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Bandwidth could be next auction gold mine, analysts say

As communications companies seed the soil with high-speed networks, they're looking for new ways to sell their plentiful bandwidth--and a few analysts say online auction houses just might do the trick.

Going once... going twice... a fat data pipe from here to Los Angeles.

As communications companies seed the soil with vast new high-speed networks, they're looking for new ways to sell their plentiful bandwidth--and a few analysts say online auction houses just might do the trick.

It's a new idea in the telecommunications world, where contracts between companies often take months to negotiate. But already several of the largest telephone companies in the world have participated in bandwidth auctions, marking an early success for the model.

"You wouldn't necessarily expect traditional telephone companies to do this," said Forrester Research's Jeanne Schaaf, author of a recent report boosting the idea. "But if a customer says 'This is the way I'm going to do it,' I think they'll line up."

The international market for bandwidth is changing rapidly as the dominance of firms like AT&T, MCI and Deutsche Telekom is threatened by newcomers like Qwest and Level 3 Communications. Prices are dropping quickly, even as the communications companies scramble to offer new kinds of services that make their basic fiber-optic network capacity more attractive.

At the same time, new ways of buying bandwidth are emerging. To date, the most promising have been the so-called bandwidth exchanges, where network carriers anonymously provide wholesale minutes to anonymous buyers, creating fast transactions made under market-driven prices.

The exchange market has been led by companies like Arbinet and RateXchange in the United States, with the larger Enron Communications, a recent entrant, also serving as a chief evangelist. But even though they have attracted a significant amount of attention, they're still in the experimental stage.

Schaaf says these exchanges are interesting but are likely to prove a niche marketplace for buyers and sellers interested largely in cheap minutes. The largest carriers--the AT&Ts and MCI WorldComs of the world--aren't interested in seeing their expensive networks go into an anonymous pool with their competitors, she notes.

"Carriers don't see themselves that way," Schaaf said. "These companies are coming from the point of view that they're service providers, not wholesalers."

The exchange houses take issue with Schaaf's skepticism. They provide the only feasible way for a company to snap up bandwidth it needs almost instantly, or for carriers to sell the excess capacity on their networks without undermining their ordinary retail prices, they say.

"We've got carriers who need to make their numbers at the end of the quarter. They need to drive their traffic," Arbinet business development vice president Bob Barbiere said. "You can't do that with an auction."

The number of minutes sold over the Arbinet exchange is growing by more than 100 percent a month, Barbiere added.

Part of the criticism of the exchange model is the idea that bandwidth can be a commodity--that a minute on one network is identical, or virtually identical, to a minute on another network. It is this feature that allows other commodities like oil or pork bellies to be traded without regard to brand name, and the underpinning to the anonymous trading feature of the bandwidth exchanges.

The supporters of exchangesHigh speed pipe dreams? say this can work, as long as you're simply talking about the pipe itself, and not the services like Web hosting or any of the other applications that companies like AT&T provide.

"As far as quality, fiber is fiber to a certain degree," Giga analyst Lisa Pierce said. "When you're talking about bandwidth exchanges, you're buying and selling capacity, not the services."

But it is exactly because the networked world is becoming so tied up in services that go beyond simple capacity that Schaaf and a few others think auctions are the wave of the future. Allowing a single seller to offer a known quantity, with its known brand name and service package, allows more flexibility for the network operators. Similarly, a buyer can let it be known that it wants a given set of features, then let communications companies bid for its business in a "reverse auction."

This has already started to take place in a few places. Band-X.com, a United Kingdom-based bandwidth trader, has sponsored a few auctions for its customers. And the big players are bidding: A November auction saved GTE 25 percent on a London-to-Dublin line, and Deutsche Telekom was the winner in a reverse-auction bidding a few months earlier.

Analysts expect the existing online auction houses like FreeMarkets.com to take up some of this business, since they're already experienced in setting up large business-to-business transactions. But the existing exchanges are likely to get into the market, too.

Already Arbinet says it has plans for its own similar system, even though it's not giving up its defense of the anonymous exchange model.

"We have our own auction products coming out as well," Barbiere said. "We've got our bases covered."