Carriers from IXCs to ILECs and CLECs have all suffered through traditional methods of exchanging telecom capacity. They may not have enough information to know who might be selling minutes or who might need them. Also, bandwidth exchange negotiations can take several months. And a carrier that can’t deliver minutes to a certain destination or bandwidth to particular customers is probably doomed to fail.
Recognizing the need for a faster and easier way for some carriers to sell excess capacity and others to add to their own network volume, minute or bandwidth exchange companies have appeared on the scene to act as middlemen. They bring buyers and sellers together anonymously and facilitate the terms of a contract and in many cases perform the actual routing of network capacity from one carrier to another. Exchanges, for the most part, are completely neutral and don’t compete with trading members or impact pricing.
Using a third party to facilitate such agreements isn’t new, but it is gaining momentum for a number of reasons. With short-term exchange contracts—one to four weeks in length—the buying carrier can test a particular area to see whether a market is really there, says Ed Braniff, CFO of the Global TeleExchange (GTX), a telecom exchange. “A local carrier who wanted to get into a new country could see if they had a high concentration of people interested in that destination,” he says.
In addition some carriers may not have the means or time to build out their networks to carry all the traffic they are generating. “Some carriers want to quickly buy capacity, and we’re hoping to obviate the need for them to build out, because it’s cheaper to buy through us,” says Eric L. Raab, managing director of AIG Telecom, another telecom exchange. This allows carriers to focus on the business side of operations rather than worrying as much about having the network infrastructure.
“I would say telecom exchanges are crucial to carriers in the fact that they have excess capacity sitting out there going unused, but being able to sell it will increase their ROI on the infrastructure they’ve set up,” says Jon Ekoniak, senior research analyst for B-to-B e-commerce at U.S. Bancorp Piper Jaffray. He adds that the goal is for carriers to be able to delay building out an existing infrastructure and instead operate leaner with less overall capacity.
Some of these exchanges handle billing, reconciliation and settlement issues on the back end, tasks that can get complicated if they are not dealt with early in the process of setting up a trading exchange.
GOT A MINUTE?
Exchange involves buyers and sellers connecting to the exchange’s switches via trunks. The exchange then helps buyers and sellers find each other based on criteria such as the number of minutes needed to buy or sell, the destination of terminated minutes and quality of service levels.
Once an agreement has been reached and the buyer and seller have signed a contract, the exchange will usually route the minutes from seller to buyer through its switch. These minutes are mostly used for international phone calls and fax transmissions.
Before carriers can start trading minutes, most exchanges will require a credit or background check to ensure that the carrier is a legitimate operation. Generally, the credit check will allow a carrier to avoid evaluations before each and every deal is sealed. What the exchanges really want to confirm is that the people they are bringing into the trading system are real carriers with real customers.
As you might guess, there’s much more to this model than simply hooking a few trunks into a switch. Before a minutes exchange can realistically set up shop and start transferring millions of minutes a month, a lot needs to happen.
After exchanges verify the validity of carriers, the carriers are able to connect to the exchange’s POP through a trunk size of the carrier’s choosing. This can vary among exchanges. “We usually expect carriers to connect to us through an OC-3 circuit,” says Dave Sumka, vice president of business systems at telecom exchange Arbinet.
At GTX, carriers hook into the switch through a variety of trunk sizes. “Trading members hook to our network with a level of capacity and trunk size that would determine what they want to trade. For example, if they want to hook in a DS-3, they have 7 million to 8 million minutes of capacity to trade at a given time,” he says. AIG Telecom takes a similar approach; carriers can hook in with everything from T-1s to T-3s, based on their up-front commitment to route a particular volume of traffic, Raab says.
Once carriers hook into the exchange, the dealing can commence. Trading occurs much as it does on the floor of the New York Stock Exchange. In most cases, exchanges will offer two types of service: contracts that can run 12 months or a spot market, in which short-term trades are worked out without contracts.
Buyers publicize what they need, sellers say what they have to offer, and the bidding goes from there. In addition to destination, pricing may involve factors such as quality of service. When a match occurs and pricing and contract details have been settled, the exchange has to verify several things. “Once a buyer and seller agree to terms, we make sure the trunk they’ve assigned for the trade is free and check to see that those trunks are not oversubscribed,” Braniff says.
Because the trunk connects directly to an exchange’s switch, the exchange knows how much traffic a particular carrier can commit to and can easily send warnings to sellers who are about to exceed their capacity. They do this by knowing initially the size of the trunk the carrier is connecting—and therefore how many minutes they can move simultaneously. If a seller tries to enter into too many contracts, which would exceed the bandwidth on its trunk, the exchange sends a message.
Most exchanges tout a near real-time routing capability. In other words, within minutes or hours of agreeing upon an exchange, the seller’s minutes will become available to the buyer. Because telecom exchanges have only recently begun to gain momentum, there are very few billing vendors currently catering to this particular market. Rather, most exchanges rely on in-house development to build software to handle other functions such as routing.
For each executed trade, the exchange makes some sort of commission—much as brokers do for each stock trade they place on behalf of a buyer or seller. In some cases, the commission will be a percentage of the dollar value of the trade, and in other cases the exchange may also charge an access fee for the right to trade minutes.
RATING, BILLING AND QoS
Once the minutes start flowing from seller to buyer, the exchange’s role isn’t over yet. It collects usage information for the minutes that have been traded through its system. The exchange will also continuously monitor quality of service levels for the minutes being transferred from one carrier to another, to make sure they fulfill the trade agreement.
On the quality of service side, there are no industry standards, and exchanges are left to deal with this independently, says Arbinet’s Sumka. “This monitoring allows us to say without bias that this is the quality of these calls,” he says. Arbinet uses parameters such as answer-seizure ratio (ASR), algorithms and other industry quality standards, and then assigns a letter grade that corresponds to the QoS. In the event QoS levels fall on a specific route, Arbinet will switch the traffic so the buyer receives the quality specified in the agreement. “If the quality deteriorates on a route, our software automatically switches the traffic to the next route that’s under the price ceiling the buyer has put in place,” Sumka says. He adds that the seller of that traffic isn’t penalized; the seller just won’t get the business. “If the buyer is willing to pay 10 cents a minute at B quality, we may find something at 5 cents and will reroute,” he says.
According to Arbinet, occasionally there are situations where no routes match a buyer’s parameters. If that happens, Arbinet’s switch will block the calls and the sender’s switch will send them out over the next best option in its routing table.
This problem of buyers not being able to find something at their price and QoS levels has actually started to occur, according to Ekoniak. “There are transactions that actually don’t get executed because perhaps the buyer is selecting too low of a price,” he says. He adds that in such a case, the exchange would most likely contact the buyer and then the buyer would probably redo its bid.
At GTX, if the quality is not being met, the deficiency is flagged and the buyer is allowed to move to another seller.
Because the buyer can specify QoS, even if sellers are terminating minutes to the same country, one minute may be different from another.
Evaluating QoS on potentially hundreds of routes simultaneously can be a challenge for an exchange, but what’s even harder is rating the calls. “Rating is probably the most complicated part of the exchange,” says Sumka. “Rates are specified by the members, and they can change throughout the contract period and even throughout the day.” This is because exchanges can automatically switch traffic so the buyer gets the best quality and rate at all times.
Due to this fluctuation, standard rate tables don’t work in an exchange environment. Also, buyers and sellers are likely to engage in multiple trades with various partners in the same period of time, further complicating rating.
For the most part, exchanges use standard CDRs in such formats as AMA. That may be about the only similarity between how exchanges process CDRs and how carriers do it in traditional situations.
At AIG Telecom, CDRs collect on the company’s Nortel switch and then move to a database every hour. Once in the database, CDRs get processed to measure trunk group utilization and other quality measures. Then they go into the rating engine.
“For every CDR, the rating engine has to examine all the trades on the system,” says Raab. “Once it determines the inbound and outbound carrier, it has to go through and figure out what trade that transaction corresponds to, the rate of that agreement, and then it has to drop that into the system.”
He adds that this is the most difficult part of the entire operation, because of multiple trades occurring in overlapping time periods. “You have different rates with different quality levels between the same parties; that’s the meat of the engine, and why we spent a lot of time designing and building it,” Raab says.
At GTX, CDRs also appear in AMA format. “As soon as the parties come to terms on a deal, the rate, capacity and trunk groups drop into a proprietary operating system and allows us to set up the network to verify that the buyer has an appropriate amount of money in the trading account to cover the minimum amount for the trade,” Braniff says.
GTX requires trading partners to put up a 3- or 6-month deposit, depending on their credit record. “We’re ensuring the buy side has the ability to pay the minimum charge,” Braniff says. For GTX, the minimum charge is equal to half the trade amount on the buyer’s side.
GTX is working with Bank of America on the financial side of minutes trading. Bank of America brings its banking network to the trading floor, by allowing carriers anywhere in the world to submit payments and receive credit for it the same day.
When minutes begin moving, GTX collects CDRs on its switches and then moves them to a central data repository. “We use the rate set on the trading floor, drop that into the rate table and calculate how much of a contract (measured in volume of minutes) has been consumed,” Braniff says. “We constantly monitor the volume and the trading account on the buy side, and we’ll send warnings if they need to put more money into the trading account.”
Arbinet collects CDRs from its Nortel switches and drops in rate information from the Web site where the buyer and seller have made their match. “The rate is specified by members and changes throughout a contract period and even throughout the day,” Sumka says. “Every phone call is a transaction, and every call gets a CDR.”
After exchanges process and rate CDRs, they will usually send copies to the buying carrier in a trade. But because one of the selling points of trading minutes through an exchange is anonymity, CDRs have to be modified so that the seller’s identifying information doesn’t appear.
Anonymity is extremely important to carriers for several reasons. Many of the carriers that participate in telecom exchanges are some of the largest operators in the world. To protect their “mind share” and market share, these carriers may not want the general public or competitors to know that they need to unload 7 million minutes to a particular destination. This might give the perception that the carrier’s business is slowing. By the same token, carriers don’t want competitors to get wind of the fact that they need 7 million minutes quickly to terminate traffic.
Also, anonymity allows carriers to buy and sell capacity in real time without jeopardizing long-term contracts. “The carriers have to ask themselves if they want to cannibalize their existing customers by offering them a higher price than what they might offer over an exchange,” says Ekoniak at U.S. Bancorp Piper Jaffray.
Because of the sensitive nature of trading minutes, exchanges that offer such anonymity extend it to the CDRs. To prevent the buyer from knowing which carrier they have purchased minutes from, exchanges will take it upon themselves to strip off any identifying information from the CDRs they send to the buyer.
“We put a lot of time into keeping CDRs anonymous, and it’s something we’ve programmed our switches to do,” Raab says. “The carriers know their customer is AIG, so all the CDRs we give them say that AIG is the carrier.” He says the CDRs they produce contain information such as dialed number, duration, country of termination and basically anything needed to rate the call but not enough to determine who the selling carrier is.
At Arbinet, the buyer only sees information such as trunk numbers and start/stop times of calls, but it’s enough to produce billing information.
Anonymity will likely become less of an issue to carriers as exchanges become a more common business method. The heavy cloak of secrecy, however, may shrink a size or two as this business method and the industry mature. Exchanges simply “will become how carriers interface with each other, and anonymity will become less and less important,” Braniff says.
Exchanges also encourage carriers to generate their own CDRs. This is not only so carriers are producing their own bills for end-user customers—just as they would for minutes generated on their own infrastructure—but also so they can ensure that theirs match up with those generated by the exchange. “Buyers do and should generate their own CDRs for traded minutes,” Sumka says. “If they don’t match, there’s a problem.”
Although most exchanges have only started trading in the past few months, bill dispute resolution is high on the list of procedures to put in place.
When a discrepancy appears, most exchanges are able to get down to the CDR level to see where the problem might lie. “Carriers don’t have to rate our CDRs to process payments, but they’ll want to verify minutes of use,” Raab says. “We create a number of summary reports that we post on the Internet for each carrier’s account. We break it down by number of calls, minutes, average prices on a country-by-country basis, and on a trade-by-trade basis.” He adds that the information is sliced and diced in a number of ways so the carrier can compare it to their own summary report. If there’s a problem, the carrier can download the CDRs generated by AIG Telecom over the Web.
Arbinet takes a similar approach and can pinpoint where discrepancies might be occurring. “We’ll first look at a higher level and then drill down where required,” Sumka says. “If the overall bottom line matches in calls, minutes and dollars, then we don’t have to look any further; but if there is a discrepancy, we’ll look by destination and bring it down from the CDR level to see where we are not in sync.”
Sumka says that many of the discrepancies Arbinet has dealt with are caused by carriers’ inability to keep up with how fast prices change. “Calls and minutes are rarely an issue; it’s usually the price that changes so much, and the older systems most carriers have are not ready for dynamic routing, where the prices changes two or three times in a day.”
Another concern for carriers and exchanges is to ensure that minutes don’t go unbilled or otherwise fall through the cracks. CDRs may not be recorded for a number of reasons, such as a call that disconnects prematurely or one that never connects.
To prevent minutes from going unrated on the exchange side, strict auditing procedures are put in place. “This is the revenue assurance aspect of it all, and it’s something we took and have taken very seriously,” Sumka says. “The difference in revenue assurance is transactions are a trust between our members with us in the middle to verify that it occurred, while in a regular carrier, you’re generating minutes yourself or doing it wholesale and are carrying traffic.”
GTX features redundant systems in its network to ensure that information is captured in several places before reconciliation occurs.
Sumka adds that telecommunications billing in general is not an exact science, but exchanges generally need to live up to a higher standard. “This is like the NYSE or NASDAQ in the early days: people are learning how this works,” he says. “Telecom billing in general is known to be not very good, and there are many issues with it; our billing has to be better than industry standards.”
Most telecom exchanges facilitate swapping minutes around the world. Another hot commodity in telecom exchanges is bandwidth. Rather than buying and selling volumes of minutes for termination to particular points around the world, bandwidth trading involves the transmission pipes themselves. For example, a carrier could buy a DS-3 circuit between two cities and send whatever traffic it wants over that. Bandwidth trading is based on city pairs, so if an exchange has POPs in New York and San Francisco, it will be able to offer capacity between those two cities.
Some of the exchanges involved in bandwidth trading include Band-X, Ratexchange, Enron and Williams Communications. Band-X and Ratexchange are neutral exchanges. Enron and Williams have a slightly different angle, because both companies have their own bandwidth and trade it.
Regardless of its underlying business model, bandwidth trading is starting to ramp up as a way for carriers to buy and sell network capacity.
“The types of companies buying bandwidth include both international and domestic ones,” says J.P. Mark, senior equity analyst and director of research at First Security Van Kasper. “They are IXCs, CLECs, ISPs—almost anyone.”
The infrastructure to trade bandwidth is very similar to that for minutes trading, according to Terry Ginn, vice president of software engineering at Ratexchange. “We have POPs in various cities [including New York and Los Angeles], and buyers and sellers plug a pipe into a port of that switch,” he says. Carriers bid on the circuit, and when there is a match, Ratexchange does the routing and switches the capacity from seller to buyer.
Typically, carriers will hook into the exchange with a larger pipe, such as a DS-3 or an OC-3 and sell only part of it at a time, or sell several smaller circuits.
Although Ratexchange is not monitoring what sort of data or voice traffic traverses the links, it does make sure the pipe is there and open. It also monitors QoS to ensure that the agreed-upon levels are being met. If a pipe goes down, Ratexchange notifies both parties immediately. In the future, the company may reroute circuits, but that’s not in the current plan.
On the billing side, Ratexchange simply bills the buyer and pays the seller, less a commission. Ginn says that by the end of the year, Ratexchange will be rolling out an IP product, which will require a much more sophisticated billing infrastructure so that CDRs can be rated by usage.
Because bandwidth trading is gaining momentum at almost the same rate as minutes trading, there has been movement in the industry to put some standards in place. The standards being discussed focus mostly on contract terms, conditions for trading, measuring QoS and provisioning bandwidth, says H. Russell Frisby Jr., president of the Competitive Telecommunications Association (CompTel), a telecommunications industry association.
CompTel’s ad hoc working group on bandwidth trading is close to finalizing a standardized contract that parties would use when negotiating terms of the sale of bandwidth. After that’s complete, the next step will be to create the Bandwidth Trading Organization, which would be made up of carriers, exchanges, pooling points and developers.
“We’re focusing on standardized conditions, so when you buy bandwidth you know exactly what you’re getting in terms of quality of service and transmission standards,” Frisby says.
He adds that a few billing and settlement issues are being addressed and will likely be added to an annex to the initial standard bandwidth trading contract.
Telecom exchanges are still a relatively new concept, and many are still in the beta test period or have only a few carriers hooked up. That should change dramatically in the near future, as carriers see the benefit of being able to quickly buy and sell capacity. The big issues will be for the exchanges to establish switches and POPs in multiple cities, so they will be able to terminate traffic and offer circuits among more locations. Exchanges will also have to be able to switch traffic as close to real time as possible to make this option a competitive one for carriers. Eventually, standards may be necessary to help define QoS and how one minute may differ from another based on quality and other factors.
As this type of telecom trading matures, billing, settlement and reconciliation issues will become more important. If exchanges expand and start switching hundreds of circuits or more and millions of minutes, they’ll need to back up this capability with better than carrier-class rating and billing systems.
WHEN IS A MINUTE NOT A MINUTE?
It may seem obvious that a minute of time is the same as any other. That is not necessarily so in the telecommunications world, especially when minutes are being traded from carrier to carrier and are being terminated in different countries.
Although the unit of time is identical, factors such as quality make it possible to define different grades of minutes. “If you look at traffic between San Francisco and Hong Kong, one minute isn’t necessarily the same as another, depending on whose network it’s on,” says J.P. Mark, senior equity analyst and director of research at First Security Van Kasper. “An AT&T; minute is probably a lot better than one from another company where the connection isn’t good or the possibility of the call being terminated is high.”
In most cases involving exchanges, price per minute is generally driven by destination country. But even within the same country, rates can differ based on carrier. “You may have more noise on the line and you might be willing to pay more for a better connection,” says Eric L. Raab, managing director of AIG Telecom. “You may pay a little more, depending on who is doing the termination.”
Because of the lack of a definitive measure of a minute, at least one exchange—AIG Telecom—is attempting to bring some order to the system. The company has developed a measure called the standard telecommunications unit (STU), which allows carriers to know up front what sort of quality of service and other parameters they are getting from the minutes. This is necessary in a market where the nature of the trade requires that buyers and sellers are anonymous to each other.
“Factors such as what a call sounds like, how long before the phone rings and call completion ratio all go into defining the quality of a phone call,” Raab says. “The same call to Afghanistan can have different quality and different prices. We standardize it and make it easier to buy and sell quickly.”