Posted: 09/1999

Bandwidth Rates Leveling; Arbitrage Opportunity
or Abundant Demand?

In the second month of applying RateXchange’s index methodology to U.S. East-West
bandwidth rates, the market is betting that prices will be relatively stable over the next
year. This is the same trend identified in the last issue of PHONE+, as traded contracts
on average have lowered their rates only slightly over the past month.

The Real-Time Bandwidth Exchange*Revealed Price Index (RTBX*RPI), which tracks the
current weighted average price, is applied to DS-3 bandwidth for major U.S. East-West
Coast routes in the accompanying chart for RateXchange trades since January 1998. For this
time period, the average rate for a DS-3 declined by 158 percent to $31,105 per month.

Graph: DS-3 Bandwidth RTBX*RPI and RTBX*RFP-360 Indices

The RTBX*Revealed Forward Price index (RTBX*RFP), which reveals prices the market sets
for future dates according to contract term commitments, also is applied to two critical
periods. The RFP-360 in October 1998, when the RPI was $54,241, reveals the price the
market was betting on a year later to be $38,133. As we come closer to the end of this
term, this discounted pricing seems more than reasonable.

The RTBX*RFP-360 slightly declined from $30,121 in May to $29,925 in July. Data from
the last two months pushes the window of revealed price stability even further and
solidifies our assumption that the market may be creating temporal arbitrage
opportunities.

The "No Temporal Arbitrage" principle for a liquid bandwidth market simply
states that if the market bets future prices incorrectly it creates arbitrage
opportunities. Today the market is betting that rates will not decline significantly in
the next year. An arbitrage condition exists in which, for example, a reseller could lock
in a 24-month contract to sell, buy two 12-month contracts and even take a loss on its
cost of providing the route in the first year to gain a significant profit in the second
year.

Of course, the temporal arbitrage condition may not exist and we may be witnessing
price stability based upon abundant demand. The much- prophesized "bandwidth
glut" has yet to be identified when looking at rates as an indicator. Selling
carriers now must speculate if their rate setting is as reasonable today as it was in
October 1998 and weigh the potential impact of new supply.

Information is provided to the publisher by RateXchange and is believed to be
accurate. RateXchange nor PHONE+ assume any liability for inaccuracies or decisions made
by readers based on this information.