Is bandwidth becoming the frozen orange juice of the telecom world?
In the past year, some companies have begun trading capacity--usually on international or major North American routes--as a commodity through clearinghouses that act as a go-between for buyers and sellers. Using one of these clearinghouses, a CLEC seeking bandwidth between Salt Lake City and Chicago, for example, could state its needs anonymously and fulfill them by picking one of several (usually anonymous) offers. Acquiring the bandwidth this way could result in a quicker and potentially more affordable transaction than might a one-on-one capacity purchase.
But the capacity trades flowing through these new clearinghouses represent only a trickle of the overall bandwidth business today. It may take a while until the trickle turns into a juicy revenue stream.
"There's an element of the emperor's new clothes in all this," admits Richard Elliott, founder and director of Band-X Inc. (www.band-x.com), a trader of bandwidth and minutes. "I'd ask you to be skeptical. Who's really doing anything, and what are they trading?"
"There has been a lot of facile talk about a bandwidth market," adds Stephen Young, principal consultant at Ovum Ltd. (www.ovum.com), a London-based telecom consulting firm. "We don't think such a thing exists--yet."
Fundamentally, Young believes there is not a global commodity bandwidth market yet because bandwidth really isn't a commodity. Demand for it is uneven around the world, and so is its availability. "Bandwidth is not a homogenous product--whoops, I almost said commodity," he says.
Bob Levin, vice president of the New York Mercantile Exchange (www.nymex.com), agrees. He says the bandwidth trading market lacks "price transparency," which means that both buyer and seller have a general idea about the value of a commodity, and therefore, can tell a reasonable offer from an unreasonable one. As a result, NYMEX, which trades in everything from energy to precious metals, isn't jumping into bandwidth just yet.
But several companies have already taken the dive.
Trade facilitators include over-the-counter brokers, online exchanges, electronic trading platforms, and commodity or financial exchanges. Over-the-counter brokers are neutral third parties who put buyers and sellers together anonymously, assure price transparency and help negotiations along. They never take possession of the bandwidth themselves, handle provisioning or operate a pooling point. Amerex Inc. (www.amerexenergy.com) and Chapel Hill Broadband (www.chbroadband.com) are two companies in this camp. Arbinet-thexchange Inc. (www.arbinet.com) is an example of an online exchange; it claims to offer everything trading parties need to do business--an end-to-end trading floor, real-time delivery, billing and OSS systems that link to those of carriers, switch activation and provisioning software.
Mike Moore, the president of Amerex, which trades a number of commodities, is proud of the fact that his company does one trade a day. "We're rockin' and rollin'," he says. "Hey, you don't go from zero to liquidity in a day."
Risky Business?
Still, to date, most major bandwidth suppliers prefer to sell capacity discretely, one customer at a time.
Large carriers--Verizon Communications (www.verizon.com), BellSouth Corp. (www.bellsouth.com) and Sprint Corp. (www.sprint.com), for example, all say they do not engage in the commodity trading of bandwidth.
"[Large carriers that sell wholesale capacity are] working to fight off commoditized bandwidth and focusing on 'Intel Inside'-type branding," says Carl Garland, principal telecommunications analyst for Current Analysis Inc. (www.currentanalysis.com). "If you resell AT&T [Corp., www.att.com] service, for instance, it's their brand on the line, and they are unwilling to concede that it's a commodity. Needless to say, they're very much into negotiating discrete contracts."
In addition, some carriers ask privately why they should set up a commodity market for a product whose price has been headed down for years and is expected to keep going down.
There are exceptions, of course. Williams Communications Group Inc. (www.williamscommunications.com), once hostile to the clearinghouse idea, reversed itself this year. It appointed Sharon Crow, a veteran trader from the energy side of the Williams companies and now vice president of broadband markets, to blend its expertise in telecommunications with its expertise in commodity trading. Meanwhile, Enron Corp. (www.enron.com) subsidiary Enron Broadband Services (www.enron.net) operates trading floors in energy and other commodities. Global Crossing Ltd. (www.globalcrossing.com) was a participant in the first "forward market" trade (a trade in which a future price is agreed upon) with Enron in February, agreeing to sell Enron a monthly, incremental DS-3 contract between New York and Los Angeles. Enron then turns around and sells that bandwidth to other carriers.
Table:
Commodity Bandwidth Traders
"As a large-scale builder of network infrastructure, we are always interested in developing new, creative ways to bring bandwidth to market," John Tingley, president of Global Crossing Services, said at the time.
Williams executives say they like commodity bandwidth trading because they see it as a way to manage risk--that is, to ensure they can get the capacity they need where they need it, and quickly, and to make sure no bandwidth lays idle.
Crow thinks carriers who resist commoditization of bandwidth are thinking only of price, and not of value. If they thought more about value, they too would see commodity bandwidth trading as a means of managing risk, she thinks. Carriers manage risk with currency; they manage risk with real property and with equipment. This is just another sort of risk. And, she adds, carriers are buyers, not just sellers. "This [commodity bandwidth trading] is a way to get from Boston to Washington without having to negotiate dark fiber purchases and collocation space," she says.
Harold Kamins, managing director of commodities at Morgan Stanley Dean Witter & Co. (www.msdw.com), agrees. Kamins, who says his company trades a small amount of bandwidth, says there's plenty of risk around to manage. He says about 20 percent of announced telecom projects don't get built. "The telecom world is a very risky world, because you're producing a product for which people don't really know the future value," Kamins says.
Making Up the Rules
Other large traders are cautious; they don't want to trade bandwidth as a commodity right now, but they don't want to ignore the idea, either.
"Teleglobe [Inc., www.teleglobe.com] has not taken a position in commodity bandwidth trading, but we want to have a role in forming the rules," says Douglas Roth, Teleglobe's director of web trading and sales.
When companies trade in pork belly futures or frozen orange juice, they can refer to a standardized contract as a starting point. Traders in bandwidth can't do that yet, though Williams, industry association CompTel (www.comptel.org) and 15 or so other companies were working on such a contract template in late July. The template is expected to cover such things as quality of service, general credit guidelines and "liquidated damages"--that is, who pays what if a deal falls through. Williams is using a draft document now, according to Chris Lemmer, manager of bandwidth trading and risk management. The final document was expected to be ready in the third quarter.
Companies trading bandwidth through clearinghouses also need to be reassured they can trust whom they're dealing with. Michael J. Smith, vice president of business development for Prebone Yamane (USA, www.prebon.com) Inc., an over-the-counter broker, notes that the buyer's credit has to be checked, and quickly, he says. Smith adds that it isn't clear whether the clearinghouse should take legal possession of the bandwidth as it goes from one party to another to guard against default from the buyer or the seller.
And it probably doesn't make sense for bandwidth trading to take its cue from trade rules for other commodities. For example, crude oil is traded on the basis of "firm delivery." Once you've promised to deliver a certain amount of crude to a certain place at a certain time, you deliver that amount exactly when and where you said you would. There is no such thing as "best effort" as in telecom.
But these issues likely are to be worked out to enable carriers to take advantage of the benefits of commodity trading. Elliott of Band-X says the business of one-on-one bandwidth trades are complicated and expensive. The provisioning that follows from such agreements can take still more months. A standardized interconnect agreement would make the process simpler and a liquid market more likely. Besides, he says, the current practice is an offense to sound business practice and simple good sense.
"SG&A [sales, general and administrative expense] in North American carriers is averaging 25 percent, and 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 corporate 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 says.
