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Rude awakening

Feb 26, 2001 12:00 PM, Vincent Ryan

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Carriers may hope to one day trade bandwidth as a financial instrument, but they shouldn't hold their breath. That was the consensus of executives and panelists at the CompTel show in Orlando last week.

“It's the first commodity market where the number of exchanges actually outnumber the number of trades,” said Philip Kassin, a partner at PricewaterhouseCoopers.

Bandwidth commodity trading—or the trading of financial instruments that allow carriers to hedge against future dips or upswings in the price of bandwidth through forward-selling and forward-buying—is indeed stalled, according to Tony Craig, executive chairman of Arbinet-thexchange. “There's no underlying physical delivery model with integrity upon which contracts can be based,” Craig said. “That doesn't exist in the bandwidth world.”

One year ago, CompTel's membership adopted a resolution to create a task force to develop protocols and standards for bandwidth trading. A year later, progress has occurred, but slowly. A model master agreement for bandwidth commodity trading posted on the CompTel Web site “doesn't seem to be gaining acceptance,” said Craig. Carriers “don't want to step up to a liquidated damages clause.” In other words, they are wary of taking financial responsibility if they can't deliver the bandwidth goods on time to customers.

In the meantime, bandwidth exchanges are forging ahead, most focused on providing anonymous, facilities-based trading services that could provide the foundation for a derivatives market. At CompTel, Band-X, an exchange that facilitates the termination of international traffic, launched its switched minutes platform in New York to complement operational locations in London, Frankfurt and Hong Kong.

These exchanges, which operate more like matchmakers than financial trading floors, offer carriers some benefits beyond mere delivery and interconnection services. The real value proposition is the removal of supply imbalances, according to Tom Blakeslee, vice president of bandwidth markets for Global Crossing. “We recently lit up a large amount of capacity, and bandwidth trading will allow us to offload excess,” he said.

Accelerated cashflow is another advantage—many exchanges claim their sellers can get paid within 15 to 30 days, much faster than the industry norm. More important, in a period when carriers of all sizes are having problems collecting from cash-strapped customers and as a result taking large write-offs of bad debt, bandwidth exchanges are touting their ability to mitigate credit risk.

The market for circuit-switched minutes—the trading of which has been going on in backrooms for years—is the only market that has the interconnectivity as well as billing and metering functions necessary for liquidity. But a vibrant underlying physical market where the payment mechanics, software and physical delivery are all worked out is still a long way off for products such as clear-channel bandwidth and IP transit.

“The energy [companies] are pushing it,” said Jim Steffens, director of international marketing operations for Sprint's Global Markets Group. “There are a lot of issues that need to be worked out before it happens. We're talking about things like standard contracts and rules of operation.”