Posted: 07/2001

Trading Post

Where Has Bandwidth Trading Been?

Where Is It Now?

A: During the past two years, confusion has grown regarding what “Bandwidth Trading” is. To discuss the bandwidth trading market and its development, it’s first necessary to define it precisely. Hence, bandwidth trading is the utilization of tools in the marketplace to manage risk (asset/price) and increase cost efficiencies. This allows a company to increase revenue, profit margins and ultimately its value. Other risks to telecommunications companies that may need to be managed include credit, operational, interest rate and foreign exchange if the company operates in foreign countries.

Q: Why did the energy industry want to participate in telecommunications, and what knowledge of telecommunications does it possess?

A: Energy companies have become involved because they see telecommunications as another product to offer to an all-encompassing customer base. The companies may not have had much prior telecommunications experience, however, they do own a valuable component to building fiber optic networks–rights of way. Furthermore, energy industry companies are behemoths that can draw upon tremendous amounts of capital. This allows them to obtain network by buying dark fiber, through company acquisition, or buildouts of their own. The knowledge they lack is being gained through the acquisition of intellectual capital–the hiring of experienced telecommunications professionals. Finally, energy companies believe what will make them competitive in the telecommunications environment is their experience in other deregulated markets. Because of this, as risk merchants, they can identify and capitalize on the inefficiencies of the marketplace.

Q: Who else has been attracted to bandwidth trading?

A: Financial institutions have been lending their risk management expertise to the telecommunications industry, and in some instances, acting as principals to transactions. During the past two years, intermediaries such as OTC (over the counter) brokers, online exchanges and pooling point operators have become involved. The OTC broker offers an interactive form of intermediation, while the online exchange is more passive in nature. Pooling point operators hope to benefit by providing physical connectivity to market participants through common switching equipment collocated at carrier hotels.

Q: How have traditional telcos received the bandwidth trading concept?

A: Initially, traditional telecommunications companies met bandwidth trading with a cold response. The reasons could be that the term is a misnomer. Rather than seeing how it could address the issues of risk management and increased cost efficiencies, many traditional telcos associated bandwidth trading with speculative transaction making. Second, traditional telcos took exception to their bandwidth being deemed a commodity. And, until eight months ago, stock valuations were extremely high, so discussing the concept as a way to manage risk and increase cost efficiencies by lowering SG&A simply fell on deaf ears. However, this is changing. During the past two years, companies have come to better understand bandwidth trading. As stock valuations have plummeted and capital markets have dried up, traditional telcos are more accepting of bandwidth trading. Additionally, companies are more accepting that bandwidth capacity is a commodity. There is a realization that a carrier will differentiate itself through value-added services sold on top of layer one.

Q: What has happened in the development of a standardized contract and pooling points?

A: Two elements considered essential to the development of an efficient, liquid market for bandwidth capacity are a standardized contract and pooling points. Serious discussions regarding the standardized contract began in March 2000 with the formation of the Bandwidth Trading Organization (BTO). This organization has issued two versions of a standardized contract. Purchasing and selling bandwidth under a universally accepted contract, where the terms and conditions are understood, allows for quicker exchange of bandwidth and the ability to treat bandwidth as a commoditized good. This eliminates the need to negotiate each and every contract, thereby creating greater efficiency. The two versions of the standardized contract call for liquidated damages in the event of non-

performance. This is necessary to ensure companies are held accountable for not delivering bandwidth within the promised time frame and at the QoS metrics and SLA specified. The main difference between the two contracts concerns the QoS metrics. Versions of the contracts can be found online at http://www.comptel.org/btofr.html.

The establishment of pooling points will bring greater efficiency and liquidity to the marketplace, as the positive impacts of creating a common grid are felt. This increased interconnectivity will enable companies to manage assets more effectively and allow for real-time delivery of bandwidth. This will result in contracts of shorter duration, and companies will have the ability to purchase the bandwidth they need. Furthermore, if an independent party/accounting firm monitors pooling points, QoS metrics will be measured and failures noted. This will allow for quick resolution of disputes and damages assessed properly under a standard contract.

Q: Where are we today?

A: The core concepts behind bandwidth trading were accepted slowly by an industry that had remained essentially unchanged for nearly 100 years. However, today, these concepts are gaining greater acceptance. Market enablers, such as the two standardized agreements and pooling points, are progressing. Pooling points stand on their own merits, as interconnectivity is crucial to the industry. While the capacity trading market has developed more slowly than some had hoped, it is actually developing at a faster pace than the electricity and gas markets. A liquid, efficient market for bandwidth capacity will develop sooner than later, and it could catch some companies sleeping.

This month’s Trading Post was written by Darren Jacobs, a director at TFS Telecom (www.tfsbrokers.com). TFS Telecom works with telecommunications companies internationally, speaking to risk management and assisting in structuring and executing bandwidth capacity transactions. He can be reached in New York at +1 212 943 8044 or by e-mail at
[email protected].