Around the Alley in 30 Days

Around the Alley in 30 Days

Day Three: Arbinet-thexchange Seeks to Cash In on Trading Long-Distance Minutes

Arbinet-thexchange at a Glance

Business: spot market for telecom minutes
Founded: 1997
CEO: J. Curt Hockemeier
Exchanges: New York, London
Employees: 100
Funding: $115 million over four rounds, including $35 million announced in July
Investors: EnerTech Capital led July round
Annual volume: 1 billion minutes
Total addressable market: 200 billion minutes
Customers: 135 customers, including seven of 10 largest telecom carriers
On Arbinet-thexchange’s position: “I think that we have already achieved a status of leader in the minutes business.” — J. Curt Hockemeier

The state of the telecom industry is most apparent by looking at Lucent. A year ago, the company had over 150,000 employees and a sky-high stock price. Yesterday, in its latest round of cutbacks, Lucent announced plans to cut 20,000 more jobs to leave it with just 60,000 employees. With mounting losses, some analysts have even doubted the company’s chances of ever rebounding. In the third installment of Around the Alley, we visit 5-year-old Alley telecom Arbinet-thexchange, which is trying to weather the storm in the industry by pushing its online marketplace for trading international long-distance calling minutes.
by James Patchett

Back in 1996, Alex Mashinky figured out how to revolutionize the way telecom carriers operated. A year later, he turned that idea into Arbinet-thexchange.

“What Alex theorized was that if you could create a spot market for international long-distance minutes, it would conceivably take a lot of the cost out of the legacy processes and systems that the carriers were using and are still using today,” says current Arbinet-thexchange CEO J. Curt Hockemeier.

“What’s happened is that his vision–that the prices were going to fall, it was going to get a lot more competitive, and the carriers were going to need a better way to transact business between themselves than what they’d been doing–that’s all come true.”

The idea behind Arbinet-thexchange is pretty straightforward: Give carriers a place to trade these international long-distance minutes. “In most cases, their networks don’t go very far. What happens is they have to hand it to someone else,” says Chris Reid, director of marketing at Arbinet. “We help companies sell their networks in markets that they might otherwise not be able to.”

Before exchanges sprouted up, telecom providers had to make bilateral agreements with other carriers to reach where their networks did not. Though the majority of minutes are still traded via these contracts, Arbinet-thexchange has grabbed a decent chunk of the market: The company’s share of minutes grew by 157 percent in the first quarter of this year. Out of what Reid estimates to be 200 billion addressable minutes annually, more than a billion of those now run over their exchange.

Reid believes the biggest battle for Arbinet-thexchange is to attract business away from bilateral agreements, which still compose the vast majority of the minutes traded. “Our main competition is carriers’ old business practices,” Reid says.

Although Arbinet-thexchange does have some competition, like the U.K.-based Band-X, Reid claims Arbinet-thexchange’s business is unique.

“No one does exactly what we do,” says Reid, adding that other exchanges link buyers and sellers for all minutes to a certain destination, whereas Arbinet-thexchange allows a new link for each call. Reid also estimates that Arbinet-thexchange handles about 75 percent of all minutes traded over exchanges.

Bad Connections

This is, of course, not the best of times for the telecom industry, which is struggling from overcapacity. Nortel Networks and Lucent Technologies have both announced massive cutbacks and losses in recent months, and their problems are not unique.

Indeed, Hockemeier estimates that the exchange, which currently has 135 members (including seven of the world’s 10 largest telecom carriers), lost a dozen companies to bankruptcy in the second quarter alone.

But Hockemeier remains bullish on Arbinet-thexchange’s future. “With the telecom industry in sort of a state of disrepair, [Mashinsky’s] vision is even more importantly applied in today’s economy, because money’s not cheap anymore. And a lot of these carriers are finding it difficult to make the kinds of margins they used to make even as the prices are falling,” Hockemeier says.

“In a lot of cases, what this has done is excite people about our model and given us the opportunity to capture business that we wouldn’t otherwise have had.”

Undaunted by the overcapacity problems plaguing the telecom industry, Arbinet-thexchange has continued to expand. The company opened a new switching hub in London a month ago to supplement its first hub in New York. (Telecom providers have to connect to one of these hubs, which the company treats as interchangeable, in order to trade over the network.)

Though Hockemeier is noncommittal about future expansion, he admits that Arbinet-thexchange has a new switching location budgeted for next year. With an estimated 60 percent of the market accessible now, an additional location in Asia could theoretically open up another 15 to 20 percent of the market. And with Arbinet-thexchange’s revenue coming from a fee subscribers pay based on the volume of their usage, an additional hub could help Arbinet-thexchange grow even more, and bly position itself for any large broadband rollout.

“As the price of bandwidth continues to come down, it will be a more frequent occurrence that carriers are willing to meet us in more distant places,” says Hockemeier. “As a consequence, what that means to me is that I have to have fewer switches in fewer locations.”

Transferring minutes over broadband is particularly feasible for voice over IP (VoIP) carriers, which represent a whopping 20 percent of Arbinet-thexchange’s traffic, though only 2 percent of the world’s. “The VoIP carrier in China can originate calls there that terminate in Afghanistan, and the interface for all of that is in New York where we connect VoIP to TDM switching,” Hockemeier explains.

With a pocketful of $115 million over four rounds and a patented $30 million technology platform, Arbinet-thexchange has set its sights high. “It’s just part of a global plan that we have to be a global exchange,” Hockemeier says.