Where to go if you're
a telecom company looking to buy or sell big blocks of excess bandwidth
quickly -- and in total secrecy? One option: Arbinet-thexchange
The closely held bandwidth exchange concern (www.thexchange.com), based in New
York, is one of a new breed that caters to carriers looking to buy or
sell excess long-distance capacity. Big telecommunications carriers
like AT&T Corp. have been secretly swapping big blocks of minutes
via Arbinet since October. Though the company was founded in 1996, it
entered the bandwidth-exchange business last fall.
On any given day, blocks of minutes for sale on Arbinet's exchange cover
thousands of long-distance routes world-wide. Sample routes might include
the busy (read competitive) London-to-New York route, as well as less-traveled
calling routes such as, say, Istanbul to Kansas City, Mo. Sales are
instantaneous, and conducted in total secrecy.
|Curt Hockemeier, Arbinet's president and chief operating officer,
says anonymity is one of many features that separates Arbinet from other
bandwidth exchanges. "It affords our members the opportunity to have a
different wholesale strategy from their retail strategy," he says.
That is a polite way of saying members can secretly cut cheap wholesale
deals while still charging steep fees to retail customers, and nobody
will be the wiser. Mr. Hockemeier reckons the blind approach also makes
it "a little easier" for even bitter rivals to do business with each other.
How it works: Carriers join Arbinet as a "member," a process that involves
a $5,000 application fee and a background-credit check. Once they have
been accepted, carriers pay $750 to $1,100 for every block of minutes
traded, depending on the type (T1, DS-3, etc.) and quality of minutes
involved. Quality ratings range from "triple-A," designating technically
superior voice connections, to "D," a grade marked by static and other
To use the service,
members log in the price and quality of product they want to buy or
sell, and specify the route. Arbinet's computerized systems immediately
begin hunting for a match. The exchange sets up a "virtual pathway"
between parties once a match is found, and calls get routed immediately.
(If Arbinet finds a match that costs less, members get the cheaper price.)
If no matches are found, carriers can enter another price. Arbinet,
which doesn't collect a commission fee for its middleman duties, later
invoices the buyer and settles up with the seller. "We take all the
risk," Mr. Hockemeir notes.
He says Arbinet's unique brand of minute-swapping can save members numerous
headaches, not to mention lost revenue from bad debt. The Arbinet approach
also reduces overhead administrative costs associated with bandwidth
trades, which can be considerable for big telecom carriers trying to
juggle global swaps.
Arbinet had planned to sell shares in an initial public offering by
now. The company earlier this year filed a registration statement, only
to watch the equity markets for new technology issues dry up. Arbinet
recently withdrew its registration, and is hoping to make another run
at an IPO later this year. "We just didn't want to sell the company
at less than what we think it is worth," says Mr. Hockemeier, who joined
Arbinet in April. Prior to his arrival, Mr. Hockemeier was a senior
executive at AT&T in charge of the company's phone-over-cable TV
effort. It is unclear how investors will receive Arbinet. Though the
company's business model might look good on paper, there are a few nagging
issues, says Andrew Cray, a senior analyst with Aberdeen Group in Boston.
Mr. Cray says Arbinet opened its doors for business last fall with "one
very large customer" -- AT&T -- and continues to rely on just a
handful of carriers for most of its revenue. That potentially puts Arbinet
in a vulnerable position, he says.
Mr. Hockemeier declines to discuss Arbinet's ever-expanding member list,
but says it includes about 40 carriers of all sizes. He says members
hail from around the world, and include major long-distance concerns
as well as start-ups.
Mr. Cray also thinks
Arbinet may be a little too ahead of its time. He says Arbinet is trying
to create a business exchange "for something that's not a commodity
-- and that's a problem." He believes a "real bandwidth-trading market
won't exist until bandwidth is a real commodity," and that could take
Mr. Hockemeier disagrees. He says Arbinet's technology, which he describes
as "space-shuttle complex but kindergarten-simple to use," already has
turned long-distance blocks into a very manageable commodity. Not quite
pork bellies, to be sure, but close enough.
Mr. Cray thinks big players, including major utility companies, will
push hard into the exchange business when the time is ripe. Utilities
like Enron Corp. are already selling data capacity. That could spell
problems for tiny upstarts such as Arbinet. "These guys may be the first
wave, but I don't know what happens to companies like Arbinet over the
long term," Mr. Cray says.
Arbinet, for its part, sees just many opportunities ahead. On any given
day, Mr. Hockemeier notes, some long-distance calling routes may have
as much as 80% unused capacity. Arbinet, he says, can help carriers
reduce costs, pump up revenue and manage their businesses better.