Tangled Webs

   You Say You Want A Revolution?
Issue 3.05
Jun 01, 1998

I abhor copywriters. They are responsible not only for such abominations as "crispy" and "think different," but for the emasculation of such once virile words as "revolutionary" by impressing them into service to describe new colors of laundry detergent. After the copywriters have finished their cherry-picking, what words are left to those of us who wish to describe unfolding events that promise to significantly change the way both we and our national governments work?

The overloaded World-Wide-Web is more and more frequently being referred to as the World-Wide-Wait, and those who spend much time using it may find it hard to believe that most international bandwidth goes unused. International carriers have long bought and sold excess capacity amongst themselves, but no centralized market existed. The process largely consisted of working through one's rolodex of industry contacts until you found a buyer for surplus capacity or someone to carry the excess traffic.

Industry watchers have long expected a centralized bandwidth market to emerge, but probably very few anticipated the form it has taken. In July 1997, Marcus de Ferranti and Richard Elliott created the first international bandwidth clearinghouse in Mr. de Ferranti's London home when they created Band-X, an Internet-based bandwidth exchange which can be accessed at http://www.band-x.com.

Bandwith as a Product

Band-X members wishing to buy or sell bandwidth or minutes between two locations use a web-based interface to post bids and offers and to browse other bids and offers which are listed anonymously at the site. When a member is interested in a particular listing, they notify Band-X via the web site. Band-X then introduces prospective buyer and seller and takes a commission on any sale that results.

Mr. de Ferranti explains that three factors have contributed to the need for a centralized market like Band-X. First, international telcom deregulation has resulted in a huge increase in the number of companies in the market. Working through a rolodex to find a buyer for excess bandwidth is becoming increasingly inefficient. Second, international traffic is not only increasing in quantity, but in geographic diversity. It's not just one or two main routes that are being traded, but dozens. Third, and finally, recent hardware and software improvements allow traffic to easily and efficiently switched between different carriers.

Band-X may well evolve into an actual bandwidth commodities market, but such an eventuality is at least a few years away, and it is far from certain that the financial community and the telcom industry will support such a market. Still, with over 1300 registered members from over 100 different countries and over 600 bids and offers placed, Band-X goes a long way to proving the validity of the concept. Buyers and sellers cover the whole telcom spectrum; from the international giants, to leased line buyers, to small corporate customers.

Although Band-X maintains a bandwidth price index for the most popular routes from the UK, there are not yet enough transactions to determine true market prices for most routes. Nonetheless, seeing what the international carriers are actually paying for their bandwidth can be quite educational -- particularly for those of us used to paying retail. For example, at the time of this writing, voice traffic between Los Angeles and Tokyo was being offered for $0.16 / minute, and a 256k line from Japan to France for US$35,000 / month.

Bandwidth as a Commodity

While trading T3s like pork bellies may seem an odd concept at first, the emergence of a bandwidth derivatives market would result in tremendous benefits to both the producers and consumers of bandwidth. Such a market would shift today's price-fluctuation risks from the carriers and their customers to speculators willing to assume such risks.

A Tokyo firm could agree to purchase future bandwidth at a market-determined cost that, undoubtedly, would be far below today's prices. International carriers, on the other hand, would have guaranteed sales of their future bandwidth at locked-in prices. The telcos could then borrow against those sales to build that capacity. In effect, carriers would be able to determine their exact return before laying an inch of cable and use that knowledge to finance the construction.

If such developments seem less than astounding, perhaps it is because the transformation of bandwidth into a commodity will merely be the last shot fired in the sweeping telcom revolution that has been going on for years.

Telecommunications has long been controlled and monopolized by national governments. In the 1960s in America, it was illegal to use a telephone not approved by AT&T. In the 1970s in Japan, special permission from the Ministry of Posts & Telecommunications was required to use phone lines for any purpose but voice transmission. Global deregulation and the growth of the Internet has not only brought hundreds of new companies into the market, but far more important, it is getting governments out.

The big losers when bandwidth becomes a commodity will be the government-backed telcos who have long grown accustomed to protected monopolies and opaque pricing practices. Their largest customers will soon not only have the telco's actual costs at their fingertips, but will be able to change carriers with the click of a mouse.

Over the space of a few decades, bandwidth will have been transformed from a bureaucratic, price-fixed, government cash-cow to a freely-tradable commodity upon which one of the world's most dynamic and innovative industries is based and the global economy is run.

This is revolutionary change.

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© Copyright 1998, Tim Romero, t3@vanguardjp.com
This article fist appeared in the May edition of Computing Japan.
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