Carrier Channel: Minute By Minute

By Khali Henderson

Posted: 10/2002

Minute By Minute
Facilities-Based Exchanges Continue to
Woo Risk-Averse Carriers

By Khali Henderson

DESPITE CONTRACTION AMONG
international long-distance minutes exchanges, the survivors report they are
profiting from carriers’ quest to manage both risk and margins.

The enduring exchanges —
Arbinet-thexchange Inc. and Band-X Ltd. — both report increases in business in
terms of members and traffic volume. Arbinet claims 210 carrier members as of
August 2002, up from 135 in August 2001, and trading volumes of 14 million
minutes per day. This translates to a 5 billion minute annual run rate, or 500
percent growth, in just over a year. Band-X reports it is interconnected to
about 20 carriers and averages 40 million minutes per month.

"Anything that saves carriers
money in the current environment or helps them manage their business better gets
due consideration," says Richard Elliott, chairman, co-founder and
executive vice president — Global Trading Development for Band-X, offering an
explanation for the surge in demand for exchange services.

If this is the case, it is curious
the current downturn did little to buoy businesses of the many facilities-based
minutes exchanges that cropped up in the late ’90s imitating the Arbinet and
Band-X models. Among the casualties were AIG Telecommunications LLC and The
Global TeleExchange Inc., which closed up in late 2000 and early 2001,
respectively. (The remaining online markets, such as Bandwidth Markets Ltd. are
bid-ask bulletin boards for minutes with no physically delivery mechanism in
place.) "It’s back to old times in many ways," says Elliott.
"There is no question that we two have been at it the longest."
Indeed, Band-X and Arbinet have been clearing PSTN minutes since August 1998 and
October 1999, respectively. Elliott suggests the pioneers may have survived
because of the years under their belts and the levels of investment in
technology, processes and management controls. "I suppose when times are
hard, having the longer track record must weigh in."

Curt Hockemeier, CEO of Arbinet,
says the liquidity that can come as a result of longevity also is an advantage
to an incumbent.

This is not to say that Arbinet and
Band-X have weathered the storm unscathed. London-based Band-X in May sold a
majority interest in its U.S.-based switched minutes business to Last Mile
Connections as a means to generate cash quicker than planned to invest in the
growth of its higher-margin managed services business, Elliott explained. For
its part, Arbinet retooled its least-cost routing business into its current
NASDAQ-like exchange, a move requiring five trips back to the capital markets —
the latest was in July when it raised an additional $36 million in private
equity financing. (The company expects to be cash-flow positive by first quarter
2003.) Both companies also have diversified their businesses to a great degree.
Band-X has its IP transit exchange, managed services and information services,
and Arbinet has its information services and soon-to-be-announced IP data
exchange and software licensing ventures. Arbinet hired Roger Kim in August to
lead its IP initiative, which Hockemeier expects to be operational in early
2003. In addition it has packaged its routing software for carriers to overlay
on their own networks. Called the AXCESSManager Routing Optimizer, it is
expected to debut by year’s end.

What has had a profound impact on
their switched minutes businesses of late has been the realization among
carriers that the exchange offers better financial management tools. "They
realize that we can do it better than they can," says Elliott, explaining
that at the foundation, an exchange offers the best market rates. "It’s the
same reason any market works, you can get a deal there."

In addition, "managing bad debt
is a big deal in the minutes market," he says, noting that Band-X averages
0.3 percent of sales. Hockemeier says Arbinet manages less than 0.25 percent bad
debt in contrast to the 6 percent to 9 percent that is typical for carriers on
their own. "We have had people tell us this is the key to them
joining," he adds.

Arbinet productized its
risk-management service in April as Credit Watch. The service allows carriers to
net out traffic in real time. In addition, all buyer balances are underwritten
by GE Insurance or secured by a letter of credit, deposit or net selling.
Automatic alerts are sent to buyers when 75 percent and 90 percent thresholds
are reached. At 100 percent, access is denied. "Intuitively, it’s the
safest place to sell," Hockemeier says.

Elliott notes that, in the wake of
the WorldCom bankruptcy, companies have been pointing traffic at the beleaguered
carrier in an effort to reduce their exposure. While this is a benefit of
exchange membership, it also "upsets the balance of the traffic
flows," he says, noting that it also has had a temporary deleterious effect
on the exchange’s volume.

Hockemeier also cites an increase
interest in minutes trading as a means to manage cost. Increasingly, he says,
carriers are choosing to route calls by margin rather than either quality or
price. It may make sense to pay more for a route that has a 60 percent ASR than
one that is less expensive but only has a 40 percent ASR.

Research firm Tarifica reports a
return to margin management is critical, noting that over the last two years
telecom companies consistently have failed to manage margins to a satisfactory
degree. "If margin management is not applied, losses will mount, essential
investment will not be possible and financial institutions may not be willing to
invest in what looks like terminally ill organizations," the analysts wrote
in a July release.