Are We Heading Toward a Commodity Market?

Posted: 08/1998

Are We Heading Toward a Commodity Market?
International Bandwidth Exchanges Symptomatic of Emerging Supply-Demand Equation

By Khali Henderson

Sean Whelan wants to change the way bandwidth is bought and sold. His service,
RateXchange, is a web-based "trading floor" for wholesale international telecom
minutes and bandwidth. The goal, he says, is to streamline the buy-sell process in an
industry where information on price, quality and availability are difficult to find and
buyers and sellers are numerous and fragmented. It also is a first step towards a
real-time commodities-style exchange for bandwidth not unlike those for corn or wheat.

While the prospect of losing control over pricing for transport may be unsettling for
some larger carriers, analysts say it is symptomatic of a larger change afoot that will
permanently alter telecom’s supply-demand equation.

Web-Based Exchange

Akin to a match-making service, RateXchange (www.ratexchange.com)
offers a forum for linking buyers and sellers anonymously. Upon accepting an offer or bid,
RateXchange will introduce buyer and seller to arrange for interconnection. When a match
is made and the transaction is completed, RateXchange takes a cut–between three-tenths
and four-tenths of a cent per minute on minute sales and 2 percent on bandwidth trades.

Six-month-old RateXchange and its predecessor, year-old U.K.-based Band-X Ltd.(www.band-x.com), are changing and, they say, improving,
the buy/sell process by taking it out of the industry trade shows and onto the Internet.

"Technology is changing things, and there is a better way to do business,"
Whelan says. Whelan is all-too-familiar with the current buy/sell process in wholesale
markets. He cut his teeth in telecom at Sprint Communications Co. where he was given the
newly created assignment of pricing bulk services and negotiating agreements with
then-emerging switchless resellers. Several months spent "winging it" in a
learn-as-you-go environment were the foundation of a career in developing new business and
resale and agent channels not only for Sprint, but MFS Communications Co. and, after the
merger, MFS/WorldCom Inc.

Trader Paul Reilly, a national account executive with WorldCom, says the web-based
exchange saves time by virtually eliminating prospecting and bidding processes. A deal
that normally takes 30 to 60 days to close can be completed in a few weeks, he says. As a
seller on the RateXchange site, Reilly has made more than 30 offers for private line
services–half of which closed.

Ticker Trading

The web-based trading environment is merely a precursor to a real-time bandwidth
exchange, analysts say. Although RateXchange and Band-X may be jump-starting the
transition to the commodities model, it will arrive on its own as a result of an
oversupply of capacity and interoperability of networks, according to Forrester Research
Inc. in its report, "Bandwidth’s New Economics."

"Bandwidth exchange is part of a larger question about supply and demand,"
says one of the report’s authors, David Cooperstein, senior analyst with Forrester
Research. "With all the fiber coming online from carriers like Qwest [Communications
Inc.], Williams [Networks] and Level 3 [Communications Inc.], getting access to bandwidth
will be easier simply because there is more of it," he says. "If the common
denominator is [Internet protocol], the networks are less discrete, and bandwidth is
easily traded like a commodity."

Cooperstein envisions a day when there is a ticker over the desk that allows resellers
and corporate telecom managers to exchange one set of bandwidth for another, moving
minutes around to the most cost-effective carrier. According to Forrester Research, the
maturation of exchanges from website to real-time ticker may be just around the corner in
2002. Cooperstein says we may see it as soon as 1999-2000.

Bandwidth Free-For-All

The prospect of a bandwidth free-for-all may scare carriers used to rate-of-return
pricing. Says WorldCom’s Reilly, "I don’t know that I want to put fiber across the
pond without knowing that I’m going to get my investment back. It makes me nervous."
(A sales and marketing guy, Reilly also notes that a truly real-time exchange would put
him out of a job.)

"Carriers like AT&T [Corp.] and MCI [Communications Corp.] will run fast and
furious against it," says Cooperstein. "It makes real what we already
know–minutes are interchangeable. Whether they want it to happen or not, bandwidth is
becoming commoditized."

The newer carriers are less concerned about it, Cooperstein says. "They are
purposely overbuilding and creating a new supply-demand paradigm. They are wasting it
rather than constraining it [to stimulate demand for bandwidth-intensive
applications]," he says. (See Figure: Bandwidth Supply and Demand Shift.)

Barriers to Free Trade

Much more than converting telcos from a tired business model to a new one based on
forward-looking pricing must occur before the real-time exchange can be realized, however.
This primarily entails standardization of contracts, grades of service and credit terms.

Whelan says RateXchange plans to be an influential driver in the standardization
process. Already, the site categorizes offers by grade of service based on carrier type in
order to help buyers better understand the price-quality tradeoff. Whelan is developing a
more sophisticated grading system that will define network quality parameters.

Until such standards are made, the web-based exchanges offer an unprecedented
opportunity not only to buy and sell minutes and lines but also to keep tabs on market
pricing trends. (In addition to browsing offers, traders can view an updated list of best
wholesale international spot rates offered by RateXchange each week.) "It’s a
positive thing–exchanges in general–because it gives you the benefit of information to
help you understand the market," says WorldCom’s Reilly.

While users of the bandwidth exchanges are predominantly carriers, resellers and
Internet service providers (ISPs), Whelan says more and more large commercial users with
private networks are beginning to buy and sell excess capacity. For these companies, the
exchange represents an opportunity to save upwards of 30 percent to 40 percent, says
Reilly.

With players like American Express, Alcoa and others in the mix, the next question is
whether Wall Street might soon take over this emerging commodities exchange.