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Bandwidth Trading: Buying and Selling Capacity Made Easy

On the other side of the coin, a significant amount of a broadband carrier's network may sit idle. Idle capacity means lost opportunity--and lost revenue. So, just as airlines search for innovative ways to fill seats, carriers are looking for ways to sell their unutilized capacity to improve cash flow, maximize asset utilization, improve operational efficiencies and decrease their costs per bit to stay competitive.

With established carriers and networking startups alike seeking to take advantage of these changing market dynamics, it should be a win-win scenario. There's only one problem: Today's market for bandwidth is somewhat inflexible, inefficient and archaic, often requiring months to negotiate, close and implement a single bandwidth transaction.

More and more, customers are looking to buy bandwidth on an as-needed basis, shedding long-term contracts for preset amounts of capacity in favor of flexible bandwidth arrangements at market-based prices. At the same time, broadband network operators want to fill those "empty seats" of capacity quickly and efficiently in order to contribute incremental revenue to the bottom line. With supply high and demand growing, bandwidth is increasingly becoming a commodity.

As a result, traditional bandwidth pricing structures are giving way to new pricing models. A number of bandwidth traders are moving in on the action to bring bandwidth providers and consumers together by negotiating with a one-contract-fits-all strategy that is based on market-driven pricing and short-term demand. These "master agreements," as they are called, cover the procurement and sale of capacity, and are essential if buyers and sellers of bandwidth want to establish real-time transactions.

Analysts predict that 20 percent of the total wholesale bandwidth market of $80 billion could be traded in some manner within five years. This translates into a $16 billion revenue opportunity worldwide, according to CIBC World Markets (www.cibcwm.com). There already are many entrants in this space, who range from carriers that own infrastructure to those that provide bandwidth "clearinghouses" or matchmaking services.

As the industry begins to adopt the practice of trading bandwidth, a more efficient and flexible market will develop. Commodity producers will be able to provide the value-added services necessary to capture a much larger margin than the commodity itself would provide. For example, an ISP easily could be given a two-hour block of bandwidth on short notice. Yet, the only way to provide a high-value service of this nature is to have an efficient commodity market and the underlying enabling technology necessary to deliver these service capabilities.

Once network speed and QoS are constant, the bandwidth capacity that transports a specific packet is indistinguishable from any other bandwidth capacity. It's also perishable, just like seats on an airplane. Once the plane leaves the gate, all the empty seats represent lost revenue. On the other hand, if those seats are filled at the last minute, the revenue received becomes pure profit. A commodity market, with real-time provisioning and quality certification, supports this method of last minute "seat filling." Bandwidth-on-demand services become a reality.

A standard bandwidth contract is an important first step in establishing a true commodity market for bandwidth. Today, if a carrier wants to reach a new market--but doesn't want to build the necessary infrastructure--it probably will need to enter into a lengthy lease contract for dark fiber or wavelengths. With a master agreement in place, however, CLECs, ISPs, ASPs and bandwidth resellers would be able to quickly acquire the long-haul or regional capacity they need to enter new markets, offer end-to-end on-net services and create new revenue opportunities. And, with access to multiple suppliers of capacity, they have the ability to negotiate more favorable prices, duration and quality terms.

The beauty of the bandwidth-trading model also lies in its ability to help ease the increasing pressure carriers face to improve their bottom line. Average sales and general administration costs (SG&A) in most telecom businesses, for example, are much higher than in other traditional industries. By using a trading market as a new sales channel, carriers can increase revenue with minimal SG&A costs, which will carry right through to the bottom line.

In order to meet the demands of, and succeed in, the rapidly growing bandwidth trading or bandwidth on-demand market, facilities-based network service providers, equipment vendors, bandwidth exchanges and pooling point developers must work together to deliver mega-capacity in microseconds, with guaranteed QoS levels. Then, only by physically interconnecting all market participants, can the trading of standardized bandwidth units become a reality.

To that end, all of the players, market dynamics and technology that drive bandwidth trading converge headlong in a critical technology hub called the "pooling point." The pooling point is a centralized, stand-alone system that facilitates connectivity of different service types across multiple networks and vendor equipment. It's not the Holy Grail of switches. Rather, it's a network within itself that consists of multiple specialized network elements designed to perform specific switching functions. It's what connects the buyers and sellers, and it's where the highest-speed, highest capacity bandwidth services are traded, provisioned, managed and monitored for quality.

Pooling points reside in "telco hotels" and are managed by companies such as Enron Broadband Services (www.enron.net) and LighTrade Inc. (www.lightrade.com). Because a diverse group of service providers (ILECs, CLECs, ISPs, DLECs, ASPs, dark fiber providers, resellers, etc.) use a telco hotel to interconnect and gain access to customers, it is the ideal place to locate the pooling point system.

Enron established the first two pooling points in 1999 in New York and Los Angeles, and by January 2001 expects to have 23 pooling points deployed globally.

LighTrade, another pooling point developer, will have spent $20 to $25 million by early this year to install and operate hardware to trade bandwidth in Atlanta; Chicago; Dallas; Denver; Miami; Philadelphia; San Jose, Calif.; Seattle; and Washington, D.C. Following close on the heels of these installations, LighTrade plans to install points in Boston, Houston, Los Angeles, New York and San Francisco. Long-range plans call for the company to have sites in the 50 U.S. cities that develop the most traffic, as well as numerous international markets. LighTrade is the first company not affiliated with a larger energy or telecommunications concern to develop carrier-neutral bandwidth trading pooling points.

The basic building blocks of a pooling point include the main distribution frame (MDF), the pooling point switch, the provisioning transaction system (PTS) and quality of service management system (QMS), and the OSS (See "Anatomy of a Trade").

Diagram:Anatomy of a Trade

The MDF is a common demarcation point between the buyer and seller where the service providers can connect their electrical cables and optical fibers. As the separation point between the carriers' networks and the pooling point system, the MDF also serves as a common testing point for both the carriers' networks and the pooling point system itself.

The very success of bandwidth trading lies in the pooling point switches' ability to reliably and efficiently interconnect, groom, monitor and post QoS data on each bandwidth transaction executed between buyers and sellers--regardless of service type (SONET, SDH, IP or wavelength services). The pooling point switch is built on a carrier-class, multivendor interoperable platform that offers the highest levels of network availability, redundancy and reliability. This is an important requirement in that it is a central piece of the switching core where many carriers' networks interconnect.

Because bandwidth trading will depend heavily on the ability of the pooling point switching system to accurately monitor and post QoS information on each transaction, a pooling point possesses highly refined QoS monitoring capabilities with open interfaces. Additionally, pooling point systems offer the ability to view pertinent information on bandwidth inventory and QoS parameters. Gaining access to relevant data regarding what capacity is available, at what rate and who is offering it is essential to putting buyers and sellers together quickly--and consummating deals almost instantaneously. Brokerage firms as well as buyers and sellers of bandwidth are free to tap into the system to check bandwidth availability or issue requests for cross-connects to be established.

The QMS also monitors the underlining bandwidth transactions across multiple pooling points and reports back to all parties involved in any given bandwidth transaction. There never is a question as to what level of service is being provided, what was received, or what was contracted. Liquidated damages would come into effect if the seller didn't meet its contractual SLA obligations to the buyer.

Like any vital piece of network equipment, the pooling point is equipped with an OSS that continually monitors the network to detect trouble before it becomes service-affecting. The OSS encapsulates--and centralizes--all the network and fault management functions of the pooling point and addresses network health, connectivity and bandwidth configuration. It also collects information on traffic performance to assist in configuration, fault and traffic management. (See "A Trade in Action" diagram)

New bandwidth management trading solutions that boast a highly reliable, cost-effective and integrated pooling point platform are now available to help simplify and increase access to available bandwidth. These bandwidth management platforms include all the essential ingredients of a pooling point to enable:

• Trading of SONET, SDH, POS or wavelength service--individually or simultaneously at various rates, i.e., DS-3; OC-3/STM-1; OC-12/STM-4; and OC-48/STM-16;
• Measurable, accountable QoS standards;
• Single management view of multiple pooling points;
• Grooming and routing capabilities for maximum bandwidth utilization;
• Ultra-fast service provisioning and service restoration; and
• Zero fault capabilities with ultra-high reliability.

While there has been a great deal of interest in bandwidth trading and a steady increase in market participants and activity, only a small percentage of companies to date are actively engaged in developing an efficient bandwidth trading application. What's more, most carriers lack a real understanding of bandwidth trading and pooling point technology.

Upon closer examination, if a CLEC, ISP, ASP or Fortune 500 company determines that the bandwidth trading model would be of benefit to its business, it should begin to seek out arrangements with companies that are furthering this concept, push for the deployment of pooling points and get involved in industry organizations specifically focused on this market. It's the only way to ensure their interests are being represented and that bandwidth trading becomes a reality.

One such group is the Communications Clearing House Association (CCHA, www.cchaexchange.org), which is assembling a team to determine standards for trading, clearing and netting bandwidth.

Diagram:A Trade in Action

The CCHA has received the backing of eight major telecom and energy companies, including Sprint International Inc. (www.sprint.com), El Paso Global Networks Co. (www.elpasoglobalnetworks.com), Williams Communications (www.williamscommunications.com) and Enron Corp. (www.enron.com).

Most of the members of CCHA also are involved with the Bandwidth Trading Organization (BTO). The BTO is a group formed by the Competitive Telecom- munications Association (www.comptel.org) to identify and resolve such pertinent issues as the philosophical elements necessary for the development of a commodities market, as well as the practical aspects of bringing it all together.

For many in the telecommunications industry, the thought of reserving and scheduling bandwidth, picking the level of service quality, paying less money and assuming less long-term risk may seem too good to be true. It's not. Highly reliable, cost-effective and integrated bandwidth trading platforms that simplify access to capacity are available today. Now it's up to the industry as a whole to come together and make sure the bandwidth trading model is made available to everyone.

Victor A. Brown is manager of market development for Lucent Technologies' Optical Networking Group. He can be reached at vabrown1@lucent.com.

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