Confessions of a middle man: Richard Elliott, chairman of Band-X, an online exchange for carriers, believes the worst is yet to come for Europe's wholesale bandwidth market - View from the Top

Telecommunications International, Sept, 2002 by Ken Wieland

The collapse of the alternate carrier market has been a bruising experience far customers, vendors, creditors and even the accountancy profession. Yet, according to Richard Elliott, chairman of Band-X, this cloud has a silver lining for his own company. "I don't want to sound as if I'm gaining satisfaction from other people's misery," he says, "but the carrier shakeout emphasises the attractions of using an online exchange."

Founded in 1997 and headquartered in the UK, privately-held Band-X acts as a focal point and intermediary for carriers around the world who are buying and selling bandwidth, voice minutes and IP transit services. The company's revenue comes from taking a small percentage from the value of each transaction.

"If you buy directly from a carrier, you're vulnerable if that provider gets into financial difficulties," says Elliott. "With an online exchange it's comparatively easy to switch networks and so it removes the fear of service loss." And as a neutral arbiter of network quality, Elliott believes that Band-X is providing an invaluable service to the industry. "Everyone claims that theirs is best but buyers can't really know without independent testing," he says.

The nature of Band-X's business means that Elliott can talk authoritatively about the shape of Europe's wholesale bandwidth market and its future prospects. But those looking for comforting news better turn away now because Elliott's prognosis is a gloomy one. "The wholesale bandwidth market once thrived on new carriers buying up capacity and putting it into inventory, which, although it generated a lot of liquidity at the time, made it difficult to see the underlying demand [from corporate users]," explains Elliott. "Now that phase has gone the industry is focusing on what the underlying demand actually is but is doing so at a time when corporates are reining in their expenditure. It's my belief that the underlying wholesale bandwidth demand in western Europe is only equivalent to 400 new STM-1s over the next 12 months, which includes contract renewals."

If Elliott's estimate is correct, and even allowing for the fact he's talking about wholesale rather than retail revenue, there's going to be a lot more carrier consolidation and casualties this year. "When you think that each STM-1 wholesales for about US$50,000, a 25 per cent share of the market size that I'm talking about would only lead to US$5 m revenue over the course of a year. But if you look at the annual network opex of KPNQwest before its demise, which was about US$760 m, it gives some indication as to how distorted this market became," says Elliott. "The broadband market is in severe crisis and the correction has by no means run its course."

The decline of the wholesale bandwidth market--due to over supply and fewer alternate carriers--would have dealt a major blow to Band-X had it not already persuaded most of Europe's national PTTs to use its services. "These people [PTTs] didn't talk to us a few years ago as we were perceived as being rather strange and engaged in some sort of revolutionary activity. But now the cost-efficiency benefits of using an online exchange have been established, we're looked upon with considerably less suspicion," says Elliott.

Incumbents are beginning to emerge as the beneficiaries in this new, less crowded, telecoms order. Elliott reports that since the shutdown of KPNQwest's network, buyers of capacity are running into the arms of established carriers on deals 'significantly more expensive' than they had with the erstwhile Dutch-based pan-European operator. Even the very fear of more alternate carrier networks closing down is pushing buyers to the doors of companies who appear to have more solid financial credentials

"Those with robust financial circumstances are able to charge a premium for their services, while others have to be more aggressive on price," observes Elliott. "What we're now seeing is an unprecedented increase in the range of prices across most routes."

And on routes where the number of service providers has dwindled significantly, Band-X indices reveal that bandwidth prices are going up for the first time since the company's formation five years ago. "Routes into Latin America, most notably Miami-to-San Paulo, are rising in price, while prices for routes into eastern Europe [Warsaw and Budapest] Milan, Madrid and Lisbon are stabilising. Routes in the heart of Europe still remain intensely competitive, though," says Elliott.

Thankfully for Band-X, the point-to-point bandwidth market does not form the bulk of its business--voice minutes and IP transit do. According to Telegeography, a research publication subsidiary of Band-X, international call minutes grew by a compound 20.3 per cent between 1996 and 2000; it forecasts ongoing compound growth of 19.3 per cent for the years 2000-2004. "The voice minute market has been very resilient, driven by mobile and dial-up internet usage,' observes Elliott.

For its IP transit business, Band-X has benefited from the fact that as volumes of traffic shift from one network to another it has been able to monitor the corresponding rise and fall in network performance--an impossible task for a buyer working independently. "PTTs, along with Interoute, Colt and Sprint, have enjoyed greater traffic volumes but it's had an impact on network performance. Buyers with Band-X can see the effects of these traffic shifts and make a purchase that takes into account both the price and the QoS levels on offer," says Elliott.