Long Distance--Why Not Commodity Trading?
February 1999, pp. 58-56
By BCR Columnist Richard A. Kuehn
About eight months ago, I stumbled on a website--www.ratexchange.com. RateXchange is one of five companies attempting to create a Commodity Exchange for the trading of long distance minutes among carriers. The other firms are Arbinet Communications (New York), Band-X and Cape Saffron (London) and InterXion (Amsterdam). The more I thought about the idea, the more curious I became, and so I spent an afternoon with the president of RateXchange, Sean Whelan, to find out what his company did and how it could help me.
For some time now, carriers have been buying and selling excess capacity so they can deliver nationwide coverage without having to construct their own facilities. The participants in this exchange know each other, are effective negotiators and create their own deals with one another.
For domestic calling, this exchange has gone largely unnoticed, and with good reason: It typically doesn't matter whose network is actually transporting the traffic. However, as we enter the era of "globalization," international facilities are being constructed by numerous organizations, offering capacity to whomever will buy it. Whelan reasons that with the supply going up, it's going to become more valuable to have an entity that traders can use to buy or sell excess capacity.
It's important to put the trading of minutes into perspective: The international long-distance market churns about $80 billion per year, of which the spot market accounts for "only" $8 billion. However, while the overall market is growing at around 7 percent per year, the spot market's growth rate is much higher, nearly 25 percent per year.
So, given that this is already a multibillion-dollar market, end users, who remain one step away from the commodity trading, need to figure out how to take advantage of it: Should you try to negotiate international, country-specific rates, or simply push for an international discount?
Tracking Prices
For the past 10 months, RateXchange has been tracking and posting on its website a consumer price index for international communications and bandwidth. Figure 1 shows both an overall rate direction and a bandwidth price direction.
Note that the international per-minute rate has dropped about 22 percent, and the cost for bandwidth has declined by another 17+ percent. The per-minute rate is also given for various regions of the world, as shown in Figure 2. Indeed, the per-minute rate is a composite of calling to the region, and takes into account the volume of traffic to the top 20 countries in each region, then tracks the direction based upon the volume of traffic to each region.
When you're negotiating, this information is useful in establishing long-term pricing direction. However, don't jump to the conclusion that lower costs mean lower rates. The carriers' costs for domestic services have been dropping for years, but that hasn't stopped them from increasing tariffed rates. The only consistent way to secure price decreases is via negotiation.
For more specific information, you can see the rates in particular countries (see Table 1). Table 1 compares prices from recent negotiations for international long distance service to the spot rates listed on RateXchange's website.
Remember, however, that the spot rate is for traffic originating in New York, Los Angeles or Miami to the foreign destination; therefore, one of the important elements is the cost of transport from your site to one of those locations. At worst, this will be in the neighborhood of what you're paying for domestic dedicated or switched service, so you need to add that amount to the spot per-minute price.
As shown in Table 1, there is usually a 4- or 5-cent-per-minute difference between switched and dedicated international call pricing. I attribute that entirely to local access charges: We often don't get full credit for the LEC access cost reductions that are passed on to the IXC. So, if I were interested in a volume discount to Germany from Chicago, I would negotiate toward a price of 14.25 cents per minute--4 cents domestic dedicated-to-dedicated U.S. transport, plus spot rate (5.5 cents) plus a 50 percent markup.
Decrypting the Rate Information
Rates to specific countries may not always be available on the RateXchange website. Instead, this is what you'll see:
M11124982 Los Angeles, United States All, Afghanistan: $.775 30/6 B
M10965966 all U.S., United States all cities, China:$.425 1,000,000 5,000,000 A
M17819967 NY/LA, United States All, Hong Kong: $0.134 200,000 3,000,000 C
These cryptic notations translate into specific information.
The opening number is a reference number, followed by the origination point, destination country, per-minute rate and minimum and maximum minutes available. The A, B or C at the end refers to the type of carrier offer: A is an offer to sell time by a major carrier, B is an offer of minutes sold by a reseller and a C offer bypasses the accounting system of the foreign administration. There are also I (voice-over-Internet) offers.
Conclusion
My main motivation for learning about RateXchange was to give myself more information (read: weapons) to take into contract negotiations. At a high level, it gave me some benchmarks--trends and specific numbers--on which I can build my strategy. RateXchange president Whelan points out that when the carriers acquire minutes via trades, there are three basic ingredients:
Quality of Minutes: Both transmission quality and the network setup time for call completion. According to Whelan, this is a major reason deals don't go through: Testing shows the circuits are either not adequate or overbooked.
Capacity: This market moves quickly, and conditions are far from stable. A carrier may advertise the availability of spare capacity, but by the time an interested buyer has tested the circuits, the capacity may no longer be available.
Payment Terms: If you're used to monthly bills, this method of buying can cause a shock: It's not uncommon for billing to occur on a weekly basis, with contracts lasting 45-60 days.
This whole world of trading minutes is moving ever closer to end users. In mid-December, RateXchange announced a joint venture with Telehub, an ATM-based service provider selling access from about a dozen major U.S. cities to its switching hubs in New York, Los Angeles and Miami. The initial concept is to enable CLECs to sell low-cost international long distance service.
But what's good for a CLEC can be good for an end user, provided they've got enough traffic going to a particular destination. Using your phone system's least-cost routing capability and dedicated connections, you, too, could access this direct, lower per-minute rate. However, remember, it takes a considerable amount of traffic to get into this kind of deal.
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