Channel Partners

February 1, 2000

7 Min Read
Resale Channel: Bandwidth Markets Take Off

Posted: 02/2000

Bandwidth Markets Take Off

As they said goodbye to the millennium, many carriers formally would greet a new era of
commodity bandwidth trading. In December, the first forward contracts were traded, routes
were cataloged, pooling points were deployed and traders organized.

In a high profile if not significant move, Enron Communi-cations Inc. ( announced it had completed its first
forward bandwidth trade under the commodity market model it proposed in May.

"This is ‘day one’ of a potentially enormous market," said Jeff Skilling,
Enron’s president and COO, in a statement announcing the trade. "Most companies that
need bandwidth today are only able to secure inflexible multiyear deals for pre-set
amounts of capacity–just like oil contracts in the 1970s, natural gas contracts prior to
1990 and electric power contract prior to 1994. As was the case in those industries, the
market structure for bandwidth is currently inefficient and expensive. We are
demonstrating that bandwidth can be traded under flexible, market-based contract
structures with the assurance that quality standards are in place and monitored real-time
by the buyer and seller."

The trade, between Enron Communications and Global Crossing Ltd. (, is for a monthly
incremental contract for a DS-3 circuit between New York and Los Angeles. Global Crossing
is the seller.

While many carriers have been dubious if not reticent about moving toward a
commoditized bandwidth market, Global Crossing–a young, aggressive submarine cable
builder that acquired the extensive North American terrestrial assets of Frontier
Corp.–is among the transport business’ progressive thinkers.

"As a large-scale builder of network infrastructure, we are always interested in
developing new, creative ways to bring bandwidth to market," says John Tingley,
president of Global Crossing Services.

Now that it has recruited Global Crossing to the cause, Enron’s goal of establishing a
commodity market for bandwidth is inching closer to reality, says Carl Garland, principal
analyst-network services for Current Analysis Inc. (

One study by The Phillips Group (
suggests: the telco revenue model is disappearing. The study offers the observation that
telecommunications service providers need to change their entire organizations to become
net focused and exploit revenues from content.

"It is no longer possible to be simply a carrier of minutes or bandwidth,"
says the study’s author David Prior, a senior consultant at The Phillips Group. Net
players must successfully occupy one of the positions emerging, but not be tempted to
revert to the telco model. Future value lies in content, not who is carrying."

In addition, there seems to be developing a critical mass of interest to warrant
organizing interested parties into an association. The founders meeting of the Association
of International Telecom Dealers (AITD, convened Dec. 1 in coincidence
with Risk magazine conference, "The Next Stage in Forward and Derivative
Trading of Telecommunications Bandwidth."

The group’s charter is to be a global membership organization for international
telecommunications traders and service providers. It aims to define and establish a common
platform for international telecommunications trading, to lobby on the industry’s behalf
and to establish a central reference for standards and data.

Although AITD claims it attracted many founding members and that the New York
Mercantile Exchange played host to its meeting, response to its coming out was not all
good. One observer, who asked not to be named, said the founders were not in touch with
their target members. Also, a competing association expects to launch early this year, but
its founders would not go on record for this article.

In the meantime, AITD organizers may have an opportunity to leverage the first-mover
advantage by tweaking the group’s strategy.

A Market Model

Toward establishing a commodity market, Enron’s proposal ( simplistically calls
for standardized contracts, neutral pooling points between city pairs and a pooling point
administrator. This would allow buyers and sellers to easily and efficiently match their
needs on four points: price, capacity, contract length and quality of service (QoS).

In support of this shared vision, telecom industry attorney, entrepreneur and founder
of Advanced Radio Telecom ( Ted
Pierson formed in September the Washington-based LighTrade Inc. ( to construct neutral pool-ing

LighTrade’s Vice President of Strategic Relations Michael Prior says the company has a
letter of intent with Lucent Technologies Inc. (
to supply the switching equipment for the pooling points. (Interestingly, Lucent’s senior
vice president Bill Plunkett is on the company’s board of directors.)

By third or fourth quarter, Michael Prior expects to have eight sites operational in
Atlanta, Chicago, Dallas, Denver, Miami, San Francisco/San Jose, Seattle and Washington,

In 2001, LighTrade plans to have points in Boston, Frankfurt, Hong Kong, Houston, Las
Vegas, London, Memphis, Milan, Paris, Phoenix and Tokyo.

Prior says he expects that trades between city pairs using the neutral pooling point
model will begin weeks in advance out of habit, but they quickly will be reduced to days
and minutes.

"LighTrade is bringing to the equation the ability to do real-time provisioning of
trades and monitoring of quality," Prior says. LighTrade does not want to match
trades, but to take orders for such contracts, and it is in discussions with companies
that already have online trading platforms.

Meanwhile, one of LighTrade’s predecessors Equinix Inc. ( has closed $280 million in funding for
its neutral Internet Business Exchange (IBX) facilities. These will offer customers
collocation, bandwidth from multiple networks, interconnection and security.

Equinix opened its first IBX facility in July in the Washington, D.C. area. Two
additional IBX facilities will open within the next few months, and expansion is planned
throughout the year.

New Markets Forming

While LighTrade and Equinix are relative newcomers to the bandwidth trading arena, some
veterans also are moving to expand their spheres of influence.

Arbinet Communications Inc. (, for
example, has secured $30.45 million from several investment banks to advance its bandwidth
trading model. For some time, Arbinet successfully has used its centralized switching
infrastructure to allow carriers to automatically transport minutes over the least-cost
route. The company is working toward applying this model to bandwidth trades as well.

RateXchange Inc. (, an
online trading floor, demonstrated in December its Real-Time Bandwidth eXchange (RTBX) for
trading spot and forward bandwidth contracts. It was expected to be open for business in
January. President and COO Ross Mayfield says RateXchange is offering four spot
contracts–rest of next month, second month and third month–and forward contracts of
year-long duration beginning every quarter.

RateXchange will trade three routes from hubs at carrier hotels at 60 Hudson St. in New
York, One Wilshire Blvd. in Los Angeles and TeleHouse in London. Mayfield says RateXchange
is the only market maker to locate its pooling points at the carrier hotels where the
market exists today.

"This contributes to the liquidity of the market because it reduces time to
interconnection," he says.

Price transparency also contributes to market liquidity. One trading floor, Bandwidth
Market Ltd. (,
announced in December a catalog of bandwidth prices for more than 300,000 circuits. The
bid-ask site uses a search engine to sort offers and bids by city of origin, destination
or speed of circuit.

"We think our market is much more convenient and efficient for buyers and sellers
than haggling at trade shows or accepting standard retail prices," says President
Howard Holme.

But broker Mike Moore, managing director of Amerex Bandwidth and a partner in Amerex (, an energy commodities brokerage,
questions the validity of this data. In his experience, more than a quarter of a million
market indicators is unmanageable.

"In the gas industry, there are maybe 1,500 indications," Moore says. "I
expect that bandwidth would be similar, but it won’t get there overnight. You need to have
liquid pooling points."

Moore, who has followed the developing commodity market for bandwidth, formed Amerex
Bandwidth in December. As of early January, he had not brokered any deals, but at that
time he said several were pending.

Unlike RateXchange or Bandwidth Markets, Amerex will help carriers trade bandwidth the
"old-fashioned way" over the telephone with Amerex brokers as intermediaries.
Moore, who also is a director for LighTrade, says Amerex Bandwidth will trade bandwidth at
LighTrade sites or other neutral pooling points that emerge in the marketplace.

Opportunities exist for several companies to serve as such points. Emerging purveyors
of neutral collocation facilities are some. Already having brought multiple carriers to a
single location for interconnection, they easily could facilitate changing interconnection
among them.

Khali Henderson is editor-in-chief of PHONE+ magazine.

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