Carrier Channel: Are Carriers Sitting on Trading Sidelines?

Posted: 08/2000

Are Carriers Sitting on Trading Sidelines?
By Khali Henderson and Ken Branson

Large carriers were conspicuous by their silence, if not absence, at a late June capacity trading conference in New York. The most vocal carriers were the usual suspects Williams Communications
(www.williamscommunications.com) and Enron Broadband Services
(www.enron.net)–both, not coincidentally, have roots in the energy business where commodity trading is business as usual.

Representatives from WorldCom Inc.
(www.wcom.com) and Global Crossing Ltd. (www.globalcrossing.com) were in attendance, but did not participate in panel discussions. Teleglobe International Inc.
(www.teleglobe.com) and Cable & Wireless plc
(www.cwplc.com) were exceptions, but their executives’ comments reinforced the idea that sizable carriers are sitting on the capacity trading sidelines.

Patrick Sheridan, a vice president for Cable & Wireless, says his company is not ready for commodity trading of bandwidth, but conceded that it would happen eventually. His purpose at the conference was to find out more about the opportunity.

“Teleglobe has not taken a position on commodity bandwidth trading, but we want to have a hand in forming the rules,” says Douglas Roth, director of web trading and sales for Teleglobe.

Warming Up

Despite contentions that commodity trading of bandwidth is being pushed by a very small but vocal force, there are even further signs that more and more carriers are warming up just in case they have to take the field.

At their request, for example, prominent U.S. carrier organization, the Competitive Telecommunications Association
(www.comptel.org), is coordinating development of a bandwidth trading organization in concert with Risk Publications
(www.riskpublications.com). A working committee of 25 companies representing carriers, exchanges and pooling point operators was formed in May to draft a standardized contract for bandwidth trading and to determine the role and responsibilities of the group, which is tentatively named the Bandwidth Trading Organization
(BTO). In a post-conference interview, CompTel president Russell Frisby told PHONE+ the process is well along and is expected to be completed by the end of summer, at which time the group will be incorporated and its master contract will be unveiled.

“The essential part of any trading marketing is standardization,” Frisby says. “There needs to be agreement on the terms and conditions in order to facilitate rapid and repeated trades.”

The delay in formalizing the BTO as a body hinges on defining its role as a standards and monitoring body, Frisby says. Those definitions, as well as the relationships between buyers, sellers, exchanges and pooling points and the BTO, are being addressed in the contract language.

Once incorporated, the BTO members will elect a governing body. Operations have not been decided but the responsibility may fall to CompTel, a role Frisby says the association is willing to play even without unanimous support for the process by its membership.

“There is general agreement in the industry that we should go forward [with developing trading standards],” Frisby says. “Some of our members will participate and some won’t. It really depends on their business plan. It doesn’t put us [CompTel] in any conflict.”

While no other industry associations belong to the group, at least one other is mindful of developments in capacity trading. The Association of Communications Enterprises
(www.ascent.org) launched its Communications Trading Industry Council in April. ASCENT president Ernie Kelly told PHONE+ at the time that the council’s charter is informational, and it does not plan to develop contract standards itself.

In late June, another forum called
e-bandwidthtraders.org (eBTO) was created by online capacity exchanges on three continents to promote capacity trading electronically.

Founding members of the nonprofit organization include the Asia Capacity Exchange
(www.ace-asia.com), The Global Tele Exchange
(www.thegtx.com) and Rate Xchange Corp. (www.ratexchange.com), each of which operate neutral markets for trading telecom services.

The group is not a competitor but a complement to the BTO, says secretary Russ Matulich, vice president of sales and marketing for RateXchange, explaining that eBTO’s membership is predominantly exchanges while BTO’s membership is predominantly carriers.

In fact, says eBTO treasurer Rick Nyman, vice president of business development for The GTX, the eBTO plans to work closely with the BTO to develop trading standards.

Other elected board members are chairperson Paula
Brillson, ACE’s CEO; Frank Genin, CEO of the London Satellite Exchange (www.e-sax.com); and Jenaro Garcia, CEO of
Iber-X (www.iber-x.com). Attorney Andrew
Lipman, a partner in the firm Swidler Berlin Shereff Friedman LLP (www.swidlaw.com) is serving as the group’s general counsel.

Membership in eBTO is open to companies that primarily derive their revenues from the operation of Internet-based exchanges for telecommunications products.

“Exchange members should not be in the business of operating proprietary networks,” says Genin. “The intent of this requirement is to differentiate between those who operate genuinely neutral exchanges and other carrier entities that operate exchanges as a unique sales channel to provide a market for their own goods and services.”

eBTO will also seek members for a carrier advisory group as well as a telecom derivative advisory group, open to any carrier or ISP that wishes to have input into the operation and furthering of the exchange concept. The founding members, for example, have been approached by numerous representatives from financial houses to work with the eBTO toward developing futures and options concepts. The board will select two representatives to sit on the eBTO governing board as nonvoting members.

Contract Talks

While most conference participants were in agreement about the need for standardized contract language, there was dissension over whether that might be achieved–at least in the near term.

Cable & Wireless’ Sheridan, for one, believes that it will be at least a year before there is agreement on a master contract. Aside from BTO’s uncirculated draft, Enron tendered a standard agreement in its market trading proposal last year, and many of the online exchanges float their own versions to their participating members.

Mike Moore, president of Amerex Bandwidth Inc.
(www.amerexbandwidth.com) the bandwidth trading arm of OTC brokerage Amerex Inc., says that commodity trading of bandwidth will happen and is happening without an overriding master agreement. “Whoever is waiting for the perfect document probably has a great excuse not to trade,” he says.

Williams’ vice president of bandwidth markets Sharon Crow told conference attendees that although her company is a principal member of the BTO, it would not wait for the standards body to finish deliberating, but intends to trade on its own version.

Players Pool

In fact, Williams is of the mind to accelerate the commodity trading process
further, asserting that third-party neutral pooling points are not necessary for near real-time trading.

“Every network has PoPs. Now they’re migrating to collocation [centers]. The long and short of it is, they’re a PoP. They’re where networks come together. If you have that in place today, going out to build new points is not a necessity. It may be an opportunity [for the pooling point operators], but it’s not a necessity,” says Ken Epps, Williams’ senior vice president and chief marketing officer.

In a post-conference interview, Epps’ colleague Sharon Crow explained that Williams contends there is little reason to create new pooling points where multiple carriers already are interconnected to
carrier-owned switches at carrier data centers and within telco hotels, such as those at One Wilshire in Los Angeles and 60 Hudson in New York.

Although the neutrality of pooling point operators has been advocated by many parties, Crow says the idea of a carrier-managed pooling point is not without precedent. In the natural gas industry, she says, a major trading hub in Henry, La., is owned and operated by Texaco Inc. subsidiary Sabine Pipe Line LLC
(www.sabnet.com). In addition to Sabine’s 131-mile pipeline, Henry Hub provides access to more than a dozen interstate and intrastate interconnects. Because of the liquidity of the market at the hub, it was selected in 1989 as the official delivery mechanism for the New York Mercantile Exchange
(www.nymex.com) natural gas futures contract.

A parallel situation in the bandwidth market is conceivable, she says.

At the conference, however, Williams’ execs argued the case alone. This may not be too surprising considering that many of the attendees were third-party operators. But even fellow energy company, Enron, sided with neutrality–a primary caveat of its May 1999 trading proposal.

Racking Up Points

Meanwhile, neutral pooling points are being planned and deployed by online exchanges and at least one company, LighTrade Inc.
(www.lightrade.com), that has adopted the concept as its entire business model.

The GTX opened June 20 the minutes-based trading floor of its Virtual Real-Time Exchange (VRTX), a web-based marketplace that enables telecom companies to instantly move wholesale phone and data applications from one network to another.

The GTX joins several other competitors operating virtual trading floors connected
to exchange points for the physical delivery of bandwidth and/or minutes. Among them are ACE, AIG Telecommunications
LLC (www.aigtelecom.com), Band-X Ltd. (www.band-x.com), CommerEX.com Inc.
(www.commerex.com) and RateXchange.

The GTX currently has exchange points using switches from Lucent Technologies Inc.
(www.lucent.com) operating in New York and London. Additional pooling points will be cut over in July in Amsterdam, the Netherlands; Frankfurt, Germany; Los Angeles; and Miami. Others are planned in Asia and Latin America.

Once connected to a GTX exchange point, carriers can buy or sell minutes using the web-based trading floor; trades are completed within three minutes. Billing and settlement are arranged through Bank of America.

The GTX also has an agreement with Equinix Inc.
(www.equinix.com), creator and operator of the neutral Internet Business Exchange
(IBX) centers, to deploy exchange points in Equinix IBX centers. Its Los Angeles exchange point was deployed in partnership with neutral collocation provider COLO.COM
(www.colo.com).

COLO.COM announced a similar agreement with The GTX competitor RateXchange in April. In addition to
COLO.COM, RateXchange has agreements in place with Switch & Data Facilities Co.
(www.switchanddata.com). RateXchange will establish at least 14 delivery hubs during 2000; 10 in the United States and four in key international locations, including Frankfurt, Hong Kong, London and Tokyo.

ACE, the online marketplace for trading international telecom capacity in the Asia-Pacific region, operates an ACE Telehub in Hong Kong and announced the opening of its second exchange point in Los Angeles in June.

ACE’s U.S. entry follows London-based Band-X, which in May announced plans to deploy switches in five U.S. cities within the next 10 months to facilitate carrier interconnection to its real-time switched minutes and IP-routed exchanges.

End Game

Richard Elliot, founder and director of Band-X, explains that his company’s confidence in the future of capacity trading stems from the conviction that the process today is simply inefficient. “SG&A [among carriers in North America] is averaging 25 percent. Part of the reason for this disgraceful performance by carriers is the time and expense of doing interconnects, of employing great numbers of people and giving them credit cards to go out and have a drink with someone and do an interconnect, only to find out later that they’ve interconnected with an idiot,” he told conference attendees.

Elliott was candid in saying that trading volume, however, is not what it could be or, perhaps, even what people are saying it is. “There’s an element of emperor’s new clothes in all of this,” said Elliott. “I’d ask you to be skeptical. Who’s really doing anything, and what are they trading?”

When posed the question, Amerex’s Moore says his company already is facilitating deals between carriers at the pace of one a day. Fellow over-the-counter (OTC) broker Henry
Kaestner, president of Chapel Hill Brokers (www.chbroadband.com), says its bandwidth desk is happy to do one trade a week. And, AIG Telecom, an online exchange, processes 40 deals on a busy day, claims managing director Dr. Eric
Raab.

Reticence among carriers continues to be based on reluctance to knowingly participate in a system wherein the price for their service is sure to go down even quicker than it already is.

Williams’ Crow says that carriers ought to think less about price and more about value. If they did that, she says, they would come around to the idea of trading bandwidth as a means of managing risk.

Khali Henderson is editor-in-chief and Ken Branson is business and finance editor for PHONE+ magazine.