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Bandwidth’s New Bargaineers

Some brash startups are trading telecom capacity as if it were pork bellies.

Picture this: it’s 2003. You’re a hard-working telecommunications executive with one of the 100,000 competing carrier companies worldwide. No doubt about it-the telecom business isn’t what it used to be. Remember the good old days when there were only 200 phone companies around the globe and often just one for each country? But that was before the World Wide Web, global deregulation and an ever-growing supply of bandwidth changed everything.

Your job is to manage data and voice-carrying capacity between Asia and Europe. Hourly, you check the spot market prices for long-distance minutes on the London-Hong Kong route with one of the 15 or so Web-based bandwidth exchanges that have sprung up all over the world. Indeed, as of 2003, bandwidth has become a commodity traded as easily as crude oil, cocoa beans or copper. Good news! Looks like those futures contracts you picked on the Macao-Berlin connection will pay off handsomely. Time to call your boss over the Internet telephone network and gloat.

Sound improbable? Well, this scenario is rapidly becoming reality thanks to continuing deregulation, new technology, a growing number of telecom market entrants (approximately 3,000 registered carriers in the United States alone as of 1998 vs. 200 or so worldwide in 1990) and a healthy application of elbow grease by some risk-loving entrepreneurs.

The unlikely setting for the world’s first electronic market for trading bandwidth is a 19th-century townhouse near London’s Victoria & Albert Museum, repository for many of Constable’s paintings, Raphael’s sketches and Donatello’s sculptures. Perhaps it was the tradition-steeped landscape that convinced Richard Elliott and Marcus de Ferranti that they had a reasonable chance of becoming “part of the history of markets” alongside the New York Stock Exchange and the Chicago Board of Trade.

It may also be that, until Elliott and de Ferranti came along, the telecom industry lacked an equivalent exchange. Historically, carriers such as AT&T and MCI have bartered information-carrying capacity through an informal network of personal contacts, explains Stephen Young, a senior telecom analyst with London’s Ovum Ltd. But now, given what Young calls “all the new varieties of telecom fauna”-callback operators, Internet service providers (ISPs), submarine cable companies-the old-boy network can’t keep up.

Seeing telecom’s need for a common trading ground, Elliott, a former banker, and de Ferranti, an IT pro and onetime RAF fighter pilot, decided to create one. Their online marketplace, called Band-X, went live in July 1997 and the pair run it from Elliott’s West London home. Band-X still isn’t a true commodities exchange. For the moment, the company operates more like a dating service, where traders can post anonymous bids and offers, but deals are consummated offline in the real world.

On Band-X’s Web site, bandwidth, or raw transmission capacity, appears in all its flavors-copper wires, fiber-optic cables, satellite links or wireless microwave transmission.

Surfing the site (you’ll need to register first) turns up an offer for a high-speed T1 connection from New York to London at a cost of $13,500 per month. New York to Miami runs $1,967 per month with a minimum one-year commitment.

A buyer interested in leasing a dedicated line-a growing ISP, say-can post a bid. If the seller bites, Band-X steps in, bringing the two parties together and charging the seller a commission of up to 2.25 percent, depending on the size of the deal.

Elsewhere on the site, phone service resellers can post bids for international phone minutes offered by companies with established telephone systems, known as circuit-switched networks. Among the deals to be had: two million minutes from Los Angeles to Taiwan at $0.17 per minute, and a minimum of 250,000 minutes from Miami to New Delhi for $0.41 per minute.

Although buyers are often bandwidth-hungry ISPs or startup long-distance companies, all telecom firms sometimes need to sell off excess capacity or buy some to make up for a shortage on a particular route.

“We make it easier for buyers and sellers to meet each other,” says de Ferranti. Now, instead of traveling to telecom trade shows in far-flung settings such as Las Vegas or Lisbon in the hopes of closing a deal, traders can simply go online. It’s clearly an idea whose time has come. In the last year a number of competing exchanges have cropped up including San Francisco’s RateXchange, InterXion in Amsterdam, and Cape Saffron, a London-based enterprise specializing in the emerging market for Internet phone service (See table: “Where to Buy and Sell Bandwidth Online” below).

Not everyone is enthusiastic about the new order. For instance, it’s now far easier to compare prices, which de Ferranti claims has some of the established companies “pretty miffed.” They’d rather be doing deals the old way, he says, when big telecom companies like AT&T, France Telecom, Deutsche Telecom and other state-run monopolies ran the whole $850-billion-dollar-a-year show. With little competition, and propped up by government protections and bilateral agreements, they signed decade-long contracts that squeezed out newcomers and kept the cost of international phone calls high.

But with deregulation, the market has changed drastically. Now there’s a much broader spectrum of players: outfits dropping new lines on the sea floor such as Gemini Submarine Cable System, Project Oxygen and Atlantic Crossing; a whole raft of companies laying new fiber-optic networks like Qwest Communications and Level 3; and hundreds of wholesalers, resellers and bandwidth brokers interested in cutting fast short-term deals at low-ball prices.

So far, the Band-X exchange has 3,000 members from more than 100 countries. However, it’s still very early days: Users have actually completed only about 50 deals. De Ferranti explains that because of the technical and commercial complexities in telecommunications deals, it can take anywhere from one to six months to conclude a deal after his exchange makes an introduction.

Where to Buy and Sell Bandwidth Online

CompanyHeadquartersYear foundedTrades inArbinet CommunicationsNew York1993international minutesBand-XLondon1997bandwidth and minutesCape SaffronLondon1998minutesInterXionAmsterdam1998minutesRateXchangeSan Francisco1997bandwidth and minutes

Indeed, he and Elliott still have a ways to go to create a true commodities “spot market” where traders can agree on amounts, quality and price at the same time for prompt exchange. A bona fide commodity exchange, where traders lay bets on future bandwidth prices, is still further off.

But these are the goals the new online exchanges are working toward. At RateXchange, former Sprint executive and company founder Sean Whelan has brought in an expert from the Kansas wheat exchange to help create something akin to a true commodities market for bandwidth. Whelan says RateXchange already offers standardized contracts, and that circuit tests for determining the quality of sellers’ connections is next.

Still, the key to an efficient exchange-whether for stocks, wheat or bandwidth-is the ability to deliver the goods. To that end, Band-X recently installed its own switch at Telehouse, a major telecom hub in London where many carriers’ lines converge. The switch, network hardware for selecting the path along which data or phone calls will travel, should allow Band-X to actually juggle traffic between clients once they complete a deal.

Sanjay Mewada, an analyst with Yankee Group, thinks that such schemes could unleash a flood of new bandwidth onto the market. Except for high-volume dates like Mother’s Day and Christmas, analysts estimate that, on average, AT&T’s international network operates at less than 20 percent capacity. If discount resellers could get their hands on the unused bandwidth, Mewada says, calling costs could drop precipitously.

Because of the possibility for such market upheavals, the industry is rife with speculation about the future of the new exchanges and, specifically, which one might ultimately dominate. Ovum’s Young predicts that Mashinsky could become the “Telecom Tsar” if his market takes off. Others think the big carriers may use the Internet to bypass the middlemen and trade amongst themselves. Telecom analyst Jeff Pulver, on the other hand, sees a slightly different future: “In less than five years, [bandwidth] will be traded on Wall Street.”

Time will tell whose crystal ball is clearest, and also whether the notion of bandwidth as commodity will ever benefit consumers. Many already suspect that savings inherent in deregulation and the vast increase in capacity created by new fiber-optic networks somehow have not made it onto their phone bills. Now, with the route prices published on the exchanges, consumers can examine the sometimes striking discrepancy between retail and wholesale rates: $1.76 per minute vs. $0.17 per minute for calls from Los Angeles to Taiwan, $2.57 per minute vs. $0.41 per minute when you dial New Delhi from Miami.

While an efficient market should cut prices, consumers shouldn’t imagine that they will ever pay the rates they see on the bandwidth exchanges. With an average deal on Band-X sized at 1 million minutes, explains de Ferranti, “the price is bound to be way under the retail price. Likewise, if you bought 14 tons of coal, you would be thrilled at the per bag cost.”

But both de Ferranti and Mashinsky hold out hope that Joe Sixpack may someday reap the benefits of the bandwidth exchanges directly. In some cases, consumers can already play the market, for instance if they bypass their long-distance company to reach a cut-rate carrier by pecking out heavily-advertised digits such as “10-10-321” before making a call. In the future, smart phones patched into a real-time exchange might automatically route calls along the cheapest path.

Such scenarios are, in fact, what daydreams are made of around the new bandwidth exchanges. Today, these startups struggle with logistics, new technology, a low profile and too few customers-not to mention powerful competitors ready to step in and take over at the first sign of success. But tomorrow, muses de Ferranti, his exchange could be a bustling bazaar where “several million” empowered consumers haggle for their share of the very stuff the information age is built of.

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