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Bandwidth Exchanges

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VoicenData Bureau
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With the arrival of bandwidth exchanges, the last bastion of the old telecomworld–negotiated bilateral contracts–is falling.

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"Bandwidth will be too cheap to meter."

Arun Netravali, president, Bell Labs.

They started by calling themselves portals–bandwidthportals. But even Yahoo! would envy the kind of impact bandwidth exchanges havemade. That too, in an industry like telecom, which is yet to get over from thehangovers of an era of monopolies and tight regulation.

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On the face of it, bandwidth exchanges are like any othertrading portals that bring together buyers and sellers. They actually are websites that facilitate trading of wholesale bandwidth in real-time among multiplebuyers and sellers. But the nature of "commodity" that is traded issuch that certain value-additions are automatically possible, which cannot beprovided in other cases. The phenomenal interest that some of these exchanges–morenotably, RateXchange, Arbinet, Band-X, and Asia Capacity Exchange–have createdamong sellers and users of Internet and telecom capacity, prompts one to believethat these could be the most perfect examples of the e-marketplaces of tomorrow.

An e-marketplace is the Internet equivalent of a real-worldmarketplace where buyers and seller are; the pricing is transparent and dependsupon the demand and supply of the product traded. Usually, price-points are moredynamic in markets than they are in one-to-one trading arrangements.

The value the bandwidth exchanges provide is to bringtogether the buyers and sellers at a common platform. Besides, they help createa set of transparent and market-dictated rules of trading; and provideconvenient ways and tools for the trading to happen.

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In addition, some of them have ventured into providingservices in synergetic areas, leveraging on their contacts and familiarity withthe industry dynamics. These could be anything from related services likeco-location and facilities-based trading to something totally unrelated butsynergetic service like recruitment. In fact, Band-X actually has a telecomrecruitment division that helps carriers hiring top people.

The Rationale

When there is fair and open competition, transparency inpricing follows automatically. Two forces have facilitated a really opencompetition in the global telecom marketplace.

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One is the pressure of competition, which has forcedoperators to find out new ways to tackle the problems of eroding bottomlines.With influencing price-points clearly out of their hands, carriers are lookingat providing more value for money. And expecting that from the capacityproviders as well.

The second is the impact of Internet, which has influencedtelecom marketplace in three ways. One, being global in nature, it has made allnational regulations irrelevant. Secondly, it has provided a unified platformwhere technologies and ideas can be mixed, matched, and experimented. Theseapplications are more often than not bandwidth hungry. Thirdly, the protocolsand technologies of Internet have made it possible to provide some of thetraditional services at a much lower cost. The shift to packet-switched networksfrom circuit-switched networks for all services is testimony to that.

These two, roughly speaking the demand side (what operatorsare expecting) and supply side (what is possible) forces have ensured that moreand more traffic travels across networks, creating demand for bandwidth. Now,whether supply will exceed demand or demand will continue to be more than supplyis a billion-dollar question. What is clear is that more and more bandwidth willbe used by multiple users–of all types for all kind of things.

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The Requisites

But to be traded on an exchange, bandwidth has to become acommodity, and measured in–and only in–quantitative terms. That meansquality will have to be standardized. Many believe that bandwidth itself cannotbe traded as a commodity as its price will always fall. The commodity that willbe traded on these exchanges will have to be some financial instrument (index)which will attach, at any given time, a value to the bandwidth. The plainvanilla bits per second will have a value attached to it. The market will decidewhat exactly that index will be. Generically speaking, this index could be atrade-off between the technological capability and the demand due to newapplications at any given time. The only necessary condition for that index isthat it should deny opportunity to make risk-free profits on investments. Whatis inevitable is that index will be found.

For any commodity, there are three players–theintermediary, the speculator, and the hedger. The hedgers are the buyers andsellers. For an exchange to have sufficient liquidity and transparency, theremust be large number of buyers and sellers. The speculators are the professionalrisk-takers who benefit at the cost of hedgers in the long run. The exchangesare the intermediaries. Though there are enough reasons that bandwidth tradingwill grow, it does not necessarily mean that all the bandwidth exchanges willcontinue to make profits. The exchanges that will continue to set the standardof the index that will be traded as a commodity will be the winners.

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Standards: Buyers in the market are interested in both priceand quality. Standardization helps in valuing premium services and quality at the same time allowing the commodity to bemeasured in a transparent way by multiple buyers and sellers. Any exchange thatinfluences the standard maximum will have the upper hand.

Inefficiency: These markets survive by leveraginginefficiencies in the actual marketplace. As it will take a long time for themarket to evolve to a totally deregulated market, these e-marketplaces willthrive on exposing those inefficiencies.

Multiple exchanges: Multiple exchanges are a must for pricetransparency and constant value-addition. There is enough room in this nascentmarket for multiple players.

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Who Will Benefit?

Broadly, there are three types of players among the bandwidthtrading community–the pure capacity creators like FLAG and APCN; theinternational carriers who are capacity builders, wholesalers, and sometimesservice providers, like AT&T, Sprint,

Telia, BT etc. The third category is that of the IP backbone service providerslike Level3, Qwest, and Worldcom. And then there are numerous local accessproviders in different countries.

From a practical standpoint, bandwidth exchanges have servedan acute need of all. For the new capacity creators, it is no more necessary toinvest money, energy and, more importantly, time on building a brand to competewith the international carriers. They can invest the saved money on the qualityof the network and can show that value in a transparent e-marketplace to thebuyers, thus reducing a lot of trouble and cost. They can also guard againstsevere price-drops by using the information generated on these exchanges.

For the international carriers, the anonymity feature in thebandwidth exchanges ensures that they can sell their excess capacity at a lesserprice without losing the premium on their branded service. They can quickly addnew geographic locations by buying bandwidth from other players and serve theirglobal clients almost on demand.

The local service providers like ISPs of course are the realwinners. The prices will come down sharply. Planning for the future becomes mucheasier. Also, bandwidth, being an online thing, the service provider canconstantly monitor quality before taking a decision.

And all this means the end consumer gets a better deal at alesser price. Is not that the ultimate achievement for any innovation?

Shyamanuja Das

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