Arbinet-the [Monied] Exchange

July 13, 2001

Arbinet-thexchange has survived the recent thinning of the bandwidth exchange ranks by seizing on a real and consistent telecom need – minutes trading, says company Marketing Director Chris Reid. Investors apparently agree with that assessment: This week, the firm landed an additional $35 million in private equity financing, just a few days after the launch of a new London switch that considerably expands Arbinet-thexchange’s spot market.

“We chose to enter the bandwidth trading market in the area we saw carriers needing the most help in near term and also having the best infrastructure and current market behavior to support trading,” says Reid. “Everyone trades minutes. It’s a tough business for carriers. They need to drive cost out of it, and it’s where they make the bulk of their money today.”

The group of investors headed by EnerTech Capital includes several firms who have sunk money into Arbinet-thexchange before: J.P. Morgan Partners, BancBoston Ventures, ComVentures, and Van Wagoner Capital Management. Entrepia Ventures and Nichimen Corporation joined as new investors.

The influx of the new millions will be used to fund Arbinet-thexchange’s operating and capital expenses until the company is cash flow positive.

And when might that be? Reid will say only this: “In the near term. We have a very clear path to that goal or we wouldn’t have been able to raise the money.”

Selling points for the investors, many of whom are intimately familiar with Arbinet-thexchange, have more to do with the firm’s continued development of its service offerings – “and the degree to which we help people in the business” – than with any new-flanged business endeavors around the corner. “We’re focusing on the clear concrete value to people. We’ll do other things when our members and we agree that the time and the technology is right,” says Reid.

That said, the company is deeply immersed in the future of minutes – Voice over IP (VoIP). Arbinet- thexchange is pulling apart boxes from the leading vendors in its Virginia lab and has integrated four vendors into its switching system. But Reid notes that, while VoIP may mean cheaper per-port cost, it doesn’t change the core activity of routing traffic on-net or selling access to a network. It also doesn’t change the peripherals – sales and marketing costs, bad debt expense – and the other areas Arbinet- thexchange is outsourcing for seven of the 10 major global carriers.

The trend toward using an exchange will grow among large carriers and newer entrants in search of least-cost routing, says Reid. In a capital-starved market, firms should concentrate on the area they can make money – retail – and outsource the wholesale marketing to, say, an exchange. The company is pushing members to streamline larger parts of their business trading and now handles OC-3 connectivity for some of its larger carriers.

Arbinet- thexchange launched its European exchange with a virtual delivery point, back-hauling its London members to the exchange in New York. The capacity to do that was quickly exhausted as European transaction volumes grew, so the exchange’s critical mass of members now allows Arbinet- thexchange to recreate the New York exchange in London.

The new Nortel GSP switch at 12/18 Paul Street in London allows European members to keep their trading in Europe and other regions of the world or continue to trade in New York – “however they’d like to trade.” Reid sees this as a big step forward in creating a global spot market. Unlike other exchanges whose members are limited to trading on each separate switch, Arbinet- thexchange’s setup is effectively creating “one big market powered by one set of software,” he says.

The company is going to continue to “offer people a better way of doing things than they did before,” says Reid. That translates into real-time delivery at a per-call level, individual trading for each call, and the financial clearing and credit risk management on the commercial side of the transactions. “If it’s all phone calls, one-off deals like before, you’re just a broker, a middleman – you haven’t really done much to help people.”

The downturn in telecom did help Arbinet- thexchange, as it has helped others in the trading arena. The exchange model allows carriers to outsource the buying and selling of entire levels of calls to Arbinet- thexchange, and that efficiency means money saved, he says.

“If you’ve got a business that offers a true value proposition to its customers and people use a lot of it — and you’re the leader with some significant barriers to entry for your competitors – you’re going to always be able to grow and generate additional capital funding if you need it,” says Reid. “Some of the guys that hit the wall were second or third entrants in a category without any real technology that differentiated them and without any real market adoption. They were good at doing press releases.”

The potential exists for a financial trading overlay in the minutes market, but carriers need help today getting the lowest overall cost. The trading of financial contracts for risk management will develop over time, and the company is talking to interested members about it. But “we couldn’t afford to build a business and wait for that to happen,” he says.

Reid is interested in the potential of trading in other areas of bandwidth, but it’s not near-term enough to be involved in. He’s also not too thrilled about a brokerage model that to him duplicates the efforts of carrier sales teams and telecom agents. But a spot market that can dynamically route traffic and solve the related commercial elements? “That’s an exciting business,” says Reid.

Contact Reid at creid@thexchange.com.