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 Channel Futures

Telephony/UC/Collaboration


Convergence of Market Forces Is Future of SpotMarket

  • Written by Channel
  • October 31, 1999

Posted: 11/1999

Telecommodities Indices

Convergence of Market Forces Is Future of Spot
Market

Downward pressure in the spot market on rates is having a decisive impact on the
fundamental structure of the industry. As rates decline, the industry adjusts contract
structures and trading mechanisms on its own in the spot market, while regulators must
account for these rapid changes. These two evolutionary paths eventually will meet to form
the spot market of the future. Below are two examples of this phenomenon, one from the
minutes market, one from the bandwidth market.


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

In the minutes market, high-volume routes such as Japan and Germany have experienced
tremendous declines over the past year. The usual suspects for this trend can be cited
(liberalization, competition, technology advances and access to capital), and declines in
the top 20 routes average about 50 percent during this period. Now it is clear that this
gray market activity is directly impacting settlement rate reform and some suggest we can
expect major settlement rate adjustments in line with spot-market pricing in major country
routes.

In the bandwidth market, we have witnessed a similar decline in the most competitive
markets. In our Revealed Price Index for U.S. coast-to-coast DS-3 bandwidth, we have seen
a 30 percent decline over the past year. DS-0 channel pricing throughout the United States
commonly has fallen from 5 cents per channel mile to 2.5 cents during the last six months
alone. The Revealed Forward Price Index points indicate that the market could be
stabilizing on these routes.

The impact of this rate movement is a decreased demand for long-term indefeasible
rights of use (IRU) agreements with most demand centered on one-, two- or three-year lease
agreements. In fact, carriers are even demanding shorter-term commitments.

By contrast, international private line (IPL) pricing still has a way to go until this
impact is felt. DS-0 mile pricing for trans-Atlantic and European continental routes has
declined from 45 cents to 20 cents per mile. Clearly, this decline will continue until IPL
agreements are negotiated with similar terms as a U.S. domestic private line.

There is a barrier, however, to the market’s evolution. Without adopting a switch-based
"bandwidth exchange" such as RateXchange, contract lengths cannot grow shorter
because provisioning new agreements takes 60 to 90 days and it incurs high marginal costs
every time a circuit is put up or taken down. As pricing structures shift to accommodate
the market, from cost-plus-required-rate-of-return to demand-based pricing, volatility
will increase. This volatility requires a web-based exchange for flexible term trading and
risk management.

Top International Spot Rates

Mexico 7 cents
United Kingdom 2 cents
Germany 5 cents
Japan 10 cents
Hong Kong 5 cents
France 5 cents
Korea, Republic of 10 cents
Korea, Democratic People’s Republic of 13 cents
Brazil 9 cents
Dominican Republic 10 cents
India 38 cents
Italy 9 cents
Taiwan, Province of China 12 cents
Australia 6 cents
Philippines 17 cents
China 15 cents
Colombia 8 cents
Israel 11 cents
Netherlands 5 cents
The top international spot rates-per-minute cost of terminating
a call from the United States to a given country are the best offers to sell voice minutes
capacity at RateXchange as of Sept. 24, 1999. 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 the information.
Tags: Agents Telephony/UC/Collaboration

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