Posted: 04/2001
Trading Desk
Trading Post
What are the Differences Between
IP, Bandwidth Trading?
A: With IP transit you actually are buying or selling Internet transit, specifically, access to and through the Internet. Bandwidth trading refers to circuits or networks of dark or lit fiber, primarily from one point to another. Here are key questions and answers that should help elucidate the distinctions.
Q: How can IP be traded?
A: In order to trade IP, quality standards are required. It can be traded only with a full understanding of the different carrier and ISP offerings. According to TeleGeography, IP can be traded three different ways: as an agent or broker, which is not really trading because buyers and sellers deal directly together; through a physical delivery point, which is a complex business model; or financial trading, which more commonly is associated with the buying and selling of contracts and derivatives more in line with how commodities are traded.
Today there is a lot of talk about an IP commodities market. It is important to note that this is by no means a mature area and has not yet evolved enough to be traded on financial risk alone. The real business is happening with physical delivery where quality standards are being set.
Q: What are the benefits of trading IP rather than setting up traditional transit relationships?
A: Trading IP, or more specifically, buying IP transit through an exchange, offers many advantages, including price and flexibility. Many companies that purchase IP transit through traditional relationships usually sign a contract with a fixed price for a fixed duration, usually 12 months. This is a disadvantage for the buyer. Once connected, they normally can't negotiate rates, increase the standard of quality or opt out of a contract without penalties.
Today, with prices falling throughout the industry and continual price erosion expected, buying IP through an exchange is attractive. With one single connection, the ability to purchase based on price fluctuations over a period of 12 months offers companies a substantial savings over the course of a year.
The dynamic Internet industry also demands flexible business plans, so the ability to only buy as much as you need, at the quality you need, is attractive. It's a matter of being competitive not only today, but also through the course of time. To have the cost structure reflect the market value is truly what an IP exchange can provide.
Q: Why should carriers sell IP transit via an exchange?
A: There is an abundance of carriers that are keen to sell more transit. An exchange offers sellers a captive market where traffic is to be had by whomever is selling. Exchanges provide sellers with another revenue opportunity. In addition, they enable network backbone operators to scale their infrastructure and reduce the unit cost associated with network buildout. By using an exchange as an alternate channel to market, sellers can significantly reduce their SG&A associated with every Mbps sold. After connecting to the exchange, sellers need no further connections to reach the buyers, but simply offer a solid network and competitive price. The ability to reach a wider customer base, try alternate pricing structures and arrange for significant discounts represent additional benefits of selling on an exchange.
Q: Why aren't more exchanges opening?
A: It's a complex environment. A company has to fully understand the market and the technologies that run it. For instance, exchanges that run voice minutes don't understand the complexity of IP and haven't yet built into that area. There's an assumption that providers simply have to physically connect to an exchange. But it's important to realize they have to present their networks to the exchange for testing, monitoring and quality control. Only then does it become a true marketplace where quality stands tall.
Q: What are the necessary market conditions for an IP Routed exchange?
A: In terms of market conditions, all you need are ISPs--both buyers and sellers--in a single facility. The organization providing the exchange needs to be neutral, independent and trustworthy. When selecting an exchange, choose a neutral, independent provider who offers quality, flexibility and service level agreements that are either equivalent to or exceed market expectations today.
Nigel Panter, executive vice president of Band-X Ltd. IP Routed, contributed this article. Band-X offers a neutral and independent exchange for IP transit buyers and sellers that allow ISPs to buy IP transit according to independently monitored quality and price. For information, login to www.band-x.com or contact Nigel via e-mail at nigel@band-x.com
