NEW YORK-Bandwidth on demand is a concept that will advance to a new level by fall when AIG Telecom’s inaugurates the first commodities forwards market for telecommunications network capacity.
AIG Telecom, Greenwich, Conn., is a new subsidiary of AIG Trading Group, a AAA-rated company with $200 billion in assets.
“The goal is to make it easier to buy and sell network capacity-bandwidth and minutes-from one carrier to another,” said Eric Raab, the AIG managing director who developed the idea.
“We will provide an exchange point where carriers can meet and anonymously buy and sell [capacity]. It is similar to wholesale transmission of electricity, and AIG has experience in trading all kinds of commodities, [including] electricity and natural gas.”
Despite the cutting-edge nature of telecommunications, this high-tech industry will be following the lead set by the agricultural sector in the last century.
In response to the boom and bust cycles that devastated many farmers, commodities markets were established for various bulk agricultural products. They allow farmers to go to a single place and reach agreements to deliver a certain amount of produce at a set price at a fixed date in the future. The hedge against risk is a forward contract, which obligates the buyer to pay the difference if the price of the commodity subsequently declines.
“This is exactly what some elements of the telecommunications markets would need,” Raab said.
“I am also concerned that carriers will need capacity in the future because they hear demand is going ballistic and don’t know where they will get capacity.”
Telecommunications companies already engage in bilateral agreements with individual counterparts to buy and sell network capacity. However, this process is complex and time-consuming compared with the efficiencies that AIG Telecom’s one-stop-shop solution will provide, Raab said.
“We don’t provide cash-settled futures, which are contracts for delivery of some product at some time in the future. Ours is now a forwards market, in which [the buyer] takes physical delivery,” he said.
“We have a critical mass of carriers and are in the phase where they are ordering and testing connections to our switch in New York.”
Participating telecommunications providers will be able to call into that switch and buy and sell capacity anonymously, so they can avoid issues about dealing with their competitors, Raab said. AIG will conduct the due diligence required for assessing creditworthiness of buyers and sellers, and it will take the related credit risk.
AIG also has developed an elaborate set of standards to evaluate network quality, which varies from carrier to carrier. Using this benchmark, it will assign different carriers’ networks to “different baskets of quality.” Prospective network capacity purchasers can choose which baskets they wish to buy out of depending on what price range they wish to pay.
“Unlike a commodities broker, which introduces the buyer and seller and then gets out, we continue to be involved in the credit checking, provisioning, pricing, quality control, payment and delivery,” Raab said.
By the time the system goes live in September, AIG Telecom expects as many as 200 domestic carriers will be participating. Each will have paid AIG a small sign-up fee and signed a master agreement, and each will pay AIG a transaction fee for delivery of each forwards contract, he said.
“We plan to extend our market overseas and are pursuing that very aggressively,” Raab said.
