Pork bellies, copper bars, Brent crude. The raw materials of the industrial economy each have a niche in the pantheon of spot markets. So now does the raw material of the new economy: bandwidth.
Fittingly, the bandwidth market is taking shape on the Web. Want to get your hands on a few million minutes' worth of switched capacity to carry voice calls from London to Karachi? Or enough DS-3 bandwidth from New York to Paris to handle the overflow on your corporate intranet? Then Band-X is for you. The haggling taking place at Band-X today (and at the copycat RateXchange) could be the way telecom networks function tomorrow.
Band-X was founded in June 1997 by Richard Elliott, a former investment banker, and Marcus de Ferranti, who followed 10 years as a fighter pilot in the Royal Air Force with successful stints in IT system integration and in the Deputy Prime Minister's Deregulation Unit in the cabinet office. Within seven months, Band-X registered 1,300 companies to buy or sell on its site, including TelQuest International and Orion Network Systems. In short order, they saw the advent of bandwidth "resellers," early traders who hope to take advantage of the deregulation of telecom markets by buying bandwidth wholesale, in bulk, and then retailing it for less than the still-outlandish prices set by former monopolies. For these dealers, Band-X couldn't have been better timed. By European Commission decree, Euro telecom markets opened to competition in 1998.
One initial problem, though, is that there is no standard package of bandwidth, no agreed-upon set of contract terms and technical specifications that ensure one chunk of bandwidth is the same as another. So instead of selling contracts to deliver bandwidth – as other spot markets sell contracts to deliver, say, crude oil or wheat – Band-X presently limits itself to making introductions between potential buyers and sellers. Both post their offers on the Web site: what they have to sell or want to buy and the rates at which they're willing to do business. Band-X simply introduces the would-be partners and then makes sure they can really do business together. If they do, the company takes a 0.625 percent commission from the party that posted the bid or offer, and then gives a quarter of the commission to the responder to ensure the two don't "forget" to report their transaction to Band-X. So far more than 100 introductions have been made, for deals ranging from tens of thousands of dollars to millions.
Eventually, and sooner rather than later, Band-X hopes that both technical and contractual standards for bandwidth will evolve from such negotiations. Then contracts can be traded right in the market. The good news is that the technical issues between buyers and sellers – network compatibility, for example – are turning out to be far less troublesome than industry skeptics first predicted. What still requires negotiation, though, are business terms: quality-of-service guarantees, payment schedules, and so on.
Given standard terms, spot trading of bandwidth should explode, especially considering the huge investments now being made in backbone transmission capacity. Over the course of 1998, the capacity of transatlantic backbones will more than triple from today's 22 gigabits per second with the implementation of fiber-optic cables. Someday the owners of those cables hope to fill it all up with long-term customers, but for now they have every incentive to hock what they can.
Over the longer term, spot trading will likely become a standard part of the telecom business. It's not that companies won't have long-term contracts anymore. They will. But as with oil, grain, and computer parts, spot markets will be valuable in ironing out the bumps in supply and demand. Those with temporary shortages or surpluses can go to the markets to get what they need, or get rid of what they don't want. And the prices they set will give everybody else a valuable indication of how supply and demand match up route by route and day by day. After all, if it works for pork bellies.
This article originally appeared in the April issue of Wired magazine.
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