Channel Partners

May 1, 2002

5 Min Read
Is an IP Spot Market Around the Corner?

Posted: 05/2002

Is an IP Spot Market Around the Corner?

By Josh Long


Russ McGuire,
chief strategy officer,
TeleChoice Inc.

Communications companies soon may be able to reserve IP capacity and instantly buy bandwidth inside a colocation hotel on 60 Broadway. At least, that is the ultimate vision of InvisibleHand Networks Inc., a Burlington, Mass.-based company that has developed software allowing buyers to view and negotiate the prices of IP transit at TeleHouse International Corp. of America’s New York City facility. The initiative marks an attempt to create a truly liquid market for IP transit.

Analysts say the company’s vision makes financial sense for backbone carriers trying to sell capacity during off-peak times. “Any time they can utilize (capacity) during a dead time or during a point the network is not busy” translates into more carrier revenue, says Frost & Sullivan wholesale analyst Rod Woodward. “I think all the carriers would be pretty satisfied with making more money right now.”

Buyers tapping an online exchange can extract details about the prices and quality of bandwidth, resulting in fewer swanky dinners and drawn-out talks typical in telecom negotiations.

Band-X Ltd. has been operating an anonymous exchange in London since 2000. There, and in New York, companies linked to the exchanges can evaluate the prices and quality of IP transit and change suppliers every month.

Yet, InvisibleHand Networks has taken the model a few steps farther. Ultimately content providers, ISPs and other web-centric companies would be able to make bids for bandwidth every five minutes while also having the option of reserving bandwidth at a set price.

For example, if a major news event broke mid-day, Yahoo Inc. could set up an automated agent to buy a certain amount of bandwidth from a backbone company at $X amount. Meanwhile, AT&T Corp., WorldCom UUNET and other backbone providers could specify how much bandwidth they would be willing to sell one day at a floor price in an auction format.

That’s the general idea.

The Yankee Group wholesale analyst Seth Libby conceded InvisibleHand Net-works “definitely faces an uphill battle because they are trying to change the way carriers” do business.

InvisibleHand Networks claims its Merkato software has proven valuable through its division, StreamingHand Service. More than 60 gaming and media distribution companies use the software to purchase bandwidth-on-demand from InvisibleHand, which buys the wholesale capacity from backbone companies, the company says.

The real test is yet to come.

Can InvisibleHand Networks and TeleHouse convince enough communications companies — including backbone providers — to use the platform? The actual software sits on servers and talks with routers, effectively permitting buyers and sellers electronically to say respectively, “this is how much IP capacity I want to buy, and this is what I’m willing to sell it to you for,” says InvisibleHand Networks CEO James Brown III, who joined the company after five years as an IT and telecom venture capitalist.

During a late March interview, TeleHouse spokesman John Neilan said InvisibleHand Networks anticipated running a trial with a few companies within the next three months. He said TeleHouse did not have a way to monitor the quality of the bandwidth.

Band-X, however, does. The company publishes quality metrics such as latency and packet loss. Buyers can acquire IP transit from various backbone companies throughout the world. One supplier may be strong in Europe while another is efficient in Asia, says Joseph Kiaer, executive vice president of Band-X’s U.S. operations.

Kiaer says he feels Band-X is “well-positioned to offer IP transit on demand with some of the local optical providers we work with.” But the company has yet to announce an initiative that would allow a buyer to switch suppliers in less than 30 days — let alone in minutes. However, Band-X is talking with colocation companies to extend its services throughout the United States, Kiaer says.

When Russ McGuire thinks of Invisible-Hand Networks, a spot market doesn’t necessarily come to mind, says the chief strategy officer of consulting firm TeleChoice Inc. McGuire says carriers would view such a model as a “tremendous risk” because competitors eager to dump off capacity would offer lower prices, threatening to wrench business away.

However, the company’s software could serve as a useful tool for carriers marketing to enterprises, McGuire adds. In the current bandwidth pricing model, companies pay per megabit.

But what if companies like Coca Cola Enterprises Inc. had a financial incentive to move traffic over backbone networks while Americans were dreaming? U.S. carriers could earn more revenue over networks otherwise lying mostly idle while curtailing peak traffic — and the related expenses — during the day, the technology analyst says.

If Coke sent its traffic over the network during a peak period Monday morning, “then UUNET’s network would need to have ‘that much’ more capacity to carry that incremental traffic above and beyond the peak amount they’d have otherwise,” McGuire said. “That translates directly into costs — capital to create the capacity, operational expenses to operate the capacity.”

“If instead, they sent it during the off-peak late Sunday night, then UUNET’s network wouldn’t need to be any bigger. There’d be plenty of spare capacity at that time of night to carry the traffic,” the analyst explains. “UUNET could choose how much of the savings they’d like to pass on to their customer, Coke.”

Where does Invisible-Hand Networks come into play? The company’s software theoretically would allow for dynamic pricing models at different times of the day and night. Such a model would not necessarily resemble a spot market as it would signify a more efficient pricing model for IP transit — a feat that McGuire contends could save backbone carriers routing traffic during off-peak hours billions of dollars in capital expenditures.

 

Links

AT&T Corp. www.att.com

Band-X Ltd. www.band-x.com

Frost & Sullivan www.frost.com

InvisibleHand Networks Inc. www.invisiblehand.net

TeleChoice Inc. www.telechoice.com

TeleHouse International Corp. of America www.telechouse.com

WorldCom UUNET www.uu.net/ 

Yahoo Inc. www.yahoo.com

The Yankee Group www.yankeegroup.com

 

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