MONDAY, OCTOBER 9, 2000

Huge trades of phone time to cut prices

by Peter J. Howe, Globe Staff

Financial wizards have figured out how to make markets for things that once seemed hard to imagine being traded like shares of stock, from orange juice and bacon to the next hour of electricity used by the New England power grid.

Now, long-distance phone calling – and telecommunications bandwidth more generally – is emerging as a popular commodity to buy, sell, and arbitrage, thanks to more than a half-dozen Web-based trading sites that allow phone companies to swap excess capacity and shop for cheap minutes on various calling routes.

It’s unlikely the average person would visit these sites any time soon to look for a good deal for a 10-minute call to Atlanta. By the time that will be technologically feasible, it will probably be too cheap to bother.

Rather, as these new marketplaces pick up steam, they will help push long-distance calling down to such cheap levels that companies will be able to offer you, say, 1,000 minutes of calls to anywhere for $10 or $20 or "free long distance" if you sign up for high-speed Internet access or some other product.

Companies might also be able to start offering very specialized calling plans that provide, for example, 300 minutes of calls to a specific country, such as Russia or England, for a fraction of current rates, thanks to some sweet deal they got from a phone company that had calling capacity going begging.

One of the emerging leaders in this market, Arbinet of New York, has a strong local connection. The current version of its site went live on July 4.

It was built and is maintained by Breakaway Solutions of Boston, a wide-ranging Internet commerce service consultant active in everything from airline tickets and commercial real estate to farm supplies.

Arbinet now has more than 80 carriers using its site. They buy and sell about 10,000 types of calling plans among 500 different origin-destination pairs, including domestic US routes and links from New York to scores of foreign nations.

In a typical deal, phone company X might post a bid offering to sell 1 million minutes of calling time on a line from New York to London for 10 cents a minute.

It can even post different prices for different quality calls, from a Bell System-level AAA call down to a much cheaper D-grade call that might have static or be prone to getting cut off, but would be acceptable to someone making a free call from their personal computer over the Internet to a friend abroad.

In contrast to the many online marketplaces that serve as auction floors, Arbinet, with Breakaway’s help, has built a site where carriers not only wheel and deal for calling capacity, but then actually complete connections they have bought through voice and Internet protocol switches hooked up to the Arbinet system.

As Breakaway has designed the site, phone companies that pay a monthly fee to participate can automatically shop for blocks of minutes, connect their networks to those from which they are buying time, and get and pay a bill at the end of the month, all from a computer desktop without ever having to talk to someone.

"You probably won’t even know who the carriers are" who handled your business, said Breakaway president Gordon Brooks.

Down the road, big companies on the level of a Gillette or a FleetBoston Financial may be able to use these sites to shop around for large pools of minutes or multinational conference call links, to shave hundreds of thousands of dollars from their phone bills.

Arbinet is aiming for an initial public offering in the next several months, but the company says it is already handling millions of trades each month.

In the last decade, the hundreds of phone companies that emerged to challenge AT&T, coupled with optical technology that has exponentially increased network capacity, have led many carriers to a situation like that of airlines desperate to sell empty seats at any price, because even a fire-sale price is better than nothing.

Generally speaking, 50 percent of the international calling capacity owned by a WorldCom or AT&T or Global Crossing now goes unused.

"If you can sell even a piece of that, it’s all upside," said William P. Loftus, the "chief delivery officer" for Breakaway.

"It’s a cutthroat business, and these guys are putting a lot of pressure on carriers to push prices down, which is great news for everyone, unless you are a company like an AT&T," said Joanna Makris, an analyst with the Yankee Group in Boston. "We can see pricing at these sites that is one-tenth of retail rates" and is bound to chip away at retail rates.

Part of the upside to the Arbinet system is that, because of strict anonymity, it can allow a phone company to sell surplus minutes that would otherwise go totally unused for a penny a minute, without disclosing the discount price to its retail customers who are paying 9 cents a minute. Rival sites – for example, TheGTX.com, RateXchange, Band-X, InterXion, and Telezoo.com – and companies such as Williams Communications often deal not only in blocks of minutes but also specific routes, buying and selling things such as a five-year lease on a 10-gigabit line from Boston to Philadelphia.

For now, Arbinet has concluded that it would rather focus on what it calls the $700 billion global market for actual calling minutes, seeing it as a more dynamic and profitable market and one that is six times as big as the estimated $116 billion market for city-to-city circuits.

Said Bob Barbiere, Arbinet’s vice president of business development: "We’d rather trade oil than the pipes that deliver oil."