Satellite Bandwidth Trading: Will It Fly?

by Peter J. Brown

Bandwidth trading appears to be hot topic, although the satellite industry has mixed feelings about the feasibility of this new way of doing business.

The London Satellite Exchange at http://www.e-sax.com is perhaps the best example of an e-commerce or Internet-based enterprise which is trying to make satellite bandwidth trading a reality by uniting buyers and sellers at a single site. Buyers can see what is available at the Web site, while sellers with satellite capacity available can use the London Satellite Exchange as a way to reach customers that might not otherwise appear on their radar screens. The entire process is overseen by the staff of the London Satellite Exchange which is prepared to address all the requisite details.

Many terrestrial capacity providers probably view this new telecom-based commodity as an evolutionary step in a world that is increasingly criss-crossed by fiber optic networks, and ready for the next wave of bandwidth-on-demand (BOD)-based services. At Houston-based Enron Online, for example, Internet-based wholesale transactions involving various commodities including metals, energy and terrestrial bandwidth have been underway for over a year. Enron serves as the principal in all transactions, and in mid-2000, Enron calculated that trading had already topped $50 billion. The first Enron Online bandwidth transaction in late 1999 involved a monthly incremental contract for DS-3 (45 Mbps) bandwidth between New York City and Los Angeles with Global Crossing as the seller.

Online trading is a complex process and readers are invited to visit http://www.enrononline.com as well as the previously mentioned Web site in London to get a thorough introduction to these e-commerce marketplaces, and the procedures required of participants.

Companies helping to forge the new bandwidth trading market, such as Asia Capacity Exchange, Lightrade, Band-X, GTX, RateXchange and Commerex, have been joined by the new London Satellite Exchange. They have evolved in step with similar ventures underway at large companies such as Williams Communications and Enron Broadband Services where telecom and energy interests are often sitting side by side.

Bandwidth trading is made possible today by the creation of pooling points or terrestrial fiber interconnection sites, among other things. As these pooling points are becoming more common, the satellite industry is no doubt watching this trend on the ground closely, given the increasing amount of traffic flowing over hybrid satellite/fiber (HFS) networks.

In effect, pooling points–not to be confused with peering points where ISPs congregate to share services–represent the telecommunications industry’s version of the modern power grid. And where is the satellite component? It might be present in the form of the dish-equipped network access point (NAP) that is co-located with a pooling point, or via a teleport circuit provisioned into a switch at a pooling point.

“This year is somewhat of an inflection point: many more entities are aware of, and electing to use, our pooling points to access, deliver and manage bandwidth,” says Douglas Minster, vice president of corporate development at Washington, DC-based Lightrade Inc. Lightrade is a company founded in late 1999 that has installed neutral pooling point switches–Lucent Wavestar Bandwidth Managers–in eight metro areas, and has additional domestic and international pooling points scheduled to come online throughout 2001. “While I cannot say that satellite-based entities have been knocking at our door, I cannot see any reason why the satellite industry should not be thinking along these lines,” says Minster.

Minster is not prepared to discuss or identify potential technical obstacles or structural components that might undermine the feasibility of satellite-based bandwidth trading, he believes that a NAP–network access point–and a pooling point could be co-located. These could provide complementary functions such as moving packets into pipes and a satellite carrier could be present.

“All of our pooling points are Sonet (synchronous optical network)/SDH (synchronous digital hierarchy)-based, and we strive to be very flexible as far as where we deploy our pooling points,” Minster says.

Bringing Price Into Play

The fact is that no satellite operator or satellite service provider we contacted stepped forward to give a glowing endorsement of either the practice or the concept of satellite bandwidth trading. At least one major North American satellite operator refused to even discuss this topic. Princeton, NJ-based GE Americom and The Hague-based New Skies Satellites N.V. were kind enough to share their thoughts on this subject. As you can see by the responses, while a degree of receptivity exists, neither company appears to be ready to adopt this approach.

“It is just too early to tell if this form of trading would provide an improvement in efficiency, reach and flexibility when it comes to the way in which we differentiate our services both from the standpoint of quality, and from the standpoint of our value-added services,” says David Helfgott, GE Americom’s senior vice president of marketing. “This is a unique industry with a fairly well established spot market and with a relatively small group of buyers too. Still, we are tracking what is unfolding at the London Satellite Exchange, and at the Asia Capacity Exchange.”

“Across our fleet, we enjoy the highest level of utilization. And despite prior projections of a glut in capacity, there is no glut. We do not have a lot of capacity floating around,” says Monica Morgan, a GE Americom spokesperson who adds that fulltime customers with existing contracts can use the Stars On-Line service accessed via GE Americom’s Web site for spot buying for occasional use capacity.

In The Hague, there appears to be a similar willingness to watch and wait. “New Skies has an extremely experienced global sales force that deals with customers directly. New Skies is not a wholesaler of space segment. However, we are always open to new developments in the industry,” says Elizabeth Hess, a spokesperson for New Skies.

Michael Goodman, an analyst at Boston-based Yankee Group sees price competition as a big obstacle. “This form of completely transparent satellite bandwidth trading using Web- based indexes and updated regional capacity data certainly brings price into play. The high priced guys are going to be vulnerable if this takes hold, although such things as transmission quality and satellite coverage cannot be overlooked,” says Goodman.

“People are not going to go to 48 different places to gather information prior to engaging in any transaction, at least not if they can help it. Are the players involved ready for formalization? For sellers or suppliers, it is easier to keep prices high under the current regime; whereas in any centralized exchange a certain amount of control is lost as all the information sources which were somewhat widely scattered are pooled together in one site,” Goodman adds.

The Curtain Opens In London

Frank Genin, CEO of U.K.-based The London Satellite Exchange, describes the purchase of space segment and satellite bandwidth as “a sophisticated process.” Still, thanks primarily to the explosion in demand for bandwidth sparked by global deregulation in the telecom sector, he believes the time is right for the satellite industry to enthusiastically embrace the creation of new and innovative bandwidth trading venues such as The London Satellite Exchange.

The London Satellite Exchange opened last September. Today, Genin estimates it handles approximately 4 GHz or 2 percent of world capacity on a monthly basis. All trades are done in U.S. dollars except Eutelsat-related transactions which are covered in euros.

Attracting secondary market sellers of satellite capacity has not been at all difficult. Genin indicates the primary objective for The London Satellite Exchange in 2001 will be to attract more buyers. With many of the big players active, and with only one of the major operators still considering whether or not to participate in The London Satellite Exchange, according to Genin, the arrows seem to be pointed in the right direction. Again, we could not get a single satellite operator to disclose or verify its level of involvement with The London Satellite Exchange.

“We estimate that 48 satellite operators who account for approximately 82 percent of the global satellite capacity are onboard now,” Genin says. “As the remaining satellite treaty organizations such as Intelsat and Eutelsat undergo privatization, the market will become totally transparent.

“The London Satellite Exchange is designed as a financial risk management tool, where offering satellite clients in particular a better and more rational way to manage risk and limit their exposure in the global satellite marketplace is a key concern,” Genin adds.

There is no fee charged to buyers, nor are there any retainers or contingencies. “We are paid what I call a success fee by the seller which is a mark up on the satellite side. This is passed on to us on top of the rate card, not in the rate card itself,” Genin says.

There is a secondary market for inter-operator trading as well. Capacity swapping is not new, but Genin sees The London Satellite Exchange as a faster and more efficient vehicle for such transactions. “We are creating an extra sales channel for the operators, complementing and working directly with their sales force,” Genin says.

Genin disagrees with the notion that this specialized form of satellite bandwidth trading can be somehow implemented effectively and efficiently on an automated or virtual platform. “With details such as link budgets and teleport facilities to sort through, among other things, there is a need for a human interface between buyer and seller. In terms of the transactional complexity, satcom is far more complex than energy or optical fiber, for example,” Genin says. “An entirely electronic trading platform for satellite bandwidth trading is just not feasible.”

The London Satellite Exchange has 12 people involved in its trading operations including top satellite engineers who are able to assist customers in finding everything from relatively small slices of interim capacity to entire satellites that are designated as “orbital slot fillers.”

“We have six full satellites available, and this list consists of four station-kept satellites and two which are about to go into inclined orbit,” says Genin, adding that Europe*Star and Loral Skynet are two examples of operators who recently engaged in transactions involving the acquisition of in-orbit satellites. “As sellers and buyers alike attempt to find solutions, this requires sophisticated calculations–such things as propellant mathematics and drift calculations–which have to be performed by experienced professionals who have a solid satcom background.”

The London Satellite Exchange Web site is an important facet of the business. Here, 1,600 log-in members can access a composite index data that is updated twice a day. All satellite capacity is tracked along with all footprints including all cross-strapped capacity in all regions.

One of the advantages the satellite capacity market enjoys is an absence of a price war, at least thus far, according to Genin. “Satellite is not like optical fiber where prices appear to be declining by 40 percent every quarter. Just under 70 percent of global satellite capacity is in use today with pricing remaining fairly stable at approximately $5,800 per MHz per month,” Genin says.

At the same time, each region is being subjected to its own set of dynamics as different satellite operators employ different strategies. In Europe, for example, Genin contrasts SES Astra with Eutelsat. “With a base of 75 million antennas throughout Europe, SES Astra has an obvious advantage, and a big DTH focus which translates into higher transponder fees on the order of $6 million per 36 MHz per year versus a worldwide average of $2.8 million,” Genin says.

“Eutelsat is now in every kind of market, a dynamic and aggressive operator which is moving very quickly, perhaps surprising many of its competitors in the process. The same is true for Intelsat. They are both very active. Between these two alone, there are 40 satellites,” Genin says.

The London Satellite Exchange has forged alliances with San Francisco-based RateXchange and Hong Kong-based Asia Capacity Exchange (ACE).

“Bandwidth needs can be filled in regions of the world, such as Africa, South America, and Eastern Europe, which are not served by ubiquitous fiber optic bandwidth,” says Michael Rose, director of business development at RateXchange. “Carriers and ISPs in these regions can now consider both satellite and fiber optic options to meet their bandwidth needs (as well as) reach a broader base of potential customers, by using both RateXchange or The London Satellite Exchange.

“Pricing of satellite bandwidth is more stable than fiber optic bandwidth prices. Margins can be balanced, by using both satellite and fiber optic platforms, when offering end-to-end bandwidth solutions,” Rose adds.

ACE is quite different from The London Satellite Exchange. ACE is creating pooling points throughout the region known as Telehubs. Also, ACE derives very little revenue from satellite-related activity today, according to Paula Brillson, executive chairman of ACE. Most of ACE’s revenues flow from the sale of international voice minutes and fiber optic bandwidth.

“The satellite companies are just starting to see The London Satellite Exchange will not drive prices down,” says Brillson. “ACE connects customers to a Telehub where the customer has the ability to switch to multiple suppliers. We are somewhat like a telecom mall in that respect. We might offer satellite as an adjunct service such as providing redundancy for non-protected fiber routes, for example, but otherwise we consider standalone satellite opportunities to be a bit limited in this region in particular.”

Asia is experiencing a shortage of satellite capacity, according to Brillson, and this is driving up the price of capacity even as new satellites such as GE 1A fire up. Another important variable is that while DVB satellite links cannot compete with fiber on a price basis alone, the terrestrial infrastructure in Asia is suffering from a lack of local loop options in many markets.

“Where satellite has the advantage, besides on the point-to-multipoint traffic, is when it comes to ease of use. Why use fiber when you can dynamically allocate bandwidth by satellite?” says Brillson. “The absence of what I describe as true access networks in the region, and insufficient or incomplete local loops in many urban areas make satellite an attractive option as well.”

Is It Worth The Time, Effort And Expense?

Wes Hanemayer, vice president of consumer entertainment for Tulsa-based Williams Communications’ Vyvx Broadband Media Services, sees satellite bandwidth trading as a standalone service without extensive technical infrastructure enhancements, and as an insufficient solution that leaves too much up in the air in the form of an incomplete transaction.

Vyvx has been selling satellite time in 15- and 30-minute increments for years. Hence, a spot market for occasional use traffic already exists, and many service providers such as Vyvx as well as satellite operators are doing this on a routine basis.

“Initiating satellite bandwidth trading seems like a great theoretical benchmark, but we have to be careful, and not get caught up in what is appealing from a theoretical standpoint versus what is really practical,” Hanemayer says. “This is quite different from an energy market such as natural gas, for example. Gas can be stored, and it does not have to be constantly pushed out. With bandwidth flowing over satellite or fiber optic networks, the commodity dies as each second goes by.

“Creating a neutral floor is not as easy as it sounds. With 100 antennas and four teleports, we are a major player with investments in transport and transmission facilities. Getting transmissions to and from a satellite is a very complicated process. Securing assets alone is not enough. What you need is technical expertise,” Hanemayer adds.

Sharon Crow, vice president of bandwidth trading and risk management for Williams Communications, wants to know how satellite bandwidth trading is going to help Williams optimize its network. Williams has been analyzing this potential market for the past four months, primarily from the standpoint of risk management. Getting it to fit altogether given the fragmented nature of the infrastructure is viewed as an enormous challenge.

“We are not skeptical about this process, rather we are attempting to establish the time line as this market moves from infant to emerging status, and finally into the form of a viable or liquid market. I am a trader at heart and I am always looking for the next thing,” Crow says.

Finding a pool of users for stranded capacity in off-peak hours is not enough to allow for the formation of a viable satellite bandwidth trading market. In this instance, the time of use constraints have been a fact of life for the satellite industry since its inception, and nothing is going to change this fact. Nor can one work around the enormous costs associated with the installation of the transmit and receive infrastructure

“You have to look at all the ‘meet me’ issues. For example, we made a carrier available in the peering environment in order to achieve optimized use of existing capacity, but the cost to do this was not small given the need for 600 to 700 downlink antennas. Such scenarios are few and far between,” Hanemayer says, describing Williams’ media Extranet platform, which is ideal for distributing non-live media in particular.

Chris Lemmer, director of bandwidth trading and risk management for Williams Communications, sees another obstacle that needs to be addressed. Whereas fiber exchanges are engaged in minute-based transactions, the satellite exchange concept has not embraced this as a unit of choice. Nor is there enough of a proliferation of Internet Protocol (IP) data over satellite to allow for the seamless or uniform trading of bits between terrestrial, wireless and satellite networks, not yet anyway. “Fiber exchanges are minute-based, and minutes are fungible. Satellite capacity is not fungible, so it is very difficult to attract liquidity,” Lemmer says.

According to Hanemayer and Crow, there is the dual role of infrastructure and return to be considered as well. “How much more capital do I have to deploy to create this universal system? A trading and credit mechanism of this sort does not materialize out of thin air, so how much of an investment is necessary, and how do you justify it when you do not have liquidity?” asks Crow. “Is the infrastructure impairing liquidity? That’s an important question too. After all, beyond the issue of how mobile the receiver infrastructure is in a particular region, there is the issue of fixed receive antennas at teleports which simply do not have the ability to look at all satellites.”

A Potent Mix

Fred Enochs, manager of global bandwidth risk management for Houston-based Enron Broadband Services, does not accept the argument that trading satellite bandwidth is a far more complex process than trading terrestrial bandwidth tied to fiber optic networks. Enron operates an extensive IP-based fiber network.

“Satellite bandwidth trading is not necessarily more technical than energy or terrestrial telecommunications trading. All the provisioning can take place on the ground, regardless of the satellite capacity involved,” Enochs says. “You do not have to worry about ground interconnects. You can trade the raw capacity, and let the buyer manage the terrestrial provisioning.”

He does not rule out the possibility that Enron might become involved in satellite bandwidth trading in the future. At the same time, it might be a while before the opportunity to trade satellite bandwidth becomes attractive enough for Enron to expand well beyond its current trading of TDM circuits, IP transport a la Mbps over fiber or storage.

“What is taking place in London constitutes an exchange versus actual trading. The London Satellite Exchange is a brokerage, and not a principal. Enron is a market maker, either a buyer or a seller in every instance,” Enochs says. “In the satellite sector, there is a significant mismatch between supply and demand. When customers buy 36 MHz on a multi-year basis, they either use it or they are stuck with it. The question is: Do they get what they want?”

Enron has established 18 pooling points across its fiber network in the United States, along with four pooling points overseas.

“Enron’s strategy is to use these as interconnection points for buyers and sellers of bandwidth, and then to trade bandwidth across multiple networks. We do not care if they are private or neutral pooling points. Interconnecting all or multiple carriers through smart switches is a necessary step,” Enochs says. “There is an emphasis here on quick provisioning, and this is essential for any service built around bandwidth on demand.”

Lots Of Variables Present

Trading bandwidth appears to be a logical way to benefit from sound risk management principles. Or is this just a partial explanation? Is the real driver here the fact that as fiber networks multiply–submarine and terrestrial–we are rapidly approaching a saturated market and perhaps even that much discussed glut in bandwidth? This is something for the reader to decide.

In the satellite industry, which has its own set of risk management issues, there is a fragmented marketplace where structural resistance to any unification along these lines cannot go unnoticed. At the same time, a spot market already exists based on a history of vibrant trading of occasional use time in particular.

What will it take to catapult the satellite industry into a bandwidth trading mode? Will a quick spurt in the rollout of BOD services prove to be the catalyst, for example? Will satellite operators venture into a common and shared trading environment soon, or will they simply elect to perpetuate their traditional practices and turf on the basis that it is a sound and prudent way to do business?

Keeping an open mind at a time when the combined forces of increased competition, deregulation, privatization and technological innovation are all pressing against the walls of existing business models is not such a bad idea. Traders are no doubt welcome in the satellite industry as all forms of commerce continue to evolve.

Peter J. Brown is Via Satellite’s Senior Multimedia Editor. He lives on Mount Desert Island, ME.