INSIGHT - Buy and sell in bandwidth.

As RateExchange, one of the new players, makes clear in its white paper, Taking Advantage of the Emerging Bandwidth Exchange Market (see www.rateexchange.com), the existing bi-lateral buyer-seller relationships in the sector are rapidly becoming both impractical and inefficient. The telco sector is talking about new technology, known as dynamic provisioning, which will move the sector towards a client-based, self-service, “point and click” approach to setting up bandwidth between designated points in real time. At the same time, tier one and tier two routes are witnessing bandwidth plays from new entrants with such frequency that long-term contracts between corporates and providers are becoming very unattractive.

In these circumstances, bandwidth exchanges are a natural response to the changes in the supply-demand landscape. Chris Champion, marketing director of US optical switch vendor Corvis Corporation, argues that, the way the industry is going, commoditisation of bandwidth on major and even on minor routes is inevitable. “Prices are already falling at double-digit levels on the most heavily travelled routes. If bandwidth gets properly commoditised by the likes of Enron, Bandex and RateExchange, we will see a proper bandwidth futures exchange, just as we have the spot fuel market,” he says.

Players such as RateExchange and Enron tend to argue that bandwidth pricing is likely to be volatile for a long time to come. RateExchange in particular points to analysis by Forrester Research which shows that demand and supply constantly leapfrog each other. Supply increases sharply with each new technological revolution, such as the move from 2Gb virtual pipes on optical fibre to 10Gb and soon to 40Gb virtual pipes.

(Virtual pipes are created on a single optical fibre by dividing the light into wavelengths and sending information down each wavelength simultaneously.

Current equipment from Corvus and others divides a single optical fibre into 160 separate pipes, each capable of sending 10 gigabits of information per second, or, in other words, of handling traffic from 10,000 1Mbps leased lines.)

After each technology leap, demand lags supply, then new bandwidth-hungry applications are unleashed – and the scene is set for the next telecoms breakthrough.

In these early days of the market, the primary business of an emerging bandwidth exchange is to broker forward contracts between sellers and buyers, thereby allowing both to hedge their bets. However, as Marcello Romano, director of bandwidth trading and origination at Enron Europe points out, there is still some way to go in Europe before players will be able to take advantage of the kinds of sophisticated financial instruments one can find on other, established commodity exchanges.

“Today in Europe there is agreement on the basic unit of trade, which is an STM 1 line (a 155Mbps pipe), with trades being conducted in multiples of this all the way up to the purchase of a full wavelength (known as a Lambda, after the Greek letter),” he explains. The time frame for trades (the lease length) is still relatively long – the average being around six months – but there is considerable downward pressure on this.

Three month deals are already on the cards.

Right now, the market in Europe is embryonic. Enron did its first bandwidth deal in the US in December 1999, and its first deal in Europe in September 2000. There is more than enough spare capacity on the major routes to form a competitive market, but the financial instruments, the settled terms and the standardised contracts that one expects from a mature market are still some way off.

However, as RateExchange notes, the very existence of a competitive market prevents producers from arbitrarily throttling back capacity to keep prices up artificially. In a market crowded with sellers, the only option is to compete on price and service – and that is great news for corporate customers.