Making bandwidth a commodity: Reality or just a good idea?

Every company wants an identifiable mark and naturally it wants to differentiate itself from its competition. But in the emerging bandwidth trading market the names are flowing more vigorously than usual. From "dating services," to the "Switzerland of telecom" and the "Nasdaq of bandwidth," colorful names abound. At the heart of all the name-calling lies an interesting concept.

After looking at commodity models such as oil, gas, electricity and even orange juice, making bandwidth a commodity makes perfect sense. The standards, economics and technologies are all defined, so why not apply the same models to bandwidth and make alittle money in the process?

A few companies believe that bandwidth as a commodity is better than the traditional model, which doesn't provide for the open exchange of prices, technology or the bandwidth itself. That traditional model forces carriers to wholesale and resale bandwidth, leaving little flexibility for the carrier.

One company in the bandwidth exchange arena is Enron Communications, which is trying to recruit support for the model from service providers. Following the lead of its parent company Enron Corp., which helped transform the natural gas and electricity industry into a commodity, Enron Communications is planning to revolutionize the way bandwidth is exchanged.

As part of its strategy, the company is setting up bandwidth offerings between two city pairs. With the first offering, time division multiplexing will be used to run service between New York and Los Angeles. The second bandwidth offering, aimed at Internet service providers, will use an Internet protocol (IP) DS-2 link between Washington, D.C., and San Francisco.

"We will have an independent third party - one of the big six economic firms - operate the pooling points on those two offerings," said Joe Hirko, president and CEO of Enron. "We will be able to establish the infrastructure that causes [the bandwidth market] to operate efficiently - but someone else will stand in as the independent party," said Hirko.

But one competitor that Hirko labeled as a "dating service," believes Enron lacks impartiality in the exchange of bandwidth.

"Enron is not an independent exchange," said Alex Mashinsky, chairman and founder of Arbinet. Enron will sell its own capacity first over another carrier's, he said.

"I don't think it matters if [Enron pushes] their own bandwidth. What matters from the customer standpoint is if other providers will come or not," said Amanda McCarthy, an analyst with Forrester Research. In contrast, Mashinsky described Arbinet as the "Switzerland of telecommunications," where it brings buyers and sellers together but has nothing of its own to sell. The Arbinet model offers a level playing field for smaller carriers to break into pricing previously available only to incumbent carriers, said Mashinsky. To facilitate the Arbinet bandwidth exchange, the company will use an access-controlled Web site where prices can be posted anonymously. As a second part of the Arbinet plan, switching hubs will be added.

McCarthy points to the current lack of hubs as a problem for Arbinet. Enron has set up network access points, or "carrier hotels," where they can co-locate equipment, while most of the others involved, such as Arbinet, RateXchange, and Band-X, are not doing that or don't have the funds to do so, she said.

But those challenges aside, McCarthy believes the concept of turning bandwidth in to a commodity will be a tough sell to carriers. "I have a hard time looking at it as a traded commodity based on the value of the underlying capacity. It's entertaining intellectually, but I can't see the market getting to that point," she said.

Hirko acknowledged that bandwidth as a commodity was not something that would happen overnight. "We don't think that the day we get these hubs built we will see 500 participants," he said.