From the ground up

Despite the predictions of recent years, the bandwidth exchange market is not, at this time, booming. This is partly because of carriers who have been hesitant to jump into the game, and partly because of the natural evolution of this new niche.

San Francisco-based RateXchange, however, is determined to help both move along.

The centerpiece of the company's portfolio is RateXchange Trading System, a Web-based bandwidth exchange platform that allows for the exchange of time division multiplexing bandwidth and will soon accommodate IP-based bandwidth.

“The way we have approached setting up a bandwidth exchange is the model that has proved itself in a lot of other commodities,” says Nick Coill, senior vice president of trading operations with RateXchange. “They all approach credit with a pre-approved counterparty credit system…. They all trade anonymously on a bid/ask market without any type of algorithms, so when you hit a bid and list an offer, you know exactly what you are getting. After the deal is made there's a name give up and the parties find out who each other are.”

Through a deal with energy broker Amerex, RateXchange also accommodates those who do not want to trade bandwidth online.

A company using this service would call a brokerage desk and give information on the bandwidth it wants to buy or sell. That information is listed on RTS for others to view but cannot be acted upon via the Web. Instead, an interested party contacts the brokerage desk to begin the exchange process.

The relationship with Amerex can be used to transition companies into bandwidth trading, although the voice trading market will always exist because of the negotiations involved with larger transactions, says Jon Merriman, president and CEO of RateXchange. “The end game for the broker community and also the customer community is to migrate the smaller, more commodity-oriented transactions to the screen,” he says.

In the past, when a deal for bandwidth was cut, RateXchange provided for the physical handoff of traffic through one of its 12 pooling points. Feedback from potential bandwidth traders, however, convinced RateXchange that the company should exit pooling point business.

“The market is looking for neutrality across a variety of platforms,” Merriman says. “If we're operating pooling points, we're not going to be neutral.”

Seth Libby, an analyst with The Yankee Group, understands why carriers would desire such neutrality. “If I'm going to buy bandwidth from somebody, I would prefer to buy it from somebody who I was relatively certain didn't have a stake in the game,” he says.

RateXchange, then, is selling its pooling points, at which time it will own no physical infrastructure and will have a purely transaction-driven business model.

This transition required changes at the top of RateXchange. In October, Merriman was brought on board as president and CEO, replacing Don Sledge. “There was a recognition that the model had to move to more transaction, more deal driven. My background is pretty much trade and deal-driven. [Sledge] came from a more traditional telco environment,” Merriman says.

This approach of neutrality is the bedrock for other major aspects of RateXchange's portfolio such as consulting services. Approaching bandwidth as a commodity, the company provides asset valuation, hedging and trading strategies, market research and pricing strategies and policies.

The company also offers historical pricing information on some of the most liquid routes, such as New York to Los Angeles and Los Angeles to Tokyo.

These services are based on data RateXchange has taken primarily from RTS. “One of our objectives is to effectively market that information to the world because it's valuable,” Merriman says.

To encourage the commoditization of bandwidth, the company is also working to establish a bandwidth futures market. In March, the company took a major step toward this goal with its acquisition of Xpit.com. Xpit has developed a Web-enabled trading and risk management system that offers traders, brokers and financial institutions access to trading pits and electronic exchanges throughout the world, and it provides real-time monitoring of accounts.

As with any futures market, carriers must first understand it. The education of potential customers is in fact one of the biggest tasks for bandwidth exchanges, according to Russ Matulich, senior vice president of sales for RateXchange.

“In the past few months [telcos have] figured out that exchanges have nothing to do with the price of bandwidth falling. Bandwidth prices are going to fall because there is as lot of dark fiber in the world,” Matulich says.

To educate carriers, RateXchange uses its consulting and market research information, which also serves as the “front of the arrow” for signing customers to their services.

“RateXchange has been educating us on the marketplace, putting everything in perspective for us as far as what's going on in the industry, what are the trends,” says Bill Morrison, vice president of emerging markets for Teleglobe, which has been working with RateXchange since March.

The process of education has been slower than many had expected. For the fiscal year 2000, RateXchange posted a loss per share of $2.69, missing the $1.82 loss analysts' had estimated at First Call/Thompson Financial.

In response to the slow growth, RateXchange has had to tighten its belt, laying off some employees.

Things, however, may be turning around for the company. From September 1999 to September 2000, RateXchange signed up only one provider. Since then, 26 more have inked deals. “With the 20-plus telecoms we've signed up, when the market is ready to actively trade and move toward liquidity, then RateXchange is the first place that most of these telecoms will be turning to,” Matulich said.

RateXchange

Headquarters: San Francisco

Top officers: Jon Merriman, president and CEO; Nick Cioll, senior vice president of trading operations; Terry Ginn, vice president of software engineering; Stephen E. Kanaval, senior vice president of derivative products

Number of employees: 36

Focus: Provides Web-based trading system for TDM bandwidth; consultancy and market research

52 week high/low: $1.15-$23.00

Annual revenue: $91,000 (2000)

URL: www.ratexchange.com