Market Makers Push "Telecommodities"

By Khali Henderson

Posted: 12/1998

Market Makers Push "Telecommodities"

By Khali Henderson

In a decade of "disintermediation," when vendors like Austin, Texas,-based
Dell Computer have been praised and copied for eliminating distribution layers (and
incremental costs) between them and their customers, the telecommunications services
market has added a layer of middlemen.

By bringing buyers and sellers together, these matchmakers–in various
incarnations–not only are facilitating the distribution of telecommunications services in
newly competitive global markets, but forcing wholesale rates to commodity levels and
speeding proliferation and adoption of new Internet protocol (IP)-based voice and fax
services. The early successes of the electronic trading floor model of buying and selling
highly competitive public switched telephone network (PSTN) and IP spot rates foretell a
day when all transport–wireline and wireless–will be traded on an open
"telecommodities" market.

Variations on a Theme

The telecom middlemen come in various modes but primarily can be categorized into two
groups–clearinghouses and dealing desks. (See listing, "Middlemen.") Both types
were started nearly simultaneously, but for different reasons.

Generally, the clearinghouses, such as ITXC Corp., North Brunswick, N.J., and
TransNexus’ Internet Communications Clearing-house, Atlanta, were formed to link hundreds
of low-profile upstart providers of IP telephony services from around the globe. The
clearinghouses provided them with routing and settlement services without the laborious
bilateral contract negotiations made standard in a global telecom market with relatively
few high-profile (and typically monopoly) providers.

The dealing desks also originated to replace the bilateral agreement process, but in
the spot market for international PSTN minutes and bandwidth. Here, buyers and sellers
post bids anonymously, and when a match is made the buyer and seller work toward an
agreement and pay the exchange a commission.

Recently, however, there has been a blurring of those early distinctions–dealing desks
are being formed specifically for IP telephony and real-time routing and settlements are
being offered for PSTN services.

For example, San Francisco-based RateXchange, a web-based ex-change for international
wholesale bandwidth and PSTN minutes, in mid-October launched a separate trading exchange
for IP voice minutes, which it had been trading with PSTN minutes. Another voice over IP
(VoIP) exchange, Min-X.com, founded by Jeff Pulver, president of pulver.com and founder of
the Voice on the Net (VON) Coalition, began trading Nov. 10. Although Pulver says that
Min-X.com is an incubator for IP telephony, he anticipates it also will house other
dealing desks to broker minutes for mobile, cable, satellite and PSTN spot rates. At press
time, Min-X.com’s switched PSTN minutes desk was scheduled to be opened early this month.

Other dealing rooms include London-based companies Band-X and Cape Saffron. Both post
offers and bids for PSTN and IP minutes, though Band-X trades are predominantly PSTN and
Cape Saffron’s are primarily IP.

Some of these virtual trading floors have evolved into the clearinghouse model of late.
Both RateXchange and Band-X recently have deployed their own switching hubs–RateXchange
in carrier hotels at 50 Hudson in New York and One Wilshire in Los Angeles and Band-X at
Telehouse in London–to which carrier traders can interconnect, potentially reducing their
trading of PSTN minutes from 60 to 90 days down to just seconds. A third company,
InterXion, set up its hub in June in its headquarters city of Amsterdam, Holland.

These companies are not the first to bring real-time trading to international PSTN spot
market, however. New York-based Arbinet Communications Inc. introduced its real-time LCR
(least-cost routing) Interna-tional Rate Ticker in late August. The patent-pending ticker
quotes Arbinet’s lowest rate to global destinations available to carriers connected to the
Arbinet Global Clearing Network (AGCN). AGCN provides real-time authentication,
authorization, least-cost routing, call placement and settlement, allowing carrier to
access AGCN’s best rates and routine option without having to negotiate and contract
separately with each terminating carrier.

Each service works slightly differently, but the primary difference is that Arbinet is
a carrier while the other three are not. The main argument here is that by not being a
carrier, a third party is in play to monitor quality–a key concern in the international
spot marketplace for PSTN and VoIP minutes.

Another place where the services diverge significantly is in their degree of
automation, which is determined more by philosophy than technology. While Arbinet offers a
completely automatic service based on predetermined criteria, Rate-xchange, for one,
leaves the trader in the loop, requiring it to select the route it wants to purchase
before the switch is made. Transferring control to the switch is a sticking point for many
carriers, particularly the old guard, which includes the larger PTT-class players that the
exchanges are eager to bring to the virtual trading table but that are accustomed to the
one-on-one negotiations process.

Believing this to be a stumbling block for full participation by large international
carriers, Min-X.com’s Pulver has opted not to migrate to the clearinghouse model like his
peers. In fact, it is the only exchange that also will facilitate quarterly face-to-face
meetings with traders. The first is schedule for Dec. 10-11 at John F. Kennedy Airport in
New York.

Khali Henderson is Editor-in-Chief of PHONE+ Magazine. Readers interested in this
topic should note that a market-maker comparison will be published in the Feb. 15, 1999,
issue of PHONE+ International, accessible via the web at www.phoneplusinternational.com