Commoditizing Global Bandwidth - Company Business and Marketing

Telecommunications, June, 2000 by Sean Buckley

Bandwidth exchanges between carriers is nothing new, but never has the process been such big business-or so closely scrutinized.

When we talk commodities, pork bellies, orange juice or wheat usually come to mind-not let's imagine wavelengths of light. But a Wall Street broker who, instead of tracking pork bellies, tracks the spot market price for an OC-12 route between New York and London. Sound unrealistic? A growing number of on-line bandwidth brokerage houses and energy companies with telecom holdings will tell you it's only a matter of time before this happens. Telecom analyst Jeff Pulver of pulver.com has even predicted a time frame: "In less than five years, bandwidth will be traded on Wall Street."

Bandwidth exchange is nothing new, but the traditional methodology is often marred by long periods of binding contracts and slow provisioning time. Driven to meet demands for high-speed, data-centric applications, upstart terrestrial and undersea carriers like Global Grossing, Level 3 Communications and Qwest have been building out their networks with excess capacity With all this capacity up for grabs, a new generation of resellers, wholesalers and on-line bandwidth brokers are poised to resell it to customers through both long-and short-term contracts.

Leading the pack in the bandwidth commodity effort are carriers that have a traditional energy background such as Williams and Enron Communications and a host of bandwidth real-time, on-line trading centers pioneered by the likes of Band-X and RateXchange. This market follows three business models:

* Clearinghouses (e.g., Arbinet, AT&T's VoIP clearinghouse, GRIC, ITXC and Telia's VoIP clearinghouse) are non-neutral service providers that provide low-cost interconnection agreements. They aggregate supply and demand to trade in spot markets, settle between clients and transit traffic.

* Brokers (e.g., Min-X, Asia Capacity Exchange and non-Web-based brokers) use a Web site to generate supply and demand and match trades on-line and off-line.

* Exchanges (e.g., RateXchange, Band-X and InterXion) are neutral third parties that operate a confidential Internet-based exchange with integrated delivery, billing and payment. This new effort has generated much interest and speculation.

Competing Methodologies

Two of the most vocal proponents of bandwidth exchange are Enron and online broker RateXchange. RateXchange's model includes three primary elements: exchange, settlement and delivery. The on-line broker trades short-term spot contracts and future contracts, providing a neutral, vertical marketplace. Through its Real-Time Bandwidth exchange (RTBX), carriers and ISPs can interconnect and trade spot and forward contracts for bandwidth, dark fiber, wireless spectrum and minutes. It has two running hubs in New York and Los Angeles with plans to extend capabilities from New York to London this year. RateXchange also provides Web-based "lead generation" markets for circuit voice, voice over IP (VoIP) and bandwidth (private and satellite capacity), plus market information services for more than 6000 members. RateXchange's lead generation service, which has more than 1700 members, allows carriers to match standardized terms and brings two parties together to consummate the transaction for a straight commission.

There is already debate over the most feasible bandwidth exchange model. While every major carrier is investigating how to engage in this marketplace, Ross Mayfield, founder and president of RateXchange, argues its model reflects today's move into the e-business market. "The basic difference between our model and Enron's is neutrality," Mayfield said. "Enron trades in its own market, selling its own fiber. We don't compete against our own customers. Second, Enron's trading model is the brick-and-mortar version of commoditization, while ours uses electronic commerce."

Enron, however, sees other bandwidth brokers as matchmakers for long-distance minutes or long-term bandwidth contracts. Enron has been working with a number of carriers and vendors to develop a set of standardized terms and conditions to allow for commodity bandwidth trading. Under the Enron model, a bandwidth contract will pool existing contracts or unused capacity (see Figure 1). Transactions are completed between the buyer and seller or through an outside broker. When a buyer needs a particular flavor of bandwidth, terms and conditions are largely standardized and key commercial terms such as price and quantity are negotiated when the deal is closed. Generally, details of the transaction are kept private. From there, a pooling point administrator helps arrange the bandwidth's physical delivery to the customer. "Many Internet-based brokers have bulletin boards allowing you to post your offers," said Tom Gros, Enron's vice president of global bandwidth trading. "The brokerage introduces the two counterparti es and nine times out of 10 nothing happens. If anything does happen, it takes months. What we have proposed is an over-the-counter market where buyers and sellers--not necessarily including Enron--can make transactions using our model. We physically buy and sell this commodity and you can call the Enron trading desk and get prices where we are willing to sell and prices where you are willing to buy on several major routes."