A furious rate of network build, coupled with rising needs for bandwidth from corporates and wholesalers, has spawned on-line capacity exchanges dedicated to matching demand with supply.

It's a curious fact that as the Internet is driving many industries to shed their intermediaries, the telecommunications sector, in one respect at least, is acquiring them. A handful of Web-based interconnect intermediaries has sprung up over the past few years to facilitate virtual trading rooms, where bids can be made for voice minutes and bandwidth across national and international routes.

These on-line exchanges have moved nimbly to exploit a furious rate of fiber building by new carriers and the emergence of fiber capacity-boosting technologies such as DWDM (Dense Wave Division Multiplexing).

"What exchanges are bringing to the table are connections and credit agreements up-front, so if demand is there supply can be switched on," says Eric Raab, managing director of wholesale capacity exchange AIG Telecommunications LLC, of Greenwich, Connecticut.

Currently, the market for trading voice minutes is more established than exchanges for raw bandwidth. Web-based interconnect intermediaries will mop up 6 billion minutes or more in volume trading of circuit-switched and IP voice minutes by 2005, according to telecoms analysts, Phillips Group Ltd., of London.

Hotly contested market

But gradually the bigger end game, bandwidth trading, is becoming more hotly contested, with some exchange players moving in on popular national and international routes. In its report The Role of On-line Exchanges in Wholesale Telecommunications, Phillips Group estimates that values transacted on bandwidth exchanges worldwide will aggregate to close to $8 billion in the same period.

At present, exchanges are used primarily by wholesalers to sell their spare capacity to each other and to newer market entrants including resellers, tier 2 and tier 3 carriers, and Internet service providers. As Guy Wilmer, chief executive and founder of iXExchange Ltd., of London, confirms: "The [London] Docklands is a feeding frenzy between carriers who are not selling to end users but just reducing costs." But he adds: "Corporates are going to do very well in future."

Wilmer believes that huge cost savings, made by separating data network provisioning from voice minutes, will see many corporates breaking free from their carrier and choosing from 30 or so minute suppliers in an exchange.

Phil Barton, chairman of the European VPN Users Association, based in Crawley, England, agrees that corporates cannot afford to ignore a wholesale market where, he says, prices are declining by 50% a year, and simply maintain their cosy relationships with managed network suppliers. With profit margins falling for high street retailers and supermarkets in Europe, for example, and "even rich pharmaceutical companies under price pressure," everyone, he says, "is waking up to the fact that high-quality international networks are costing a lot of money."

Lack of technical know-how

But Barton is in no doubt as to how radical a change it would be for the average corporate telecoms manager to use exchanges to embark on a do-it-yourself strategy for provisioning bandwidth or voice.

"There are a lot of managers out there who are not knowledgeable technical people. You'd have to go back to understanding how to manage and build networks. If you've got a 40-megabit-per-second transatlantic pipe, you need to know what to do if it breaks," he says. And in order to operate in this wholesale environment, "it would be a case of crossing the rubicon and joining the telcos club," he says.

The more likely outcome, certainly in the immediate term, is that users and incumbent carriers alike will use virtual trading rooms largely as a convenient way to check out prices, and this could see a broader community cruising the exchanges. As David Martin, vice president of strategic planning for Hamilton, Bermuda-based Project Oxygen Ltd., puts it: "It calls to mind the slogan of a discount clothing store in New York: 'An educated consumer is our best customer'."

An educated customer is also in a better position to negotiate a better deal, and exchanges could be a useful stick with which to heat carriers when provisioning capacity in the future.

"Consumer corporations are now in a position to buy at a markup from wholesale, rather than a discount from retail prices," adds AIG Telecom's Raab.

But for the time being, corporate telecoms departments on the whole are likely to continue to tread carefully when it comes to exchanges believes Peter Gbedemah, chief executive, Europe, of North American Gateway, based in Toronto, Canada.

"Brokerages are by definition a no-brand," he says. "IT never got fired for buying IBM, and telecoms [managers in the U.K.] have always been safe with BT."

The incumbent carriers themselves seem equivocal when it comes to exchanges. Steven Haines, general manager of BT's wholesale services division--formerly BT carrier services--says exchanges don't represent a competitive threat to the operator's own wholesale business: "Their impact is on niche business...It's purely for fulfillment," he says.

While BT does not put its own capacity up for sale, it has used bandwidth exchanges to buy capacity at short notice in order to fulfill a new contract on routes where it does not have its own available network, Haines says.

Wholesalers, too, have a reputation--and margins--to preserve, and are clearly not about to hand over capacity for a commodity trade at the lowest price. Commodity provisioning, some argue, would remove the value-add from the equation.

"To the extent that everything gets cleared and everyone gets paid, it's a good mechanism, but we've built our reputation on quality of service and in this market not everything is standard," said a spokesman for Global TeleSystems Group Inc. (GTS), of Arlington, Virginia.

The perception of some carriers is that the value-add of quality-of-service guarantees is removed, given the anonymity of the underlying network provider in many of the deals traded on exchanges (see box).

"I am genuinely paranoid about quality of service, and that's something that you just can't be sure of if you go to a bandwidth exchange," says Peter Manning, chief executive of London-based Colt Telecommunications Group plc, which is building a pan-European broadband network to major cities.

What's more, this lack of transparency could compound the inhibitions of any potential corporate buyers.

Accusations of inconsistent quality are perhaps most vociferously leveled at the minutes exchanges. "Quality is getting worse," says Freddie Talberg, managing director of London-based telecoms consultancy Monnet Ltd. "Every time a new interconnect is added, the switch has to process it and it adds delay. It's a killer of quality. The more carriers come onto the market, the more complex it is." The minutes disposed of in an open market are likely to be only as good as the price you pay, he adds.

This cuts to the chase of whether exchanges can succeed in making minutes truly fungible--and by definition the bandwidth being traded--and a safe trade for a user where end-to-end quality is a necessity.

Talberg says that incumbent carriers do little to promote quality, given their reluctance to publish and share quality data about minutes. What's more, he worries that on-line exchanges just serve to diminish quality further in their pursuit of trading huge volumes. "It's just a numbers game--some charge a small percentage commission per minute, while others charge a fiat fee. It is a volumebased pricing model," he insists.

Amsterdam-based capacity exchange and co-location facilities company InterXion provides a realtime call quality monitoring service so that operators can track the quality of each call routed through InterXion switches--although it does not measure the quality of the connection once it is established.

The company's president, Bob Meije, says he would mediate if two parties were in dispute over quality. The easier remedy, he concedes, is for the buyer to sell off the sub-standard lot and find an alternative supplier through the exchange's switch.

Quality monitor

Richard Elliott, managing director of Band-X Ltd., London, reasons: "It is not the role of the market maker to guarantee quality, but to monitor quality across all routes."

But Alex Mashinsky, founder of Web-based traffic exchange Arbinet Communications, of New York, reckons that its minutes spot market implements quality controls that would satisfy corporate buyers. "We take a score of major carriers and monitor their circuits to provide a median for quality that is updated constantly," he says.

When a customer buys from Arbinet, they specify their quality level--on a range from triple-A to Z-and the price they wish to pay, and Arbinet routes traffic over the optimum circuit on a per-call basis.