Neutral Points

The operators of pooling points — the spots where long- and short-haul carriers, Internet service providers and application service providers interconnect their networks — are rushing to unfurl the neutrality flag.

The companies are trying to allay any fears that they are biased or are profiting from information gained from their bandwidth switching operations. So powerful is the demand for neutrality that bandwidth trader RateXchange is giving up its pooling point business altogether.

In late April, El Paso Global Networks announced plans to partner with The Carlyle Group to build neutral pooling points in four cities. The same day, Enron Broadband Services said that it would open its 25 pooling points to any companies that want to interconnect. Enron had previously restricted access to its pooling points to its bandwidth trading clients.

LighTrade and Pooling Points are pure plays in the neutral pooling point market. Their businesses are based on their ability to rapidly provision circuits and provide quality-of-service monitoring to carriers that exchange bandwidth through their facilities. Other companies involved in colocation or bandwidth trading — including Colo.com, Equinix, LayerOne, Switch and Data, and Universal Access — may also provide connectivity among carriers.

Pooling points, or network interconnection facilities, are critical to the maturation and liquidity of bandwidth trading.

By 2006, bandwidth traders may be swapping $20 billion per year in contracts, market research firm Ovum said. Most bandwidth trading has been in switched minutes for long-distance voice traffic, not high-capacity circuits.

Long-distance voice capacity can be provisioned quickly and the commodity is well-defined. Trading high-capacity circuits, on the other hand, is hampered by the lack of standardized contracts, the inability to provide real-time provisioning and a lack of available neutral pooling points.

Energy traders have long had specific locations where they can fix prices and delivery schedules. In the natural gas market, futures prices are set at the Henry Hub in Louisiana, where nine interstate and four intrastate gas pipelines interconnect. Chris Lemmer, director of bandwidth trading and risk management at Williams Communications, says the industry needs "a Henry Hub in each tier 1 city before we can have robust trading."

Industry analysts agree. "The more networks that are connected, the better it is for everyone," says Stan Hanks, owner of consulting firm Network Mercenaries.

Interconnectivity should help carriers because it will increase their networks value. Metcalfes law says that the value of a network equals the square of the number of its users. The same factor applies in connecting disparate networks, because it lets owners trade capacity and therefore gain revenue from an unused asset.

In New York, the biggest interconnection hub is at 60 Hudson St. In Los Angeles, major carriers interconnect at the telecom hotel at 1 Wilshire Blvd. While most major carriers have circuits that terminate in those buildings, the industry is still grappling with which company will own and operate the switches and the "meet-me rooms" where the actual interconnections are made.

LighTrade, which already has eight U.S. pooling points and will add two more by the end of this month, charges carriers a monthly fee for space on its switches, and connection fees for each circuit provisioned. "We think theres a real desire and need for a carrier- and trader-independent platform like the one were providing," says Michael Prior, senior vice president at LighTrade.

Geoffrey Allen, a director in global wholesale markets at Enron Broadband Services, notes the concern and says the decision to open its pooling points was market-driven. And while Allen believes the pooling point business is essential, he also sees a shakeout looming.

As a matter of fact, on May 10, Colo.com filed for bankruptcy.

Brent Wilkins, CEO of Chapel Hill Broadband, says that eventually there "wont be 18 pooling point providers — therell probably be less than five." And while Wilkins isnt certain which companies will survive, he is sure that all of them will be neutral.