Bandwidth Markets
Kostis Sakellaris
June, 2004
1. The Emergence of Bandwidth Markets
In the 1990s there were
shortages of global bandwidth
foreseen
Internet traffic was said to be doubling
every three months
The bandwidth markets presented an
effective and efficient mechanism for
matching the needs of users and suppliers
1. … and their downfall.
No shortage of bandwidth: capital
expenditure on fiber infrastructure far
exceeded actual demand
Internet traffic grew closer to 100% per
year (instead of 1000%).
Failure of the highest profile bandwidth
trader, Enron.
1. … and their downfall.
Telecommunications sector “depression”
Deregulation has opened the market to
dozens of new operators
Excess capacity is flooding the market
Competition has heightened dramatically
Revenues have plummeted
Where “dynamic” was once used to describe the
international bandwidth market, “volatile” seems to be the
current adjective of choice
2. Bandwidth Trading
Corrosive
effect
of
demand/supply
mismatch on bandwidth pricing.
Annual STM-1 lease prices on major
European routes have fallen by 85 to 90
percent from 1999 to 2002.
While the decline of prices has been
consistent across the sector, prices
themselves vary widely among carriers. On
major routes, the highest price was often
four times the lowest price
2. Bandwidth Trading
Currently, bandwidth
considered:
trading
can
be
A market for surplus inventory
Distressed sales market
Bandwidth trading permits the participation
in a surplus inventory market by re-sellers
and intermediaries.
2. Bandwidth Trading
Typical Contract Structures:
IRUs (Indefeasible Right of Use)
Lease Contracts.
2. Bandwidth Trading
Lease Contracts
 Initially lease agreements were no less
than five years and typically limited to 10
years.
More recently in what is now a clearly
distressed, or ‘buyers’ market, shorter term
leases have become available.
2. Bandwidth Trading
IRUs
IRU contracts are pre paid leases
Enabled buyers to treat the asset
purchased as a fixed asset until late 1999.
Majority of the capital sum is paid in
advance with a smaller operation and
maintenance charge paid annually.
IRU durations available in the market range
between 10 to 25 years.
2. Bandwidth Trading
Traditionally, bandwidth negotiations are:
Bilateral
Time consuming
Require a business relationship
Lack of price information
Fully specified price, quality, minimum
usage and performance
3. Bandwidth as a Commodity
Deregulation of the telecommunications
industry has changed the landscape.
Existing bilateral nature of buyer-seller
relationship is inefficient and impractical.

Long provisioning times compared to
the speed of business,

Uncertain traffic profiles

Necessity of ‘global coverage’
3. Bandwidth as a Commodity
Special considerations:
Bandwidth capacity is generic with the
exception of Quality of Service.
Bandwidth is not storable
Geographical arbitrage
Integration of voice/data traffic
Also:
liquidity,
connectivity.
standardization
and
4. Arbitrage Issues
At least four arbitrage opportunities in
bandwidth trading:
Temporal arbitrage
Product arbitrage
Geographical arbitrage
Distributional arbitrage
Theoretically arbitrage can be eliminated
by appropriate market design.
4. Arbitrage Issues
Example: geographical arbitrage
Monthly fee of a one-year DS-3 contract
between NY and Prague offered at $70,000.
Cost connecting NY-London is $18,000 and
London-Prague is $28,000.
Therefore buying the two segments will
incur a cost of just $46,000.
4. Arbitrage Issues
Example: geographical arbitrage
5. Bandwidth Risk Management
Market Participants see as the most
important benefit from bandwidth trading the
development of bandwidth derivatives and
their application in:
Risk Management
Speculation
Arbitrage
5. Bandwidth Risk Management
Risk Management
Lock-in the future price of bandwidth
stabilising future revenue streams
Cap possible losses in case of price
fluctuations.
Deconstruct risks in order to bear only the
acceptable risk desired and offload all other
risk in the market.
5. Bandwidth Risk Management
Real Options
Can be defined as opportunities to respond
to changed circumstances of a project by
management.
These opportunities are rights, but not
obligations, to take some action in the future.
Aim to quantify management’s flexibility.
6. Bandwidth Exchange
Neutrality
Anonymity
Speed
Coverage
Financial Safety Nets
Quality of Service Management
Standard Contract
6. Bandwidth Exchange
Benefits for sellers:
Offer broader range of termination services
Offer termination services at or below
marginal cost for short term periods
Arbitrage pricing and capacity
More manageable cash-flows
Plan network utilisation in a real-time
environment
6. Bandwidth Exchange
Benefits for buyers:
Acquire termination services at lower price
than the bilateral agreements
Limit market exposure
Managing cash-flows
Provision of management tools in terms of
the routing table
7. Existing Markets
The survivors are profiting:
Arbinet-The exchange
- 298 Members in 2003 (up from 135 in 2001)
- 7.9 billion minutes in 2003 (+57% 2002)
Band-X
- 20 carriers in 2002
- 0.5 billion minutes in 2002
7. Existing Markets
Arbinet:
Services offered include:
Marketplace for voice minutes (three
products)
Marketplace for data (three products)
SwitchAxcess, for optimized routing
RapidClear, for accelerated settlement
services
Information products
7. Existing Markets
Arbinet:
It can minimize or eliminate risks like:
Burying Codes: Argentina
- Each city assigned its own mobile codes
- Buried seven digits in phone number so
most carrier routing software is unable to
read them.
Geographical Arbitrage
7. Existing Markets
Band-X Case Study: Real Data Services Ltd
(London-based ISP)
Became facilities-based carrier:
Cut down middle-man
Virtually no capital expenditure
No additional operations or engineering
resources
With benefits of BT interconnect rates
8. Bandwidth Markets Outlook
Through bandwidth trading carriers can:
reduce their costs of doing business
restore some of the profit margin lost due to
increased competition, and
apply risk management techniques.
Still, bandwidth trading in an elementary
stage.
8. Bandwidth Markets Outlook
Future of bandwidth trading is not bright, but
still it has potential.
It is not impossible that it could evolve to
being a primary or major secondary market.
Whether this potential is realised depends
upon the state of competitiveness in
telecommunications markets over the next
few years.