Trading Desk: Band-X Focuses on Improving IP, Minutes Exchanges

Posted: 03/2002

TRADING DESK

Band-X Focuses on Improving
IP, Minutes Exchanges

By Josh Long

Neutral exchange Band-X. Ltd. always knew it would need more money to support operations around the globe, says COO John Lewis. Unfortunately, the privately-held company faced the same glum reality as so many other telecom businesses did late last year. There wasn’t a lot of green to go around, and investors considered it too expensive to support global infrastructure.

Still, Band-X is getting closer to the bottom line — reaching profitability. The company raised $5.5 million last December in a third funding round, a milestone one investor said will help the exchange break even.

“It is still a ways from being cash-flow positive,” said Madison Dearborn Partners managing partner Jim Perry, but “it is within sight.”

In its first two funding rounds, Band-X had raised $51 million from Goldman Sachs, Morgan Stanley Private Equity and Madison Dearborn Partners. Madison Dearborn, Morgan Stanley Venture Partners and some private individuals contributed $5.5 million in the latest funding round, Perry said.

That Enron Corp. and its small entourage of energy merchant bandwidth partners have dropped out of the so-called bandwidth trading market is not stopping Band-X from developing initiatives that will help forge liquidity.

Refocused in the three markets where the volume of new business has contributed to three-fold growth during a year’s period, reaching nearly $50 million in 2001, the company is developing initiatives to diversify its IP transit and minutes exchanges — electronic platforms that allow companies to anonymously buy and sell wholesale Internet capacity and minutes.

To get to this point Band-X first had to retrench. The London-based company ceased operations last fall in Brazil, France, Germany, India and the Netherlands — letting go about a third of its global workforce. Band-X still manages exchanges and brokerage operations in the United States, United Kingdom and Hong Kong.

“The focus going forward is to really get deeper into fewer geographical markets, basically building on the success we had in those markets,” Lewis said.

At the heart of the company’s strategy this year is diversifying its IP and minutes exchanges. The IP business is less mature than the minutes exchange but growing, Perry says.

Companies in the New York-based IP exchange can acquire capacity from a pool of 10 suppliers virtually every week (if they so desire) after committing to one supplier for the first month. There are more than 25 suppliers connected to the company’s exchanges in the United States, United Kingdom and Hong Kong. But U.S. broadband companies that want to buy and sell IP transit in the United States must be connected physically to infrastructure in the New York exchange. That could change.

Band-X is in early discussions with U.S. collocation companies to license its technology to them so their customers could buy and sell IP transit anonymously from their respective facilities, Lewis said. In that scenario, the U.S. collocation facilities would offer Band-X services as a franchise.

“We are setting up alternate channels to market in both the U.S. and Europe,” said Band-X spokeswoman Vanessa Clark. “These could include a franchise-type agreement or long-line connections.”

Senior analyst at wholesale research firm Atlantic-ACM Taher Bouzayen says he thinks Band-X may be on to something. But he wonders whether carriers would support an IP exchange in a collocation facility since their customers would be more prone to walk away after finding a better deal.

The concept is not new. Why stick with carrier X all the time if you can find a sweeter deal on Internet capacity with carrier Y or Z in the same facility? No doubt, Band-X would have to deliver a smooth sales pitch if the exchange wanted to forge such franchise agreements, the analyst said.

In further developments, Band-X is creating web capabilities that will allow suppliers of IP transit to offer three-month forward contracts. In other words, buyers would commit to a contract and specific price for 90 days. Perhaps future fluctuations in supply and demand on particular routes as opposed to last year’s norm — low demand and rock-bottom prices — would entice customers to sign a forward contract. Band-X anticipates making the service available at the end of the first quarter.

The company also plans to make its minutes exchange more valuable to clients. Band-X may begin managing voice traffic on behalf of buyers in the United States, changing supplier routes based on price and quality parameters.

Last December, the company began offering the traffic-management service to a U.K. mobile operator that uses the exchange to terminate international calls.

“We will review the opportunity to offer a similar service in the U.S. once we have further refined our service in the U.K.,” Clark says. “Our switched business is more established in the U.K. market as it has been in existence for longer, so it makes sense to start the service there.”

Band-X also owns research firm Tele-

Geography Inc., manages a global recruitment service and brokers deals for companies that need collocation and network services. Network services include dark fiber, conduit, wavelengths and point-to-point circuits.

Industry voice brokers say the exodus of the energy merchants has curbed activity involving point-to-point transactions on more liquid routes, such as from New York to Los Angeles. Enron and the other merchants were trading circuits using a standardized contract on those routes each week. But Lewis said the network services business is not a core part of Band-X’s business.