Source: Telecom Business
Date: February, 2001
by Ted Jackson
NEW YORK – In the life of a company, certain deals are watersheds. These deals can
change perceptions toward the company, providing b validation of the business plan
and spurring growth. GE Capital’s recent decision to partner with
Arbinet-thexchange Inc. could represent such a watershed deal for the
fast-growing online voice-minutes
In December, Arbinet-thexchange signed a deal with GE Capital
Commercial Services that harnesses the might of GE Capital’s balance sheet to Arbinet-thexchange’s
vision for the voice-minutes trading market.
"GE Capital understood right away what we were trying to do," says
Arbinet-thexchange CEO Curt Hockemeier.
GE Capital will support Arbinet-thexchange with global credit-risk management
by providing financial guarantees for most trades executed on thexchange, as well as a
variety of other financial services and back-office functions.
"This provides a means for our members to increase network utilization and reduce sales
and marketing, operational, bad debt and capital costs at a juncture when
telecommunications industry earnings are under heavy siege," Hockemeier says.
According to Joe Krum, president of GE Capital Commercial Services, Arbinet-thexchange’s
e-commerce application is distinguished by its ability to integrate the physical
delivery of bandwidth via switching and routing equipment with an online marketplace.
"Enhancing the credit risk management and financial settlement services allows thexchange to
safely scale its role as the counterparty to all transactions," Krum says.
Arbinet-thexchange is a true exchange in that carrier members simply place orders to
buy or sell voice minutes and thexchange automatically routes the buying members’ voice traffic
to the selling member’s network using the least-cost route. Arbinet-thexchange competitors, such as Band-X,
simply provide an online forum for buyer and seller to negotiate then execute the switch.
Clearly trying to push the telephony trading envelope, Arbinet-thexchange
wants to create true commodity-like trading in voice minutes. On commodity
exchanges like the Chicago Board of Trade and the New York Mercantile Exchange,
traders do not actually enter into deals with one another, but instead trade
with a clearinghouse owned by the exchange that is the real counterparty to all
transactions. The clearinghouse acts as a financial guarantor and backstop to
all transactions – something that Arbinet-thexchange also does for its
voice-minutes exchange. It is in this clearinghouse/counterparty function that
the GE Capital deal will prove critical. By furnishing the financial guarantee
for most trades, GE Capital can provide the financial muscle that will make
Arbinet-thexchange’s clearinghouse role financially
"With our small balance sheet, and given that we act as
counterparty to all trades on our exchange, it would have been impossible for us
to grow as planned without a b financial partner," says Bob Vaters, CFO at
Arbinet-thexchange. "It gives us huge credibility to have a financial
partner like GE Capital. The more risk from our exchange that GE underwrites,
the faster we can grow under our business model."
And Arbinet-thexchange has indeed been growing fast lately. Vaters says
Arbinet-thexchange processed more than 5.8 million transactions in
November, a 49 percent increase from the previous month. The firm’s membership
roster has more than tripled over the past year to 100.
Arbinet-thexchange refuses to divulge the names of its carrier members
publicly, but the list reads like a Who’s Who of Tier 1 and Tier 2 carriers.
Driving the surge in interest in Arbinet-thexchange has been the
new, much tougher telecommunications financial environment. By providing a
centralized telephony exchange infrastructure, Arbinet-thexchange is
creating a framework whereby voice networks can become more closely
interconnected and managed more efficiently. Arbinet-thexchange’s ability
to streamline the process of negotiating and managing voice minutes deals
between carriers is at the heart of the exchange’s appeal, helping drive down
telecom industry selling, general and administrative costs. Carriers looking to
cut SG&A have been coming to thexchange in an effort to boost sagging
bottom lines. The deal with GE will now allow Arbinet-thexchange to offer
another area in addition to SG&A in which it can deliver cost savings for
carriers: bad debt expense.
By entering a wholesale voice minutes
transaction on Arbinet-thexchange, carriers will essentially be doing a
deal with the AAA-rated balance sheet of GE Capital, effectively outsourcing the
credit-risk function and taking much of the credit risk off their balance
sheets. The ability to better manage bad debt exposure will become increasingly
necessary as the shakeout among upstart carriers widens.
"Carriers currently have to provision anywhere from 2 percent to 6 percent of their
wholesale revenues against nonpayment," says Vaters.
GE Capital’s AAA-rated backing should drastically reduce these costs for
This will all be very appealing to
carriers who seem to issue downward earnings guidance almost daily. The benefits
of the GE Capital deal are likely to be a very potent arrow in
Arbinet-thexchange’s competitive quiver as the battle to dominate the
voice-minute exchange space intensifies.