications trading, to lobby on the industry's behalf and to establish a central reference for standards and data.
Although AITD claims it attracted many founding members and that the New York Mercantile Exchange played host to its meeting, response to its coming out was not all good. One observer, who asked not to be named, said the founders were not in touch with their target members. Also, a competing association expects to launch early this year, but its founders would not go on record for this article.
In the meantime, AITD organizers may have an opportunity to leverage the first-mover advantage by tweaking the group's strategy.
A Market Model
Toward establishing a commodity market, Enron's proposal (www.enron.net/bandwidth) simplistically calls for standardized contracts, neutral pooling points between city pairs and a pooling point administrator. This would allow buyers and sellers to easily and efficiently match their needs on four points: price, capacity, contract length and quality of service (QoS).
In support of this shared vision, telecom industry attorney, entrepreneur and founder of Advanced Radio Telecom (www.artelecom.com) Ted Pierson formed in September the Washington-based LighTrade Inc. (www.lightrade.com) to construct neutral pool-ing points.
LighTrade's Vice President of Strategic Relations Michael Prior says the company has a letter of intent with Lucent Technologies Inc. (www.lucent.com) to supply the switching equipment for the pooling points. (Interestingly, Lucent's senior vice president Bill Plunkett is on the company's board of directors.)
By third or fourth quarter, Michael Prior expects to have eight sites operational in Atlanta, Chicago, Dallas, Denver, Miami, San Francisco/San Jose, Seattle and Washington, D.C.
In 2001, LighTrade plans to have points in Boston, Frankfurt, Hong Kong, Houston, Las Vegas, London, Memphis, Milan, Paris, Phoenix and Tokyo.
Prior says he expects that trades between city pairs using the neutral pooling point model will begin weeks in advance out of habit, but they quickly will be reduced to days and minutes.
"LighTrade is bringing to the equation the ability to do real-time provisioning of trades and monitoring of quality," Prior says. LighTrade does not want to match trades, but to take orders for such contracts, and it is in discussions with companies that already have online trading platforms.
Meanwhile, one of LighTrade's predecessors Equinix Inc. (www.equinix.com) has closed $280 million in funding for its neutral Internet Business Exchange (IBX) facilities. These will offer customers collocation, bandwidth from multiple networks, interconnection and security.
Equinix opened its first IBX facility in July in the Washington, D.C. area. Two additional IBX facilities will open within the next few months, and expansion is planned throughout the year.
New Markets Forming
While LighTrade and Equinix are relative newcomers to the bandwidth trading arena, some veterans also are moving to expand their spheres of influence.
Arbinet Communications Inc. (www.arbinet.com), for example, has secured $30.45 million from several investment banks to advance its bandwidth trading model. For some time, Arbinet successfully has used its centralized switching infrastructure to allow carriers to automatically transport minutes over the least-cost route. The company is working toward applying this model to bandwidth trades as well.
RateXchange Inc. (www.ratexchange.com), an online trading floor, demonstrated in December its Real-Time Bandwidth eXchange (RTBX) for trading spot and forward bandwidth contracts. It was expected to be open for business in January. President and COO Ross Mayfield says RateXchange is offering four spot contracts--rest of next month, second month and third month--and forward contracts of year-long duration beginning every quarter.
RateXchange will trade three routes from hubs at carrier hotels at 60 Hudson St. in New York, One Wilshire Blvd. in Los Angeles and TeleHouse in London. Mayfield says RateXchange is the only market maker to locate its pooling points at the carrier hotels where the market exists today.
"This contributes to the liquidity of the market because it reduces time to interconnection," he says.
Price transparency also contributes to market liquidity. One trading floor, Bandwidth Market Ltd. (www.bandwidthmarket.com), announced in December a catalog of bandwidth prices for more than 300,000 circuits. The bid-ask site uses a search engine to sort offers and bids by city of origin, destination or speed of circuit.
"We think our market is much more convenient and efficient for buyers and sellers than haggling at trade shows or accepting standard retail prices," says President Howard Holme.
But broker Mike Moore, managing director of Amerex Bandwidth and a partner in Amerex (www.amerex.com), an energy commodities brokerage, questions the validity of this data. In his experience, more than a quarter of a million market indicators is unmanageable.
"In the gas industry, there are maybe 1,500 indications," Moore says. "I expect that bandwidth would be similar, but it won't get there overnight. You need to have liquid pooling points."
Moore, who has followed the developing commodity market for bandwidth, formed Amerex Bandwidth in December. As of early January, he had not brokered any deals, but at that time he said several were pending.
Unlike RateXchange or Bandwidth Markets, Amerex will help carriers trade bandwidth the "old-fashioned way" over the telephone with Amerex brokers as intermediaries. Moore, who also is a director for LighTrade, says Amerex Bandwidth will trade bandwidth at LighTrade sites or other neutral pooling points that emerge in the marketplace.
Opportunities exist for several companies to serve as such points. Emerging purveyors of neutral collocation facilities are some. Already having brought multiple carriers to a single location for interconnection, they easily could facilitate changing interconnection among them.
Khali Henderson is editor-in-chief of PHONE+ magazine.
