NEW YORK-RateXchange Inc., San Francisco, expects by early February to execute the first trade on its new online bandwidth exchange, inaugurated to meet the growing demand for telecommunications transport capacity.
In early December, the company demonstrated its Real-Time Bandwidth eXchange at a conference in New York. Since then, it has been signing up and interconnecting telecommunications carriers and noncarrier traders to its switches in New York, Los Angeles and London, said Ross Mayfield, president and chief operating officer.
“We believe that with our exchange, risk and yield of network assets can finally be managed to the equal benefit of buyers and sellers,” said Donald Sledge, chairman and chief executive officer.
“This could be as powerful a growth factor in the telecommunications marketplace over the coming years as technology, deregulation and privatization were in the 1990s.”
The Real-Time Bandwidth eXchange will permit anonymous trading of forward and spot contracts.
Mayfield offered this example of how the system will work:
Having projected capacity needs a year ahead, ABC Telecommunications Co. expects it will need 10 extra DS-3s by Jan. 1, 2001. Digital Service, level 3, also known as T-3, is the equivalent of 28 T-1 channels and operates at 44.736 megabits per second.
ABC then arranges in January 2000 to buy a forward contract for delivery of this capacity at a fixed price from XYZ Telecommunications Co. a year later. The exchange’s forwards contracts start once each quarter and are of one-year duration.
Perhaps by October 2000, ABC will realize it only will need nine extra DS-3s in early January 2001, instead of the 10 it had projected originally. Alternatively, the carrier may determine it actually will need 11 DS-3s.
In these scenarios, ABC can either sell its excess bandwidth capacity or buy extra on the spot market, which consists of month-long contracts.
“Carriers will be practicing yield management, the way airlines do with seats,” Mayfield said.
“They’ll also be practicing risk management, securing prices in the future and avoiding volatility of (bandwidth) availability and price.”
Noncarrier traders are permitted to participate in the Bandwidth eXchange because they “add liquidity to the market,” Mayfield said.
“With more chances to buy and sell, price setting becomes more rational.”
RateXchange already has 4,000 customers participating in its online bulletin board. This service generates leads about bandwidth availability and introduces interested parties, which then engage in the buy-sell transactions themselves. However, after RateXchange steps out of the equation, problems often occur, Mayfield said.
“A year of honing our exchange architecture has resulted in our ability to offer a mission-critical service guarantee we believe will propel market liquidity by eliminating factors that currently result in 90-day transaction cycles and 90-percent transaction failure rates,” he said.
“We seek to provide a path of least resistance for the coming revolution in online trading of bandwidth by facilitating transaction fulfillment, by allowing exchange participants to use our standardized contracts and credit mechanism (and permitting them) to acquire ports in delivery hubs for interconnection.”
The market apparently is ripe for this kind of service. In the fall, AIG Telecom, a subsidiary of AIG Trading Group, Greenwich, Conn., inaugurated a commodities forwards market for telecommunications network capacity.
RateXchange projects that online trading of what it calls “telecommodities,” which include bandwidth, will be an $8 billion annual market by 2002.
By 2003, the domestic wholesale network services market will reach $116 billion in yearly revenues, a 24-percent increase from 1998, according to projections by Phillips Group-InfoTech, Parsippany, N.J.
The telecommunications and information technology research firm sees Internet Protocol wholesale volume in three sectors as key drivers of this growth. Wireless wholesale services, propelled by Internet access, will quintuple to $5.5 billion by 2003, compared with 1998. Competitive local exchange carriers will see their revenues multiply more than tenfold to $2.62 billion. Likewise, packet/cell-based network service provider revenues will experience a similar trajectory, reaching overall revenues of $20.45 billion by 2003, compared with $2 billion in 1998.
“The passage and implementation of the Telecommunications Act of 1996 have moved much of the focus of wholesale from long distance to local access, including not only wireline but (also) wireless and cable access markets,” said Richard Kent, vice president of global professional services at Phillips Group-InfoTech.
“The rapid acceleration of telecom technologies, particularly fiber-optic transmission and switching capabilities … are doubling … bandwidth capabilities every nine months … [leading] to a significant fall in bandwidth costs.
“The third driver has been the impact of the Internet on the demand for bandwidth and the transformation of bandwidth usage from circuit-switched voice to IP packet networks.”
