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  1. Carrier Ethernet exchanges have sellers, but need more buyers

    CEN Feature (Oct 5 2010)

    1. Carrier Ethernet exchanges have sellers, but need more buyers

      Anyone who has ever organized a farmers’ market, planned a new shopping mall or launched a trade show may have experienced two different forms of anxiety. The first anxious moments come when you wonder if you’ll get enough farmers, stores or businesses to participate. The second stage of anxiety comes after you have some farmers, stores or businesses and you wonder if you’ll get enough shoppers or attendees.

       

      It’s not much different in the Carrier Ethernet exchange market, where I think it’s fair to say that exchange operators have at least partially overcome the first stage of anxiety, but are now beginning to cross their fingers about the second stage.

       

      CENX, for example, has numerous carriers participating in its exchange. But with few exceptions (such as Optimum Lightpath), those carriers are mostly there to sell connectivity to other carriers. Just last week CENX added Cox Business to the roster of carriers that plan to connect to its exchange. But Cox Director of Carrier Product and Sales Operations Jay Clark said that company, too, is primarily interested in selling connections.

       

      Consider also Neutral Tandem, which has the potential to gain a leg up in the Carrier Ethernet exchange business through its purchase of global wholesale connectivity provider Tinet, completed last week.

       

      Tinet already has network-to-network interface agreements with 15 operators worldwide and has 90 points of presence worldwide, which Neutral Tandem plans to convert to Ethernet exchanges to supplement several U.S.-based exchanges of its own.  Neutral Tandem expects many of the carriers that already connect to the Tinet POPs will want to participate in the exchange business—but here, too, most of these carriers are most interested in being sellers, rather than buyers on the exchange.

       

      Other companies that have entered the Carrier Ethernet exchange market, including Equinix, are likely in a similar position of having more sellers than buyers today. And the success of the whole Carrier Ethernet exchange concept hinges on having both.

       

      So will the exchanges attract buyers? I think the answer is yes.

       

      Cox, for example, has negotiated NNIs for interconnectivity in the past—and Clark views the Carrier Ethernet exchange as a means of eliminating those hassles, particularly when the carrier seeking interconnectivity is a relatively small one. It sounds like Cox will simply tell those carriers that if they want interconnectivity, they will have to achieve it through the exchange. And undoubtedly some of the other carriers that will be sellers on the CENX and other Ethernet exchanges also have the power to drive would-be interconnectivity partners to the exchange.

       

      Even large carriers may opt to buy some connections through the exchanges. Neutral Tandem Chief Operating Officer Surendra Saboo believes the Tinet acquisition will bring connectivity to certain carriers in other parts of the world with which large U.S. operators, for example, may not already have NNI agreements. Saboo thinks the large U.S. telcos will view the exchanges as a simpler and easier way of obtaining connectivity with those companies.

       

      And once sellers start seeing some business through the exchanges, they also may take greater interest in being buyers themselves.

       

      There’s another thing about farmers’ markets, shopping malls and business conferences to remember though: business never seems to happen at a steady pace. It often starts out slow, but then suddenly a bunch of customers comes all at once. Despite some anxiety we’re seeing today, I suspect the same will be true for Carrier Ethernet exchanges. In the technology business, it’s called critical mass.

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    On 10/8/10 GigabitG said:
    "An interesting, and very well timed article. In my opinion the success or otherwise of exchanges will ultimately depend on cost and performance. Right now the main value proposition to end users seems to be that, by connecting to an Ethernet supplier through and exchange, they should expect a faster installation than would otherwise be the case if they were to connect directly. As you mentioned in your article, eliminating this hassle, would be a benefit for buyers and sellers alike. However, that is assuming that connecting to a supplier via an exchange, as a buyer, is less of a hassle. And if the carriers have already been through that hassle, by negotiating a direct NNI agreement in the past, are they likely to do so again, but this time with the added hassle of having to do so through an exchange? So hassle can be something that works both ways.

    Also, whilst it can be a time consuming and laborious process for carriers to agree direct NNI agreements, at least that's what it is.. direct! Direct in that each carrier has agreed common sets of QoS settings, and O&M processes between them. There is also more than likely a resilient, and direct, fiber connection between their switch infrastructures, which (aside from the marginal costs of cross-connects within a DC) does not add additional recurring costs to their respective cost bases. Contrast this with the exchanges who are suggesting that connecting via a 3rd party switch infrastructure is more secure and cost-effective than a direct NNI agreement. Maybe so, for NNI's not yet in place, but most of the larger Carriers already have NNI agreements in place with their strategic partners.

    And finally what about cost? Equinix and Neutral Tandem / Tinet have an advantage in that they can effectively subsidise the costs of joining the exchange as it compliments their core business. But how will customers justify connecting to a supplier through an exchange if it is going to be more costly than connecting directly? Whichever way you look at it, in the longer term, exchanges will have to generate enough revenue to justify the significant investment and associated costs.

    So, in my opinion, the value proposition needs to be more clearly communicated to buyers in order for exchanges to really boom

    "

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