IN THE NEWS

B12 THE WALL STREET JOURNAL THURSDAY, AUGUST 17, 2000

Under the Radar

Arbinet Plays Matchmaker to Telecom Firms

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 Inc. 

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 irregularities.

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 a while.

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.