CRAIN’S NEW YORK BUSINESS
MAY 7-13, 2001

ON-LINE TELECOM MARKET GETS LIFT IN THE DOWNTURN

Arbinet-thexchange assumes others’ risks By Tom Fredrickson

The wave of failures sweeping the telecom sector – and which most recently drove Manhattan-based Winstar Communications Inc. into bankruptcy – has not been bad news for everyone.

In fact, for a fast-growing 5-year old company called Arbinet-thexchange Inc., it has been a major boon. The company operates an on-line swap meet for telecom carriers. On it, exchange members, which pay annual fees reaching into seven digits, anonymously buy and sell minutes on each other’s phone lines.

It is by guaranteeing that the companies selling capacity will get paid even if the companies buying that capacity go belly-up that Arbinet-thexchange has attracted a growing legion of increasingly risk-weary customers.

Growing Volume

In fact, Manhattan-based Arbinet-thexchange reports that its call volume has grown 30% per month since August, when it started marketing heavily to large carriers. That means that it currently handles about 300,000 calls per day, netting out purchases and sales among individual carriers and taking care of billing.

As call volume has grown, so, too, has the membership, which now stands at 130, including seven of the top 10 carriers in the world. Each pays a one-time $10,000 membership fee, plus monthly rates ranging from about $2,000 to more than $100,000, depending on the size of the interconnection with Arbinet-thexchange.

According to analysts, Arbinet-thexchange’s willingness to shoulder risk has helped fuel its growth. "It significantly changes the dynamics of what they are doing," says Kevin Calabrese, who follows telecom companies for Argus Research Corp.

Still, Arbinet-thexchange is far from immune to the turmoil in the telecom market. The company, which was founded in 1996 by Alex Mashinky, a Russian-born electrical engineer and telecom entrepreneur, faces problems arising from fears that some companies could fail to deliver promised bandwidth.

In addition, huge overcapacity and plunging prices in the $700 billion global bandwidth market are eroding the need for companies to use thexchange to find the cheapest possible prices.

As a young, growing firm, Arbinet-thexchange also must cope with an ongoing financial drought afflicting the entire industry. Investors’ fears of telecom companies already forced Arbinet-thexchange to abandon the IPO it had planned for last year. Instead, it must live off the $80 million it raised privately between March 1999 and March 2000. That will not last long.

During 1999, the most recent year for which figures are available, the company’s capital spending totaled $2.9 million, and the company forecast "substantial capital expenditures to come."

For now, though, Arbinet-thexchange executives are convinced that industry instability is working to their advantage, much like salesmen of homeowner’s insurance find business booms in hurricane season. Arbinet-thexchange’s ability to manage risk "presents us an excellent opportunity and an excellent chance for our members to reduce bad debt," Chief Financial Officer Robert Vaters says.

For the companies selling their unused capacity, Arbinet-thexchange officials say, there is no risk of not getting paid by customers going under because Arbinet-thexchange guarantees payment within 15 days, compared with a carrier industry average of about 65 days. Adding to the comfort factor, the company clears transactions with the backing of giant GE Capital, which assumes a portion of the risk.

Unaffected by bankruptcies

Better yet, the steps the firm takes to avoid credit potholes have paid off to date. It has yet to lose a dime from carrier bankruptcies.

To actually deliver the excess lines to its customers, Arbinet-thexchange operates gateway switches in New York and London, where it routes calls. Buyers and sellers get matched through the web site and have their lines assigned via the company’s switches.

In addition to helping reduce risk, the service allows carriers to anonymously make money on their unused capacity, without raising the ire of their customers, which pay full freight. The buyers also can see the quality of the connections that are for sale – typically at wholesale prices of about 3 cents a minute.

Analysts say the exchange industry, which is still in its infancy, has a definite future. "If you get somebody to bear the risk for you, it’s all the better," says Seth Libby, telecommunications analyst with the Yankee Group in Boston.