telecom carriers and bandwidth trading has not yet resulted in a formal engagement. In some ways it remains a mere flirtation, with carriers tempted by the promise of efficiencies, but loath to betray established ways of doing business. But, say industry participants, the dalliance has set the stage for a truly liquid bandwidth trading market to develop.
Bandwidth trading is regarded by most as being in an experimental phase. As late as October, Telephone.com Inc. (www.telephone.com) announced "the first carrier-to-carrier bandwidth trade by a U.S. online exchange," for a DS-3 bandwidth route between New York City and St. Louis. In rebuttal, Becky Kerr, media relations spokeswoman for Washington, D.C.-based The Global TeleExchange (www.thegtx.com), stated that its first carrier-to-carrier bandwidth trade occurred on Feb. 28, 2000, for a synchronous transport module 1 (STM-1) between New York and Malmo, Sweden.
Patrick Horvath, vice president of sales and marketing for Telephone.com, says that even if the deal made through Telephone.com should prove not to be the first of its kind, it's still significant as further validation of the online exchange model in bandwidth trading.
Telephone.com blends the traditional person-to-person approach of selling bandwidth and minutes with the Internet technology underlying its exchange, which allows carriers to utilize their own switches rather than proprietary common switching points.
Brokering seems to be the prevailing model for bandwidth trading in the early going, despite attempts by neutral third parties such as online exchange Ratexchange Corp. (www.ratexchange.com) to implement an anonymous, multilateral trading system. OTC brokers, in fact, are reporting increasingly frequent trades. Michael Moore, president of Amerex Bandwidth Ltd. (www.amerexbandwidth.com), for example, says his brokerage is completing, on average, one to three deals per day out of industry-wide numbers of two to eight transactions per day.
Reading From the Same Script
Absent audited transactions, evidence of the uptake of bandwidth trading is largely anecdotal. However, one undeniable sign that carriers are warming up to this new way of executing bandwidth deals is their cooperation in creating a master trading agreement. The exercise requires no commitment, but enables carriers to be involved in shaping a process that might potentially transform their business. At press time, consensus on the document was believed by its sponsors--executives at the Competitive Telecommunications Association (CompTel, www.comptel.org)--to be just weeks away.
After months of deliberations, the drafting committee had hoped to unveil the agreement at CompTel's Fall Business Conference in October. Meetings of the committee members during and immediately after the conference failed to resolve outstanding issues relating to QoS standards. The master agreement is planned to include QoS standards and to provide means for addressing failures to deliver. Such remedies could range from credits for limited outages to contract termination for chronic problems, according to CompTel president H. Russell Frisby.
While QoS clauses remain unresolved, the committee has made headway on another issue, liquidated damages, which had stalled its deliberations earlier this fall. The committee decided that the amount of such damages will be calculated based on the replacement price for comparable bandwidth units. In the event that the market price is not readily able to be calculated, the agreement will provide for liquidated damages equal to 125 percent of the contract price for the prorated portion of the bandwidth unit that is in default.
Agreement on this point is key, says one industry expert, noting that this is a major departure for carriers that are used to doing business based on "best efforts." Because of the liquidated damages provision, Moore says, some carriers will be resistant to using the contract, at least initially.
"They are not readily willing to jump on it, but that doesn't mean they aren't going to do it in time," he says.
Sean Whelan, vice president of strategic alliances for Telseon (www.telseon.com) and the original founder of Ratexchange, agrees. He says the liquidated damages clause will delay carrier trading.
"Carriers are not known for meeting their commitments," he says. "What they are being asked to do now is meet them or pay. That's a change in culture. There's risk there. From the trader's perspective, this is normal procedure. From the carrier's perspective, there's risk--and unknown risk. They are going to seek to limit or minimize that risk."
Whelan says his own company is poised to sign a version of the master agreement with such modifications. "I suspect many other carriers will go through this process, [although] maybe not as willingly as Telseon, which is a fairly progressive company," he says.
Moore also says he is confident that they will come around, and also confirms that the CompTel contract is already being used by carriers in its draft form. Many of them, he admits, have energy roots and are used to performance and delivery guarantees.
"Reliant, Koch, Aquila and El Paso have already signed off on [the contract] for bandwidth deals," he says.
What they're after is a piece of the action in a commodity market that analysts expect to exceed the $800 million value of the energy commodity market within five years. Because these companies have trading and telecom experience to draw from, they are in the driver's seat. In fact, a pivotal point in the discussion occurred in May 1999, when energy company subsidiary Enron Broadband Services (www.enron.net) tendered a proposal for commodity trading of bandwidth, which basically called 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 QoS.
The CompTel master agreement, in fact, is adapted from a document originally prepared by Enron. When the master agreement is approved by the committee, it will be posted on the CompTel website for comment. Frisby says that because of the legal and technical issues raised by bandwidth trading, the committee expects that revisions to the agreement may need to be considered.
Finalization of the contract, however, is expected to encourage participation both in terms of volume and number of carriers trading.
"[With the contract], everyone can be assured of what they are buying," explains Chris Lemmer, director of bandwidth risk management for Williams Communications Group Inc. (www.williamscommunications.com). "It promotes liquidity when the major contract terms are similar."
Reserved Seating
While consensus may be near on the master trading agreement, it is far away on the issue of physical delivery. The disconnect is not critical, however, as several solutions appear to be emerging side by side, offering carriers options for provisioning service.
One option is the neutral pooling point, a new business opportunity for companies such as LighTrade Inc. (www.lightrade.com), which exist simply to offer a neutral point to switch bandwidth between carrier networks in minutes rather than months.
In March, the company formally announced an agreement with Lucent Technologies Inc. (www.lucent.com), valued at up to $50 million, for optical networking products such as Lucent's WaveStar BandWidth Manager, which serves as a lightwave traffic cop.
LighTrade says it will have 13 to 15 pooling points in service in Atlanta, Boston, Chicago, Dallas, Denver, Houston, Los Angeles, Miami, New York, Philadelphia, San Francisco, San Jose, Seattle and Washington, D.C. by the first quarter of 2001.
One company that is banking on LighTrade to foster liquidity in the market is Aquila Energy (www.aquilaenergy.com). One of the largest wholesalers of electricity and natural gas in North America, Aquila signed a long-term agreement with LighTrade in October as part of its goal of becoming "a premier global telecom merchant."
"Our decision to commit to LighTrade's pooling points is a reflection of our confidence that bandwidth trading will be a large and active market," said Sushil Nelson, senior vice president and general manager of Aquila's broadband services, in a prepared statement. "We are similarly confident that LighTrade's presence in the market will enable that development by providing connectivity that is critical to building liquidity."
On the other side of this debate stands the communications subsidiary of fellow energy giant Williams Communications. Lemmer, who directs bandwidth trading activities for the company, says Williams has advanced the idea of a "virtual pooling point" as a more viable alternative. The proposal is that carriers leverage existing PoPs within carrier hotels to quickly connect to trading partners.
The only advantage of using an active cross- connect such as the Lucent Bandwidth Manager operated by LighTrade or another neutral party, he says, is the possibility of trading bandwidth by the hour. That, he adds, is not a reality today, and is difficult to cost-justify when connectivity using a passive cross-connect within a carrier hotel already exists.
In early November, Williams Communications signed an agreement with COLO.COM (www.colo.com), a neutral collocation facility to provide bandwidth inventory to customers from 13 COLO.COM facilities, in cities such as Boston, Chicago, Dallas, Seattle and St. Louis. In a prepared statement, Joe Turcotte, senior vice president of access services and IP for Williams' network unit, said the agreement would give customers greater access and connectivity to its network.
Lemmer says the COLO.COM agreement is in line with its virtual pooling point strategy, wherein the carrier can operate its own switches and still quickly connect to a buyer or seller also located in the COLO.COM facility.
Beyond Real Estate
The virtual pooling point arrangement seems to be developing organically in the market at carrier hotels and neutral hubs. As critical mass is achieved at some of these locations, carriers are looking for ways to facilitate doing business with collocated carriers and other service providers. Neutral facilities operators are beginning to step up to the plate.
LayerOne Inc. (www.layerone.com), which calls itself the first optical transport exchange, offers quick and simple provisioning of local and long-haul circuits among multiple carriers via neutral optical distribution nodes at carrier hotels. LayerOne had more than a dozen exchange sites in place at year's end, and plans for more than 120 nodes within three years.
CEO Alexander Muse says LayerOne is similar to the metropolitan access exchanges (MAEs) at which ISPs have traditionally swapped traffic, but that those are at Layer 3, while it offers service at Layer 1--the physical and electrical level of the open systems interconnection (OSI) model.
By transporting traffic at Layer 1, carriers can achieve greater speed and gross throughput. At Layer 3, traffic is sent through routers and switches where each packet is read one by one and forwarded to the destination based on its unique address. At Layer 1, traffic is transmitted as pure light and, at the interconnection point, converted to electricity and back to light to resume its journey. A Layer 1 connection can be more efficient transport for traffic that has already been sorted into big streams heading toward the same destination.
LayerOne targets heavily populated carrier hotels that house multiple service providers, but lack an entity to connect carrier tenants within the building or to carriers' customers outside the building that want access to these tenants' PoPs, network access points or dark fiber.
The exchange sites, called NEXUS optical distribution exchanges, or NODEs, provide connections to everyone in the building using cross-connects from vendors such as ADC Telecommunications Inc. (www.adc.com). Muse says the seller of the transport connects on the "A" side of the cross-connect, and buyers hook up to the "B" side to access their services and bandwidth. The buyer pays LayerOne a monthly fee for the connectivity.
"We created the standard for the A and B side methodologies in our exchange," Muse says. "Today it's on a one-to-one basis, but we want to create a one-to-many relationship."
In its first one-to-many agreement, LayerOne announced in October that Level 3 Communications Inc. (www.level3.com) will act as an "A" side provider of a variety of services in all of LayerOne's markets. Level 3 will initially deploy in LayerOne's Chicago, Dallas, Miami and St. Louis facilities and expand into additional NEXUS Exchange facilities as they become operational.
Since then, LayerOne has struck similar deals with Cidera Inc. (www.cidera.com), Enron Broadband Services, Metromedia Fiber Network Inc. (www.mmfn.com), Telseon and Qwest Communications International Inc. (www.qwest.com). Prior to that deal, LayerOne had only announced single-market deals with such service providers as Enron Broadband Services, NEXTLINK (now XO Commu-nications Inc., www.xo.com) and Qwest. The Level 3 deal "is tremendously valuable to us" because it creates lots of "inventory" for LayerOne, Muse says.
LayerOne keeps a database of what connectivity and services it offers and where from "A" side providers, so carriers looking for such services can quickly find and provision such services without lengthy carrier-to-carrier interconnection negotiations, Muse says. But, he adds, carriers have to interact directly to agree on pricing.
LayerOne eventually expects to provide the database information via a web interface, but currently the company's engineers provide the information on request.
In another approach, neutral collocation provider Equinix Inc. (www.equinix.com) announced in mid-October a new service for residents of its Internet Business Exchanges to facilitate buying and selling of products. The new service, called Equinix MATRIX (marketplace and transactions Internet exchange), enables integrated business exchange (IBX) participants to research, evaluate and negotiate services from multiple providers through a browser-based platform and with the assistance of Equinix staff.
Sellers can use MATRIX to provide real-time electronic catalogs of service offerings, selectively target information to buyers, publish promotion, respond to RFPs and negotiate deals. Buyers, on the other hand, can search and find vendors, create and manage RFPs and negotiate deals.
Steve Reichgut, director of product marketing for Equinix, says that unlike other buyer-seller matching services tendered by online exchanges, MATRIX does not foster anonymity, nor does Equinix take a commission for the trade. The service, he says, is intended to facilitate and automate discussion and negotiation between participants in the exchange.
By provisioning a $20,000 circuit, for example, in two days rather than six weeks, the provider stands to improve his top line by $30,000, says Reichgut, explaining one of the sought-after benefits of the MATRIX/IBX combination.
"[MATRIX] is a complement to our business model," says Whelan, whose company is an Equinix customer. "Telseon is all about facilitating on-demand transactions."
By listing its services in the MATRIX database, Telseon can be tapped by ISPs or carriers seeking metro connectivity between the Equinix hub and their PoP or other metro traffic aggregation points. Or, in another scenario, long-haul bandwidth traders can use Equinix as a delivery mechanism to fulfill trades with partners parked in other hubs.
Khali Henderson is a contributing editor for xchange's sister publication, PHONE+ magazine. She has been covering the evolving bandwidth trading market for two and a half years. xchange's executive editor Paula Bernier contributed to this article.
