Telecom Trades

Arbinet thrives by giving flexibility to buyers and sellers of voice capacity.

Psst. Want to buy or sell some telecom routing capacity? For you buyers: today only, real cheap. For you sellers: Dont worry, its all anonymous. Nobodys going to tell your muck-a-muck retail customers you slid some capacity under the table at flea-market prices.

Sound good? If so, have we got an online exchange for you.

New York-based Arbinet-thexchange Inc. runs an independent e-marketplace where telecommunications carriers can not only trade calling capacity of all kinds—from traditional voice calls to VOIP (voice-over-IP) minutes—but also complete the connections theyve bought by connecting their networks directly to Arbinets voice and IP switches.

So far, the idea is clicking with buyers and sellers alike. Currently, Arbinet is accounting for sales of about 2 billion minutes annually. While thats only a small fraction of the estimated total of 200 billion to 250 billion minutes of voice capacity sold annually, it represents between 67 percent and 80 percent of all now sold by independent online exchanges, according to Arbinet President and CEO J. Curt Hockemeier. Compare that with Arbinets competition, such as e-marketplace Band-X Ltd., for example. Experts estimate its handling trades at a rate of about 300 million minutes per year.

But eWeek has other reasons for believing Arbinet is going to survive the independent exchange die-off. Yes, it recently received a nice financing deal—$35 million. And, like other successful independent e-marketplaces, its shown creativity in expanding its sources of revenue. The exchange, for example, has developed add-on subscription services. One is called AxcessCode. For $1,950 per month, Arbinet continuously updates 3,500 international dialing prefixes so members can complete calls.

But what really stamps Arbinet as a likely survivor is that it delivers real value by helping members stay nimble in the fast-moving telecom market. Arbinet imparts to carriers the mosquitolike ability to zero in on a market, suck it dry, then fly off to a juicier opportunity without spending money on infrastructure.

"The general benefit is flexibility," said a staffer from the carrier services of an East Coast VOIP provider who requested anonymity. The VOIP outfit was in negotiations to join Arbinet when this story was going to press. "We could get better rates than we can by going through an exchange like Arbinet, but it takes time to provision things. [By using an exchange like Arbinet], you can move quickly into new markets or revisit existing opportunities."

Telecommunications companies join Arbinet as members, paying a $10,000 application fee, submitting to a background credit check and hooking up some capacity—DS-3, OC-3, T-1 lines, for example—to Arbinets switch. They then pay a fee for each block of minutes traded.

Using the service consists of logging in, entering the price and quality of minutes members want to buy or sell, and specifying the route. The exchange then automatically matches buyer to seller and sets up the pathway to route the calls immediately—and anonymously. Sellers are telecom companies interested in unloading excess capacity. Buyers can be any kind of business.

That anonymous part is important for a few reasons. First, it lets carriers unload unused capacity at bargain-basement prices, with retail customers none the wiser. "If you have a branded deal with someone, you can sell off excess network bandwidth anonymously and not hurt those branded deals," said Chris Reid, Arbinets director of marketing.

Another reason anonymity is important has to do with the global push to deregulate the telecommunications market. Take the United States as an example of whats happening throughout the world: Until recently, AT&T Corp. held a monopoly. After deregulation, MCI WorldCom Inc. and its kin popped up. Competition began, and prices eroded.

The same scenario has been duplicated globally. But when theres an exchange such as Arbinet available to a given countrys incumbent phone company, it has a chance to sell capacity at fire-sale prices and thus undercut its newly born competitors. "One way the [incumbent monopoly] has to hold onto a market is to offer a cheaper rate on the exchange," Hockemeier said. He claims Arbinet has attracted several such large carriers.

Besides the Tier 1 carriers, Arbinet is also signing up plenty of smaller players buying and selling VOIP minutes.

While they comprise a mere 2 percent of the 200 billion to 250 billion voice-minutes market, they now represent about 20 percent of Arbinets business.

VOIP providers like the nimbleness they get from Arbinet. A new market for such a provider might include, for example, such transitory populations of phone users as a boatful of merchant marines who pull into a harbor and buy phone cards en masse. Overnight, capacity need surges, yet a few weeks later, the ship is back to sea and capacity zeros out. Obviously, for a service provider, provisioning such fleeting demand by investing in equipment would be a waste of money. "Youre not going to put gateways there for a month or two of business," said a spokesman for a VOIP provider who requested anonymity. "An exchange allows you to take advantage of it without putting up boxes everyplace."

The VOIP spokesman also likes the company Arbinet keeps: The exchange claims seven of the top 10 carriers as members. After all, an exchange "is only as good as its constituents," he said. "[Given the financial standing of Arbinets Tier 1 members], theres a certain amount of financial diffusion there, if the buyers default."

Although Arbinet is not yet profitable—and officials wont predict when it might be—the independent e-marketplaces business model will probably help it survive even the currently eroding prices on the global telecom capacity market, predicted Seth Libby, an analyst with The Yankee Group, in Boston. Thats because Arbinet isnt attempting to change the market so much as provide good alternatives to how it works.

"Theyre ... taking processes like phone calls, networks and industry contacts to do business and centralizing them to some extent," Libby said. "You can pick up the phone and have access, the ability to buy from anybody else almost in real time from any other entity connected to those facilities. When youre looking to get capacity, you can call all those contacts at once and compare all those prices. ... As far as improving transaction processes, exchanges still do make sense."