Electronic markets for telecommunications transport capacities

Telecommunications Policy 25 (2001) 587–610

Electronic markets for telecommunications transport capacities Torsten J. Gerpotta,*, Sven W. Massengeilb a

Chair of Telecommunications Management, Department of Business Administration, Gerhard-Mercator-University Duisburg, Lotharstr. 65, D-47057 Duisburg, Germany b A.T. Kearney, Charlottenstr. 57, D-10117 Berlin, Germany

Abstract Until recently inter-carrier sales and purchase of telecommunications transport capacities were mainly based on long-term bilateral contracts between capacity supplying and demanding operators. Not long ago various firms started to supplement this traditional decentralized organization of the capacity business by setting up institutionalized electronic market places to trade network capacity products similar to traditional commodity exchanges. This paper portrays the mechanics of the new capacity trading approach along with its advantages and disadvantages for both established and new carriers. Eleven electronic carrier capacity market places were identified around the globe and analyzed with regard to the volume and structure of carrier capacity products being traded. Results suggest that operators of electronic capacity markets face severe difficulties in motivating major carriers to participate in the market. Former transmission network monopoly holders are particularly reluctant to participate in electronic carrier capacity market places. Incumbents fear that their participation could accelerate the decline of transport capacity prices. On a more general level the analysis suggests that new intermediaries in electronic markets are likely to fail when (1) supply and demand is highly concentrated and (2) trust in the quality of the products traded and in the commercial settlement processes is not firmly established. r 2001 Elsevier Science Ltd. All rights reserved. Keywords: Bandwidth; Carriers’carrier; Electronic markets; Inter-carrier settlement; Telecommunications

1. Fundamentals of the transport capacity business among telecommunications carriers 1.1. Core services marketed At least since the liberalization of most European telecommunication markets and the rapid diffusion of Internet access, management practitioners and scholars alike pay substantial attention *Corresponding author. Tel.: +49-203-379-3109; fax: +49-203-379-2656. E-mail addresses: [email protected] (T.J. Gerpott), [email protected] (S.W. Massengeil). 0308-5961/01/$ - see front matter r 2001 Elsevier Science Ltd. All rights reserved. PII: S 0 3 0 8 - 5 9 6 1 ( 0 1 ) 0 0 0 3 3 - 7

588

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

to voice and data services provided by telecommunications network operators (=carriers). Here, pertinent market analyses focusFalmost without exceptionFon telecommunications services for end-customers. Hardly any attention is paid to the fact that many carriers also lease portions of their own networks’ capacities for a specified period of time to other telecommunications firms. These companies also operate telecommunications networks and sell telecommunications services to end-customers but either do not have any or do not have sufficient network capacity of their own on certain routes. This inter-carrier sales and purchase of telecommunications transport capacity is called ‘‘carriers’ carrier market/business’’ (Gerpott, 1998, pp. 55–56). In the carriers’ carrier business three main classes of core services are bought and sold: (1) Optical fibers without transmission technology: These are single strands of fiber/fiber pairs in an optical fiber cable (at present often consisting of 90-180 strands of fiber) between two defined locations. They are sold without light communications transmission and for this reason this transport capacity product is also called ‘‘dark fiber’’. The capacity per time unit (=bandwidth) of such dark fiber depends on the transmission technology installed by a procuring carrier. (2) Bandwidth: With the transfer of bandwidth, customers buying the capacity product get access to a permanently existing network connection with a defined maximum bandwidth, between two points of interconnection, in the supplying carrier’s network over a specified period of time. Important features of this service, which is also called (digital) point-to-point circuit or leased line, is the data transmission speed (at present mainly 2, 34, 155 or n  155 Mbit/s), the location of and the distance between the two end points of the transmission route as well as the quality of connection (rate of failure, bit error rate, jitter, etc.). Depending on the location of the end points of a point-to-point circuit, one has to distinguish between national and international bandwidth services. A carrier buying bandwidth may, depending on the transmission and switching technology he applies, use this product for different telecommunications service offers of his own (e.g. telephone calls, transport of Internet traffic). (3) Switched telephone minutes: This service comprises the transport of switched telephone calls between two network access points via the supplying carrier’s (long-distance) network. Here, neither the supplier nor the buyer of telephone minutes has to operate a local access network around the calling or called party if interconnection agreements with local network operators for terminating and originating the traffic are in place. In circuit-switched digital telecommunications networks a telephone call is carried by switching a bi-directional full duplex circuit with a transmission rate of 64 kbit/s between the network transfer points for the complete duration of the telephone call. Therefore, the transport of telephone traffic is explicitly offered and bought on the basis of time, i.e. in switched minutes. However, by using compression techniques, it is possible to transmit several telephone calls over one full-duplex channel. Therefore, when selling telephone minutes between carriers, the compression factor used by the supplier is an important quality of service indicator. In addition to this ‘‘classic’’ technology for handling telephone calls, carriers increasingly use packet-switched Internet Protocol (IP) networks. Such IP-networks do not use one circuit exclusively during each telephone call. The information to be transmitted is divided into packets which might be transported over different network paths between the two calling

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

589

parties. Nevertheless, in practice IP-services are not billed according to the data transmission volume but rather the length of the time period from the beginning to the end of telephone calls. This version of an inter-carrier transport capacity product is therefore also called ‘‘IPminutes’’. Furthermore, it is common practice to differentiate between national and international telephone minutes based on the geographical location of the point of interconnection used, irrespective of the technical means used to transport the information. 1.2. Changes in market organization Up to the mid-1990s the carriers’carrier business focused exclusively on bilaterally negotiated international ‘‘over-the-counter (OTC)’’ case-by-case transactions between network operators. Each carrier had a monopoly in its respective home country and required transport and switching services of the monopoly supplier of a specified foreign country for terminating telephone calls abroad. The interstate prices per call minute which had to be paid to a carrier in the destination country of a phone call by a carrier in the country of origin (=accounting rates) were agreed upon in lengthy and difficult negotiations for periods of several years (see Schwandt, 1996, pp. 28–29; Langenfurth, 2000, pp. 145–147). The subsequent technical implementation of an interconnection for the transfer of (international) telecommunications traffic often took several additional months.1 The negotiated accounting rates were generally unrelated to the costs of an international telecommunications traffic transport route and resulted in high end-user prices for international telecommunications services (see FCC, 1996, p. 4; OECD, 1997, p. 17; Cave & Waverman, 1999, p. 22). As a rule, there was no market for national carriers’carrier services since telecommunications networks were only operated by one supplier within each country. However, since about the mid-1990s two trends in the telecommunications sector have led to a situation where the carriers’carrier business is also subject to fundamental changes with regard to its size, supply structure and market organization: (1) Break-up of telecommunications monopolies: The proportions of countries in which telecommunications networks can be operated by more than one company has considerably increased over the last years; it is expected that up to the year 2005 in 85% of all countries around the globe telecommunications monopolies will have ceased to exist (see ITU, 1999, p. 3). Due to market liberalization the number of corporations running national, pan-European and transcontinental telecommunications networks has drastically increased.2 Consequently, it is no longer the case that just a few national incumbents act as suppliers and buyers of international telecommunications transport capacities. Instead, new carriers offer optical fibers, bandwidth or telephone minutes to other telecommunications network operators on the national and international routes they establish. In addition, they 1

For instance, it took a half year until Deutsche Telekom (formerly Deutsche Bundespost) and US-carriers like Sprint and MCI came to an ‘‘Accounting Rate Agreement’’ in 1987 and one further year until the handover of international traffic between the contracting parties worked smoothly in both directions without any technical difficulties; cf. Aronson & Cowhey (1987, pp. 14–15). 2 For an overview see Bhise et al. (1999, p. 77); OECD (1999b, pp. 31–37); Yankee Group (1999, pp. 12–16); Engebretson (1998, pp. 19–22); TeleGeography (1998, pp. 26–29 and 94–97).

590

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

also ask for telecommunications transport capacities on routes outside the regions covered by their own network. Overall, the liberalization of telecommunications markets also promotes the competitive intensity and the complexity of the carriers’carrier business since the number of possible bilateral inter-carrier purchase and sales relationships for telecommunications capacity services increases exponentially with the number of market participants on the supply and demand side. (2) Explosion of transmission capacity of telecommunications networks due to technical reasons: New multiplexing technologies enable carriers to increase the speed of information transmission through existing and new optical fiber cables per time unit at least by a factor of 100 times compared to the bandwidth common in the mid-1990s networks (see Engebretson, 1998, pp. 19–20; Pospischil, 1998, p. 748; TeleGeography, 1998, p. 20; PWC, 1999, p. 11). This increases the probability that carriers, at least on certain routes, will own more transport capacity than they need for the provision of telecommunications services to their end-customers.3 Consequently, to improve network utilization, it makes sense for carriers to purposefully sell short-term free transport capacity to other network operators, i.e., to act as suppliers in the carriers’carrier market also. One implication of the outlined regulatory and technical changes was that the costs of the former market organization of the inter-carrier transport capacity business increased considerably. This market organization, which is generally defined as the extent and the quality of utilizing institutions (mainly state institutions, private intermediaries, codified legal regulations, uncodified standards) to match supply and demand for a certain category of goods, was characterized by bilateral contracts with long term and fixed service quantities and prices which were directly negotiated between two carriers. Due to the rapidly growing number of suppliers and buyers as well as the technological dynamics in the carriers’carrier telecommunications transport capacity business the quantity of possible contract opportunities to be investigated by each market participant increased. Similarly, the carriers’ willingess to enter into long-term contracts decreased. One market organization approach to cope with this altered situation is the introduction of contact fairs. These allow supplying and buying carriers to convene periodically at one location. Carriers then meet in person and in this way promote the conclusion of purchase and sale contracts for telecommunications transport capacities on defined routes for certain periods of time. In the US and in Germany these market events, similar to traditional (trading floor) exchanges personally attended by the transacting parties at a specified location,4 were organized for example by the telecommunications carrier Star Telecom.5 The disadvantages of this type of market organization are (1) the low standardization of the objects of sale and the terms of contract resulting in high negotiating costs, (2) the lack of a presentation medium which would make all sales and purchasing requests transparent for all participants at the meeting, as well as 3

This assessment is also taken by Vogelsang (1996, pp. 146–147); Pospischil (1998, pp. 747–748); Bhise et al. (1999, p. 77). According to Makris (1999, p. 78), an MIT-analysis suggested that in 1998 AT&T did not use more than 17% of its total network transport capacity. 4 A description of typical characteristics of real trading floor exchanges is given, for example, by Hielscher (1993, pp. 1128 and 1141); Schwark (1994, pp. 60–61). 5 See PWC (1999, p. 30). In Germany such a contact fair was organized for the first time by Star Telecom under the name ITEX (International Telecommunications Exchange) in January 1999.

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

591

(3) the long time elapsing from the conclusion of a contract for the supply/procurement of telecommunications transport capacities to the actual fulfillment of the contract. In view of these deficiencies, several companies in various countries independently developed the business idea to establish Internet-based electronic market places.6 Their objective was to further develop the carriers’carrier capacity market from a commodity market with rather close supplier–buyer relationships to an exchange-like spot market with comparatively more relaxed supplier–buyer relationships and immediate performance fulfillment after conclusion of the contract in the sense of cash/spot transactions (see Hielscher, 1993, p. 1135 for an explanation of the term cash/spot transaction).7 With respect to such market places, the present paper’s objectives are to *

*

* *

highlight in more detail the services which may be rendered by their operators (Subsection 2.1.1); analyze their advantages and disadvantages for carriers selling and buying network capacity (Subsection 2.1.2); outline the worldwide supplier situation (Section 2.2); investigate to what extent it is possible and necessary for these market places to further develop from exchange-like events to officially licensed exchanges (Section 2.3).

At first our analysis may appear to be specific to the telecommunications sector. However, a closer look reveals that it allows to draw more general hypotheses/conclusions: The analysis indicates which market characteristics and service management variables must be considered by operators of electronic market places for various business-to-business/industrial goods transactions in exploring profitable strategic positioning options for their firms (Section 3).

2. Exchange-like electronic market places for telecommunications network operators’ transport capacities 2.1. Theoretical considerations 2.1.1. Services provided by market place operators To date, the basic value proposition of electronic market place operators is to bring together the capacity supply and demand of a multitude of carriers at a (real) location. This is achieved by making available to carriers a platform composed of telecommunications and information technology systems which electronically supports all stages of telecommunications capacity transactions (information, contracutal agreement, fulfillment). To be able to provide such 6

An overview about general characteristics of electronic market places is given by Schmid (1993, pp. 468–469); Gerpott & Heil (1998, p. 736); Segev, Gebauer, F.arber (1999, p. 138), among others. 7 The major difference between commodity and spot markets for standardized products within business-to-business industries is that on commodity markets buyers and suppliers have a closer business relationship which is going beyond a single isolated transaction and which may entail personal trust and partner-specific investments whereas spot markets are characterized by unlinked, anonymous product exchange acts. For further details on the distinction between commodity and spot markets see Backhaus (1999, pp. 293–294).

592

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

intermediary services, operators of electronic market places for telecommunications transport capacities establish the following two partial interlinked platform systems: *

*

An electronic ‘‘communication room’’: Since carriers manage their networks from different locations, the market place operator establishes an electronic bulletin board to which carriers are granted access via Internet connections (after registration and assignment of a user-specific password). Users are registered to enable the platform operator to check the quality of market participants (e.g. ability to pay, quality of supplied services). The web-based trading/virtual dealing room enables registered users to first notify other market participants anonymously about their own transaction offers, to obtain information on what other carriers are currently offering and to initiate business transactions. In practice, bringing together anonymously placed transaction offers (=matching) in the electronic communication room is currently and intentionally still done ‘‘manually’’ by the market place operator. Where offers match, he discloses to each market participant wishing to enter into an agreement the company data of the other party. There is no mandatory obligation on the market participants to adhere to their transaction offers. In contrast, after a potential match is achieved, the market operator provides carriers with facilities to enter into bilateral, confidential negotiations via Internet or telephone in which the ultimately binding contractual arrangements (service quantity, prices, quality, dates, etc.) are fixed at a level of detail appropriate for the respective transaction. This type of contract conclusion procedure refrains from using an automatic system to match offers and inquiries, since telecommunications capacities are not standardized to the extent that the agreement stage can focus exclusively on matching the prices envisaged by market participantsFas is the case of classical security exchanges. Switch or router: To be able to implement short-term transactions on a spot market for telecommunications capacities, a fast physical interconnection of the telecommunications networks of the respective carriers involved in a transaction is necessary immediately following the contract signature. Therefore, the market platform operator sets up a central switch to which each registered carrier has to be connected with at least one point-to-point circuit before his first participation in the market forum. To ensure smooth real-time interconnection/traffic transmission between different networks once a contract has been concluded, the market platform operator tests the technology of each new carrier on the market with regard to interoperability with all firms already connected to the switch. Only when interoperability has been ensured, does the market operator enable new carriers to participate in the capacity business. To prevent incompatible hardware elements and transmission protocols, the market operator can try to encourage carriers to only use standardized and/or dominant-design technology. To link networks which are not directly compatible, the market operator can also create network interconnection possibilities himself by means of gateway technology and multifunctional switches,8 which are often beyond the financial or technical reach of individual carriers.

As it is typical of potential market participants to be unwilling to exchange incompatible for compatible network technology just to gain access to a telecommunications capacity market place 8

For such telecommunications network components that help to overcome network incompatibilities see Gabel (1991, p. 5); Decina, Pattavina, and Trecordi (1996, pp. 300–302).

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

593

(which is not yet developed), the market place operator’s ability to contribute to overcoming problems of interoperability by means of his own systems is likely to be a crucial success factor for the operator’s long-term survival. This factor could be vital in the competitive differentiation from other electronic capacity market places and from bilateral capacity transactions without involvement of intermediaries. Overall, the integrated operation of the two above outlined partial systems by one company cannot be classified as a state-licensed public (commodity) exchange. Rather, it can be characterized as a (commodity) exchange-like Internet-based, private online market place. This place is designed to bring together a large number of suppliers and buyers of standardized telecommunications transport capacity services in one location as a permanent unofficial market ready for transactions. Up to now, the two main services provided by electronic market place operators in the telecommunications transport capacity business (mediation of transactions, interconnection) differ from the core services provided by Internet auction companies and/or aggregators acting on different markets. The two most important differences are that there is no dynamic price-fixing process, transparent for all market participants and/or no active bundling of purchase or sales offers from different market participants for the same services to realize economically advantageous transaction volume increases.9 Therefore, the introduction of telecommunications capacity auctions or the bundling of demand can be seen as basic opportunities of the present market place operators to expand their services. In addition, operators of electronic market places for telecommunications transport capacities have the possibility not only to mediate spot transactions but also to engage in (commodity) futures dealings. This means that they can initiate transactions where the dates for price determination for capacity purchases and sales on the one hand and the fulfillment of contract on the other hand vary considerably.10 Regarding these futures one can generally differentiate between (1) unconditional business which must be fulfilled by the contracting parties and conditional business where the transaction partners have the right to withdraw from fulfillment (by paying a price), and (2) standardized contracts where subject, term, quantity units and fulfillment modalities of transactions are fixed according to predefined rules and non-standardized contracts.11 Futures dealings enable carriers to safely calculate revenues from and costs of telecommunications capacity supplies and/or purchases for a certain period in the future. In addition, they help to reduce risks of market price changes in delivery/purchase agreements for telecommunications transport capacities by conditional financial counter trading. The basic requirements for success for market place operators also trying to establish futures dealings are that *

the future price development for telecommunications transport capacities is perceived as not foreseeable with certainty and volatile by the market participants; 9

With regard to the Internet auction and aggregator business models see Schaaf (2000, pp. 2–4); Mayfield (1999, p. 2); Roddy (1999, pp. 3–4). 10 The boundary between futures and spot transactions is mostly fixed at two to seven days: Transactions with fulfillment not before three to eight days are classified as futures transactions. See Eller (1999, p. 9); Hielscher (1993, p. 1135). 11 Standardized unconditional (conditional) transactions also carry the label ‘‘futures’’ (‘‘options’’). Nonstandardized unconditional (conditional) contracts also carry the label ‘‘forwards’’ (‘‘OTC options’’). See Breuer (1993, pp. 552–555); Hielscher (1993, p. 1135); Kolb (1994, pp. 1–6); Eller (1999, pp. 4–29).

594 *

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

the market participants have different expectations regarding the price development of specified telecommunications capacity products.12

Dealing in futures and options for telecommunications transport capacity additionally implies that a market place operator succeeds in uniformly specifying the basic capacities and contract terms in such a way that they are accepted as appropriate by most carriers. All in all, given the requirements and complexity of futures dealings, it can be concluded that market place operators should only then foster the introduction of such telecommunications transport capacity dealings once a high-volume spot business has been established. Finally, market place operators can offer the following three secondary support services to back up their primary services: *

*

*

Quality monitoring of the supplied telecommunications transport capacities: At the switch he controls, the market place operator can measure service quality parameters for the telephone minutes supplied (e.g. call set-up times, call failure rate, subjective assessment of voice quality interference by noise, echo effects, etc.) or bandwidth (availability, bit error rate, etc.; cf. ETSI, 1997, p. 12–13; Gerpott, 1998, p. 248; Makris, 1999, p. 85; PWC, 1999, pp. 20–21). These measurements are then made available to the buyer and seller of telecommunications transport capacity. The data enable the transaction partners to check to what extent quality promises were fulfilled. The market place operator himself in his role as intermediary cannot give any direct quality guarantees for services rendered due to insufficient technical possibilities of controlling service deliveries. However, when suppliers repeatedly violate quality agreements, the operator is free to exclude them from further access to the market platform. Settlement of transactions: The market place operator can provide billing support between carriers by summarizing the payments for all respective contracts between the market participants for the agreed periods in one invoice and by balancing invoice items where there are reciprocal supply linkages. For contracts on telephone minutes where the service quantities were not previously fixed, he can likewise compile call data recorded in the switch of the market place with contract-specific prices to prepare a contract-related or company-related bill for services supplied/bought among the carriers. Co-location: New carriers entering a national market often lack immediately available airconditioned rooms with uninterrupted power supply and protection against unauthorized access. They need such locations to set up their own network switch and/or other network technology (e.g. servers). Therefore, it makes sense for market place operators to keep free space available near their switch which they can lease to carriers. This service which is also called facilities co-location or equipment housing (see CompTel, 1999, pp. 6–12, PWC, 1999, p. 24), does not only increase market place operators’ revenue potential. Rather, it also facilitates the acquisition of co-location customers for participation in the telecommunications

12

Certainly, there may exist different expectations concerning the prices even in the case that all market participants generally agree about the sign of future price changes. So, network operators may expect without exception falling prices in the capacity business in the foreseeable future (cf. Fig. 1), but this does not necessarily imply that they also agree about the extent and speed of future declines in prices for specific transport capacity services.

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

595

capacity market place as it provides these customers with the option to quickly install a connection to the market operator’s switch with very limited transmission and operating expenditures to participate in spot transactions. For operators of electronic market places for telecommunications transport capacity, the main source of revenues is the commission payments from sellers and purchasers which are calculated as percentage shares of the net turnover of binding delivery contracts concluded through the market place operator’s mediation.13 In addition, market place operators generate further revenues from the initial connection of carriers to the market place (switch computer) as well as the three support services specified in the above. 2.1.2. Advantages and disadvantages of market places from the network operator’s perspective Compared to decentrally initiated transactions for carriers supplying and buying capacity, electronic market places for telecommunications transport capacities have the following advantages (see also Makris, 1999, p. 82; Mayfield, 1999, pp. 2–3; PWC, 1999, pp. 14–15; Schaaf, 2000, pp. 5–6): *

*

*

*

Increase of transparency in what was previously a rather badly arranged market: By organizing a central market platform, information relevant for telecommunications capacity business is structured and bundled. Accordingly, buyers can checkFat low search costsFthe destinations between which they are offered telecommunications capacity and the terms (price, quantity, quality parameters, time/duration) on which this is made available. Suppliers can compare their services with competitors’ offers. Reduction of the contract parameters to be negotiated: As a rule, transaction negotiations on an institutionalized capacity market are based on standard contracts. Contrary to decentralized negotiations between companies without a long business history, only one price per unit of quantity has to be fixed in the extreme case. Therefore, an electronic telecommunications capacity market place reduces agreement costs. Reduction of the share of non-realized capacity supply contracts: A high percentage of OTC capacity contracts between carriers is not fulfilled because price dynamics in the capacity business are such as to encourage attempts at subsequent negotiations. Numerous carriers sell an amount of transport capacity that is higher than the quantity they are actually able to deliver. They do this to raise their network capacity utilization rate. Further, carriers often do not meet service quality promises. Business rules specified by market place operators and measures taken to enforce these rules (e.g. exclusion of suppliers) counteract various types of contract violation by suppliers. Accordingly, such rules reduce agreement costs. Reduction of interconnection expenditures: The one-off interconnection of a carrier’s network with a switch which is also used by many other network operators is less expensive than several spatially distributed interconnections with only one network operator each. Therefore, this also reduces handling costs in telecommunications capacity transactions.

13

TeleGeography (1998, pp. 71–72) reports commission payments for market place operators in 1998 between 0.625% and 2.25% depending on the contract/transaction value. For similar figures see Makris (1999, p. 76); PWC (1999, p. 31).

596 *

*

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

Shortening of the set-up time for interconnection: The time taken for the administrative and technical set-up of bilateral individual contracts for telecommunications capacities was several months on average (cf. Section 1.2). Institutionalized market place operators are able to interconnect approved market participants’ networks and accordingly to deliver capacity in only a few hours or even in less than one hour. The billing processes for many contracts provided by the market place operator also contribute to a reduction of administrative handling costs and time. Utilization of an additional sales channel: The probability of concluding rather short-term telecommunications capacity transactions is increased by electronic market places with a higher number of participants. For sellers in particular, the additional sales channel has the advantage that excess capacity can be marketedFto a large extent anonymouslyFat prices which are lower than their ‘‘regular brand prices’’ without the fear of any negative effects on the regular prices. For sellers and buyers alike electronic market places with a higher number of participants help to reduce the dependence on individual carriers who were previously powerful on the market.

To summarize, the presence of suppliers and buyers of telecommunications transport capacity in an exchange-like electronic market place run by a private company can reduce the market participants’ transaction costs in the capacity business and expand the market relevant for them. It should, however, be observed that the sale and purchase of transport capacity on an electronic market place could also have negative economic effects. We identified four major disadvantages which hold in particular for (1) established network operators possessing a monopoly in their national home market in the past and (2) alternative carriers with widely spread (inter)national trunk networks: *

*

Acceleration of the drop in prices for telecommunications transport capacities: In electronic market places an increase in the volume of offers and in the transparency of prices can be expected as an outcome of the aforesaid reduction in transaction costs. This could result in reduced prices for standard services and it could be difficult for suppliers who held significant market power in the past to attain prices on common routes which are above the ‘‘uniform market price’’. Therefore, by participating in electronic market places, carriers could market their excess capacities better on a short-term basis but at the same time contribute to a reduction of their present margins (see also Cave & Waverman, 1999, p. 26; Gruber, 1999, p. 44). Thus, carriers with considerable network resources have to consider carefully to what extent an expansion of quantities sold when participating in electronic market places would lead to additional contribution margins which would more than compensate for the margin reductions due to the expected fall in prices. Deterioration of the market position in the end-customer business: If telecommunications capacity prices are permanently reduced as a result of a substantial growth in the volume of electronic market capacity transactions of established carriers, companies competing with large carriers in the end-customer market who only operate a few transmission routes of their own are put in a position to reduce telecommunications service prices in the end-customer market. Accordingly, new carriers with very limited network resources can either increase their market shares in the end-customer business at the expense of the incumbents or contribute to a reduction of the general price level for telecommunications

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

*

*

597

services for end-customer which in turn would lower profits (cf. Hurley & Rogerson 1997, pp. 18, 23, and 66).14 Duping with baits: If offers announced by a carrier in the electronic communication room are not binding (in order to facilitate individual negotiations for fixing a wide range of contract parameters in addition to the price), it cannot be ruled out that carriers will only give ‘‘bait prices’’ to motivate buyers to get into contact or to investigate the demand price elasticity. Duping with unfair matching: Companies operating an electronic market place with the intention of achieving profits could misuse their manual matching function by giving carriers incomplete information on matching and possibly lowest price offers. The market operator could instead draw the buyers’ attention to offers which because of open or collusive agreements generate a higher commission for him than transactions which would be more advantageous from the buyers’ point of view.

Up to this point, we provided a theoretical and abstract analysis of services offered by operators of electronic market places for telecommunications transport capacity. In the following section empirical observations on the situation of such market events up to the year 2000 are given. 2.2. Empirical observations Expert interviews and document analysis led to the identification of 11 operators of private electronic market places for telecommunications capacity worldwide. These operators are listed in Table 1. Six operators have their headquarters in the USA, four in Western Europe, and one supplier is located in Hong Kong. The market place locations have predominantly been chosen in a way that they are close to the (inter)national telecommunications traffic nodes to which these carriers already operate transmission lines anyway. This is to keep the investment of potential market participants for a connection to a switch of the market place operator as low as possible. Market places were founded mainly between early 1997 and early 1999. This period coincides with the explosive global diffusion of the Internet as reflected in an increase in the worldwide number of Internet hosts from 10 million in January 1997 to more than 45 million in January 1999, Therefore, it appears likely that increasing bandwidth demand (projections) from Internet users also precipitated the creation of electronic capacity market places. The most frequently marketed capacities products are telephone minutes and bandwidth (cf. Section 1.1). Only two operators (Band-X, GTX) mention dark fiber as a product bought and sold on their market places. Here, we suspect that dark fiber is less likely to be suitable for short-term transactions arranged via electronic market places due to its lack of generally accepted quality parameters/standards and the considerable contract-specific investments which a dark fiber buyer will have to make for a utilization of the capacity. Rather, a decentralized market organization of bilaterally negotiated long-term contracts should lead to lower transaction costs for dark fiber. To date, market participants are convinced that it is necessary to specify a larger number of quality and performance parameters when placing bandwidth offers. For example, for bandwidth offers a carrier in the Band-X market place has to specify termination points of the connection, type of bandwidth, transmission rate and protocol, price, duration of contract, terms of payment, A price elasticity of end-customer between o0 and > 1 is one assumption on which the reasoning is based. For the validity of this assumption see Gerpott (1998, pp. 198 and 297) with additional references. 14

598

Table 1 Operators of electronic market places for telecommunications transport capacities Market place name/locationa

Traded servicesb

1.

ACE Asia Capacity Exchange (Hong Kong China) [10/1999]

K

AIG Telecom/Greenwich (USA) [11/1999]

K

2.

K K K

K K K

3.

Arbinet/New York (USA) [2/1999]

K K K K

Planed switches/ market place locations

Bandwidth Switched and IP telephone minutes

K

Bandwidth Switched telephone minutes

F

Bandwidth Switched and IP telephone minutes

K

K K

K K K K K K K K

4.

Band-X/London (United Kingdom) [7/1997]

K

K

Dark fiber Bandwidth Switched and IP telephone minutes

K K K K

K

Tokyo Singapore Sydney

K

Price index information

Auctions

Beijing Bombay Hong Kong London Moscow Sao Paulo Syndey Tel Aviv Tokyo

Yes

Yes

K

Price index information Quality monitoring of international routes

Frankfurt Sydney

Yes

K K K K

Yes

K

Price index information Auctions Co-location

K K K

Bandwidth

F

6.

GTX Global TeleExchange/McLean (USA)

K

Dark fiber Bandwidth Switched and IP telephone minutes

K

K

K

Yes

K

K

K

Yes

Yes

Enron/Houston (USA)

K

Additional services

Yes

5.

K

Quality Billing monitoring

K

London New York

Yes

Yes

K

Co-location

Noc

Yes

K

Co-location

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

No.

7.

Hanse-X/Frankfurt (Germany) [11/1999]

d

K K K K

Bandwidth Switched and IP telephone minutes

K K K K K

Iber-X/Madrid (Spain)

K K K K

9.

10.

11.

a

InterXion/Amsterdam (Netherlands) and Frankfurt (Germany) [6/1998]

K

Min-XMinutes Exchange/Melville (USA) [6/1998]

K

RateXchange/Los Angeles and New York (USA) [6/1998]

K

K K K

K K

K K K

Bandwidth Switched telephone minutes Bandwidth Switched and IP telephone minutes

K

Switched and IP telephone minutes

F

Bandwidth Switched and IP telephone minutes

K

K K K

K

Dusseldorf London Paris Zurich

Chicago Miami

Yes

Yes

K

Co-location

Yes

Yes

K K

Price index information

Yes

Yes

K

Co-location

No

No

K

Contact fairs

Yes

Yes

K

Price index information

Locations of switches in operation. Figures in brackets: Month/year in which the first switch started operations. IP=Internet Protocol. c Assignment of suppliers to quality classes prior to the permission to enter the market place. d Reorganization as part of a state-licensed exchange planed by the end of 2002. Source: Prof. Gerpott-/Massengeil-Research and Analysis. b

.

K

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

8.

Amsterdam New York Tokyo Vienna Zurich

599

600

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

delivery time, responsibility for local termination, installation features, downtimes, and repair modalities. Accordingly, an automatic matching of bandwidth supply and demand is virtually impossible in practice whilst only referring to the price. However, as there is a vector of standard quality parameters for bandwidth and since there are no transaction-specific irreversible investments for a utilization of capacity, all in all, this type of capacity product is in practice obviously suitable for purchasing/selling in the electronic exchange-like market places. Compared with dark fiber and bandwidth offers, telephone minutes reveal the least problems as regards the specification/standardization of quality, and are highly fungible (=exchangeable/ justifiable) due to their even greater technical quality standardization. Therefore, telephone minutes are the indispensable basic product in any electronic capacity market place. Some market place operators (e.g. ACE, Arbinet, RateXchange) strive for a ‘‘refinement’’ of this product and the reduction of any remaining quality uncertainties by allocating minute offers to quality categories additionally defined by themselves. Only a few market place operators, such as RateXchange or Hanse-X, claim that they also offer (standardized) futures and options for telecommunications capacities or else are planning their introduction. In actual fact, however, there is, at best, an organized mediation of non-standardized futures, i.e. of forwards or OTC-options.15 This observation suggests that the inexperienced market place operators are at present still cautious in their assessment of the cost–benefit outcomes of futures offers and that, due to market communication reasons, operators use factually imprecise labels to identify the futures variant supported, or to be supported, by them. The minimum length of time from the conclusion of capacity supply contracts to the start of their fulfillment by means of an interconnection of the networks of the contract parties in spot transactions varies considerably among the market operators listed in Table 1. Thus, typical implementation times range from 0.5 h with InterXion to 36 h with Arbinet. Overall, however, the system platforms of every carrier allow short-term spot market transactions. Information from neutral sources on registered carriers and transaction volumes for the individual market places has so far rarely been available. According to press reports (see Makris, 1999, p. 82), the market place pioneer, Band-X, which started operations in London in 1997, registered about 3000 carriers, switch-based service providers and other companies for access to its market place in mid-1999. Further, Arbinet in New York (start of its market place operations: beginning of 1999) had approximately 200 market participants and InterXion in Amsterdam (start of business: 1998) about 90. Especially with Band-X, there is a glaring discrepancy between the number of (supposedly) registered companies and the number of transactions concluded which is stated as being o100 for 1999. This suggests that either the Band-X market participant figures are exaggerated or Band-X has indiscriminately urged every companyFirrespective of its interest in capacity transactionsFto register. On the whole, it is especially the established network operators that (still) seem to have a distinctly more negative attitude towards electronic market places for transport capacities than younger carriers with a less than good infrastructural basis. For example, Schaaf (2000, pp. 2 and 13) reported that, to date, Deutsche Telekom has presented itself only once as a transaction party in an electronic capacity market place in which it sold international bandwidth to Band-X in August 1999. In the USA, established carriers such as MCI Worldcom, Sprint or Qwest have expressed themselves in negative terms with respect to their 15

For the differentiation of futures, options, forwards and OTC-options see above in footnote 11.

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

601

presence in electronic market places for telecommunications capacities. Only for AT&T there are press reports that this carrier has some unofficial cooperative links with the market place operator Arbinet (see Gruber, 1999, p. 44; Makris, 1999, p. 85). With respect to the capacity volumes mediated via telecommunications platforms, it is reported that the intermediaries InterXion and Arbinet handle on average 0.33 million and 0.48 million telephone minutes per day, respectively, via their market platforms in Amsterdam and New York (Gruber, 1999, p. 43). If we take into account that in 1999, Deutsche Telekom aloneFhowever, via a large number of switchesFconnected on average 121 million long-distance and international telephone minutes per day, and that in 1999 approximately 296 million international telephone connection minutes were registered each day on a worldwide basis,16 it becomes obvious that the relative significance of electronic market places for telecommunications capacities at the end of 1999 (still) has to be rated as being rather low. The main reason for the current lack in numbers of powerful carriers involved in electronic market places despite their theoretical advantages (see Section 2.3) could be their fear of contributing to a decline in prices in the capacity business through their own presence in the new market places. The price statistics visualized in Fig. 1, which, by way of example, record the price trend for international telephone minutes and the bandwidth services going out from Great Britain in the electronic market place of the operator, Band-X, in London between January/ October 1998 and January 2000, seem to confirm these concerns in an impressive manner. There are, however, two arguments against this theory that the decline in prices for international telephone minutes and bandwidth services is first and foremost a result of the introduction of exchange-like electronic market places for telecommunications transport capacities: *

*

Since the mid-1990s, there has, in general, been a strong decline in prices for telecommunications capacities and for telecommunications services in the carriers’carrier business and the endcustomer business (see Gerpott, Walter, & Gemmel, 1998, pp. 1281–1284; OECD, 1999a, pp. 166–188; RegTP, 1999, pp. 25–27; Gerpott & Walter, 2000, pp. 34–35). This generally is similar to the one shown in Fig. 1. This can be attributed to an increase in the number of carriers due to liberalization and a ‘‘production cost reduction’’ due to technology advances. Consequently, telecommunications capacity price trends in electronic market places primarily reflect general supply-side changes and not specific market reorganizations. In the energy industry in which, as in the telecommunications service industry networkdependent non-storable services are marketed, there has been an electronically supported market place for electricity in Scandinavia since 1991, trading under the name of NordPool. This market place had registered 271 energy companies by the end of 1999. The average kilowatt–hour price for electricity sold via this market place did not permanently decline between 1993 and 1998, despite an increase in the number of market participants and the business volume. On the contrary, the price varied depending on the fundamental supply and demand situation (e.g. supplied amount of electricity, weather conditions) (see NordPool, 1999, 2000; Menges & Barzantny, 1997). If we apply these observations to electronic market places 16

The reference value concerning Deutsche Telekom is calculated on data from RegTP (1999, pp. 112–116), and the base value concerning the international telephone minutes is taken from TeleGeography (1998, p. 253). For the (still existing) limited significance of market events for telecommunications network capacities see also Schaaf (2000, p. 3).

602

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

Fig. 1. Trends in pricing for telephone minutes on outbound international routes from the United Kingdom and for bandwidth at the electronic market place of Band-X. a 100=Prices in September 1997. For information on pricing trends for telephone minutes traded on the Band-X market place between September 1997 and January 1998 see TeleGeography 1998, p. 73. b 100=Prices in October 1998. Source: Band-X; Prof. Gerpott-/Massengeil-Analysis.

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

603

for telecommunications transport capacities, they speak against the fear that there will be a significant, virtually automatic drop in the prices of the services traded in this place through the emergence and extension of exchange-like electronic market places, i.e. predominantly due to changes in the market organization. To summarize, the empirical analysis suggests that *

*

*

since approximately 1997, 11 companies worldwide have started to establish exchange-like market places for telecommunications transport capacities. the decline in prices that could be observed for years with respect to telecommunications transport capacity services is not so much attributable to the emergence of electronic market places for such services but rather to fundamental changes in the number of suppliers and in the production costs for telecommunications services. the number and value of the telecommunications capacity transactions brought about via electronic market places is indeed growing, however they are still quite low in relation to OTC transport capacity contracts.

The previous observations give rise to the question as to what extent it is possible and advisable to supplement or even replace the current exchange-like market places with the establishment of ‘‘real’’ exchanges in order to increase the telecommunications capacity transactions via electronic market places. This question will be addressed in the following section. 2.3. Market development by transition to licensed exchanges? In (commodity) exchange-like market events a single company acts as an intermediary for standard products and organizes the market place according to its own ideas within the scope of the general business law. This means that the operator tries to enforce rules for the market, for example for the admission of service types and market participants, minimum transaction value, mediation fees, determination of service prices, assumption of fulfillment and payment guarantees by the market place operator itself or by the market participants, the market’s management structures and processes, and procedures in case of disputes between market participants.17 In contrast, for ‘‘real’’ stock exchanges, in Germany and also in many other countries, a corporationstyle institution which is granted state approval in the form of a license is operated with special public, neutral status to bring together supply and demand of exchangeable goods. It is organized with a democratic-style self-administration in line with the rules of the national stock exchange act and supported by companies buying and selling goods on the exchange for their own account and by transaction mediators.18 17

See also Hielscher (1993, pp. 1170–1171); Rosen (1994, p. 1214) and Schwark (1994, pp. 65–67) with regard to differences between exchange-like market events and exchanges in the stricter sense. 18 For the term of an exchange within the German legal system and for an introductory review of the German stock exchange laws see Hielscher (1993, p. 1128); Schwark (1994, pp. 60–74); Petershoff (1999, pp. 441–443 and 451–452). Because of international differences in the core features of an exchange and its corresponding organization, our reflections refer first of all to (commodity) exchanges that might have their location in Germany.

604

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

General central prerequisites for selling and buying specific goods on a regularly-held exchange (in the stricter sense) which also hold in Germany include (see also Hielscher, 1993, pp. 1134 and 1165; Schwark, 1994, p. 75): *

*

*

Fungibility (=interchangeability of the transaction objects): This means that goods to be marketed on an exchange are by and large of a similar quality so that they are usually bought and sold according to quantity, weight or measure (see Hielscher, 1993, p. 1130 among others, and y 91 BGB (=German civil law)). Liquidity or marketability of the transaction objects: This means that the supply and demand of the goods to be sold on an exchange is so frequent that the market participants’ transaction cost savings caused by the exchange are considerably higher than the costs attributable to the exchange operation to be borne by the market participants; therefore, due to net cost savings, the exchange operation makes economic sense for market participants. Existence of transaction-competent companies who ensure that an institutional exchange body is available to provide the resources for a proper operation of the commodity exchange.

If these criteria are applied to telecommunications transport capacity services, the following conclusion is tenable with respect to fungibility (see corresponding PWC, 1999, p. 22 and differing Schaaf, 2000, p. 6): A definition of standardized service types is possible for telephone minutes and bandwidth which can be precisely specified by (1) a vector of technical quality characteristics generally accepted by carriers as value-determining, (2) the location of start and end points on the transport route, (3) capacity quantity data as well as (4) time intervals for which capacity is to be provided. Consequently, they can each be assessed in principle as fungible and accordingly qualify for trading on a commodity exchange. The liquidity of a telecommunications transport capacity exchange, which is determined by multiplying the number and the average value of the capacity contracts concluded over a specified time, depends on the number of carriers supplying and demanding capacity as well as the number of marketable service types. Regarding the number of buyers and suppliers of telecommunications transport capacity in the carriers’carrier business it can be stated that (TeleGeography, 1998, p. 26; RegTP, 2000, p. 24): *

*

at the end of 1997 more than 1000 carriers worldwide operated international telecommunications routes; at the end of 1999 approximately 250 companies had a license to operate public telecommunications transmission routes and/or offer public voice telephony services in Germany.

This shows that internationally and in Germany there is a large number of potential transport capacity suppliers and buyers in principle. Nevertheless, for the following two reasons it is not possible to conclude from these numbers that a high degree of liquidity can be expected for telecommunications transport capacity exchanges (in Germany): *

The bulk of the telecommunications transport capacity installed internationally and nationally in Germany is still controlled by a few suppliers. For instance, in 1997 20 telecommunications

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

*

605

network operators handled 65% of all international telephone minutes to be switched worldwide (TeleGeography, 1998, p. 37).19 In Germany, in the first three months of 1999 approximately 65% of all national long-distance telephony minutes were provided to endcustomers by a single company, Deutsche Telekom (see RegTP, 1999, p. 116). In the carriers’carrier business the capacity supply and demand is concentrated on a few routes between national trade centers and internationally outstanding trading areas. In 1997, about 51% of the international telephone minutes occurred on routes between 49 country pairs (e.g. Germany–Austria) while the remaining 49% was distributed over routes between approximately 4,000 other country pairs (own calculations based on TeleGeography, 1998, pp. 262 and 270–273). In Germany, in particular, the highest share of telephone minutes and bandwidth services is handled along routes connecting the cities of Frankfurt, Stuttgart, Munich, Dresden, Berlin, Hamburg, Dortmund, Du. sseldorf and Cologne in a ring-like connection of the respective two other nearest cities of these nine locations (e.g. Hamburg–Dortmund, Dortmund–Du. sseldorf).

An implication of these market structures is that an exchange for telecommunications transport capacity located in Germany would have to concentrate on capacity marketing for a few international and national main traffic routes between metropolitan areas at least in the shortterm and mid-term to guarantee sufficient liquidity. Regarding the readiness of transaction-competent companies to be involved in the institutional body for a state-licensed telecommunications capacity exchange, it can be said in the case of Germany that up to the beginning of 2000 only the Hanseatische Wertpapierbo.rse, the HessischThu.ringische Landesbank and the telecommunications market place operator Hanse-X (cf. Table 1) officially announced the operation of such an exchange in Hamburg by the end of 2002, with the Hamburg Chamber of Commerce taking over the formal responsibility for this institution. Therefore, the conclusion of the present research is that telephone minutes and bandwidth have sufficient fungibility and liquidity for being traded on a licensed exchange on selected routes but that only in one case have definite steps been taken by market participants towards creating a state-approved exchange body in Germany. The low interest in establishing genuine telecommunications capacity exchanges in Germany can also be taken to suggest that such a form of market organization for the carriers’ carrier business does not have any significant advantages compared to the exchange-like electronic market events which are already in existence or are to be newly established. In order to validate this conclusion, the following investigates the differences which exist in Germany from the carriers’ point of view between the sale/purchase of telecommunications transport capacity on an exchange and on an exchange-like market event. It can first be repeated here that in Germany state-approved exchanges are democratically organized institutions with members’ self-administration. Their sole purpose is the neutral provision of services to their members. Accordingly, the main argument for organizing markets by means of licensed exchanges instead of exchange-like private market events should be the better protection of market participants against unfair behaviors on the part of a market place operator. Such operator behaviors may occur when admitting market participants, when bringing together 19

However, for international telephone minutes the supply concentration decreased significantly since the early 1990s: The share of worldwide switched telephone minutes of those carriers which began to operate international networks after 1989 increased from 0.03% in 1990 to 11% in 1997; see TeleGeography (1998, p. 37).

606

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

suppliers and buyers and when determining/publishing exchange prices with which the operator violates official rules of his market event to maximize his own economic success to the disadvantage of buyers and sellers. This potential advantage of neutrality/correctness of licensed exchanges is technically/organizationally supported by the fact that one core feature of real commodity exchanges is the operation of an order system in which the market participants may only enter binding transaction offers. These are then automatically brought together by the system proceeding from the target of attaining maximum market revenues (see Hielscher, 1993, p. 1138; Schwark, 1994, pp. 63–64). Thus, exchange prices are calculated solely on the basis of actual transactions concluded without direct individual case-by-case interference of the market operator which is substantially different from the matching procedures of exchange-like market events for telecommunications capacities. This security advantage of licensed exchanges has however to be balanced against cost disadvantages due to the comparably high bureaucratic expenditures required for an orderly exchange operation. In addition, from a carrier’s point of view, there are some problems involved in complete automation and in ensuring anonymity in the matching of supply and demand. This type of intermediation is a protection for network operators against competitors being able to gain information about their own transactions and items. But it also leads to a situation where carriers do not have any transparency regarding specific transaction partners and no possibility of personally explaining specific business requirements during the information stage preceding any contract conclusion. Here, the exchange-like market events described above offer the advantage that they can be tailored in a better way to the differential interests of market participants because they also permit confidential bilateral negotiations on the procurement and sale of services (see Rosen, 1994, p. 1214). Finally, a non-licensed operator of a private market event can, at low cost in comparison to formal exchange organizations, take the following specific steps to reduce the distrust and concerns carriers supplying and demanding capacity might have regarding the possibility that an intermediary might employ unethical enrichment practices: *

* *

regular auditing of the neutrality of his intermediation services and his business practices by a credible institution (e.g. advisory board formed by market participants, auditors); dispensing with capacity transactions on his own account; excluding carriers supplying and demanding capacity from acquiring a share of his equity.

To summarize, the overall result of our analysis is that the establishment of licensed exchanges for telecommunications transport capacity in Germany is in principle legally and technically possible for telephone minutes and bandwidth on national and international main traffic routes. However, handling telecommunications capacity business between carriers via such an exchange is by no means much more favorable than a use of the exchange-like private market events already in existence (see Table 1). Exchanges differ from the market organization variant mentioned above primarily by higher organizational costs incurred through a higher regulation intensity and not by a considerably better protection of the interests of carriers supplying and demanding capacity. Accordingly, in our opinion, the offically licensed telecommunications capacity exchange in Hamburg scheduled for the end of 2002 in Germany will only show transaction frequencies and values which could also be attained with lower organizational costs by setting up an exchange-like electronic market event.

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

607

3. Conclusions concerning the strategic positioning of electronic market place operators The following conclusions are based on the assumption that the present findings on driving forces and barriers in the development of electronic market events for telecommunications transport capacities are also partly transferable to the operation of electronic markets on which other services are sold between companies (=business-to-business markets). Then, the following general conclusions, to be understood as hypotheses, may be derived for the strategic positioning of electronic business-to-business market place operators: The opportunities a corporation has to set up an electronic market place as intermediary and in the long run to further develop this market place operation into a profitable business are higher *

*

*

*

*

if there is a minimum number of companies which can be seriously considered for market participation as suppliers and/or customers. Only this minimum participant potential (quantifiable only on a sector-specific basis) opens up the possibility that an institutionalized market event may help to achieve sufficient transparency advantages for suppliers and buyers as well as a minimum number of transactions mediated via the markets to cover market operation costs. if the potential suppliers are companies with a fixed-cost-intensive production function which is at least partially not utilized to capacity or where past utilization resulted in high current stocks. For such companies there is a substantial incentive to participate in electronic market places as a supplier in order to reduce excess capacity/stocks. if the potential customers are companies with a demand pattern which is difficult to forecast in the long-term. In this situation, procurement solely through long-term bilaterally negotiated contracts is difficult and short-term demand coverage via electronic market forums is more suitable. if market participants trust the quality of services offered and the demanding institutions. Again, this trust should be higher, if * for the services traded on the market a vector of clearly defined quality variables exists which is generally accepted by the market participants as suitable for determining the goods’ value, i.e. if services are standardized goods which do not require costly pre-transaction-description and -testing of their state and quality. * the market participants have a positive reputation based on their business history, their size, their ‘‘branding capital’’, etc. * the market operator assumes fulfillment guarantees for companies buying and payment guarantees for companies selling. * the market operator takes clear steps to safeguard his neutrality and the fairness of mediating procedures. if by offering unique services and co-ordination contributions he can discourage supplies and buyers from concluding transactions together directly without employing the intermediary after the first transaction.20

With particular reference to operators of exchange-like market places for telecommunications transport capacity these general hypotheses imply that 20

In this case the market place operators function only as ‘‘marriage brokers’’; see Makris (1999, p. 82).

608 *

*

*

*

*

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

the 11 market makers (see Table 1) existing today should quickly initiate co-operations or mergers among themselves since the number of carriers supplying and demanding capacity would presumably not be sufficient even on important routes to be able to operate all market places with commercial success;21 they should especially endeavor to attract carriers with high capacity demand potential quickly in order to induce established network operators (e.g. MCI Worldcom, Swisscom) also to participate in the market on the supplier side; they should quickly promote an inter-carrier agreement of clearly defined quality of service classes for bandwidth and telephone minutes which will make transactions easier; they should reinforce carriers’ confidence in their neutrality in the mediation of business transactions by introducing transaction rules and mechanisms for monitoring these rules to convince market participants that there is no need to organize in the form of a highly regulated, state-licensed exchange;22 they must provide unique value to market place participants by means of (a) dynamic price finding mechanisms in the form of various types of auctions, (b) supply and demand aggregation assistance, (c) interoperability management and (d) co-location offers, in short by services which go beyond the mediation of simple contracts.

Finally, our research also indicates thatFdespite the enthusiasm for new business opportunities resulting from a transition (yet to be proved) to a new ‘‘Internet economy’’ characterized by electronic mediation processesFclassic basic rules for successful competitive strategies do not become obsolete: Even in such an economy, intermediaries will only survive if they provide services which are advantageous from a customer’s perspective and which neither the competitor nor the customer can produce himself at a comparable cost–benefit level. In view of the development of the carriers’ carrier business over the last few years it seems to us to be quite likely but by no means certain that operators of exchange-like market events for telecommunications transport capacity will be able to adhere to this principle.

References Aronson, J. D., & Cowhey, P. F. (1987). Bilateral Telecommunications Negotiations. New York: International Institute of Communications. Backhaus, K. (1999). Industriegu.termarketing (6th ed.). Mu. nchen: Vahlen. Bhise, H., Bhise, J., Bundschuh, R. G., Hawn, J., Lalande, K., & Rao, N. L. (1999). Battle for the backbone. McKinsey Quarterly, 36(2), 76–87. Breuer, R.-E. (1993). Das Effektengesch.aft. In N. Kloten, & J. H. Stein (Eds.), Geld-, Bank- und Bo.rsenwesen (39th ed.) (pp. 525–575). Stuttgart: Sch.affer-Poeschel. Cave, M., & Waverman, L. (1999). The transformation of international telecommunications. Business Strategy Review, 10, 21–27. 21

The validity of this suggestion is supported by two changes in the ownership structure of the market place operators which took place after this paper was submitted for publication in July 2000: First, Band-X acquired HanseX; second Enron bought an equity stake in InterXion (see numbers 4 & 7 and 5 & 9 in Table 1). 22 CompTel founded an institution named Bandwidth Trading Organization (BTO) which proposed such a set of transaction rules (see http://www.comptel.org/btofr.html). However, it is unknown to what extent these rules have already been introduced at any capacity market place.

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

609

CompTel (1999). Uncaging competition: Reforming collocation in the 21st century. Competitive Telecommunications Association, Washington, DC. Decina, M., Pattavina, A., & Trecordi, V. (1996). Network architecture evolution in the future. In F. E. Froehlich, & A. Kent, Encyclopedia of telecommunications,, Vol. 12 (pp. 293–325). New York: Dekker. . berblick, Strategien, Tendenzen. In R. Eller (Ed.), Handbuch Derivativer Eller, R. (1999). Derivative InstrumenteFU Instrumente (2nd ed.) (pp. 3–38). Stuttgart: Sch.affer-Poeschel. Engebretson, J. (1998). The rise of the carriers carrier. Telephony, 235(10), 18–26. ETSI (1997). ETSI Technical Report 138Fnetwork aspects (NA) (2nd ed.). European Telecommunications Standards Institute, Valbonne. FCC (1996). International settlement rates: Notice of proposed rulemaking. IB Docket No 96–261. Federal Communications Commission, Washington, DC. Gabel, H. L. (1991). Competitive Strategies for Product Standards. Berkshire: McGraw-Hill. Gerpott, T. J. (1998). Wettbewerbsstrategien im Telekommunikationsmarkt (3rd ed.). Stuttgart: Sch.affer-Poeschel. Gerpott, T. J., & Heil, B. (1998). Wettbewerbssituationsanalyse von Online-Diensteanbietern. Schmalenbachs Zeitschrift fu.r betriebswirtschaftliche Forschung, 50, 725–746. Gerpott, T. J., & Walter, A. (2000). Preisanpassungen fu. r Standard-Festverbindungen der Deutschen Telekom. Telekom Praxis, 77(1), 31–36. Gerpott, T. J., Walter, A., & Gemmel, D. (1998). Preisvergleiche fu. r Standard-Festverbindungen. Zeitschrift fu.r Betriebswirtschaft, 68, 1273–1302. Gruber, P. (1999). Suche Telefonminuten, biete Bandbreite. Computerwoche, 26(38), 43–44. Hielscher, U. (1993). Bo. rsen und Bo. rsengesch.afte. In N. Kloten, & J. H. Stein (Eds.), Geld-, Bank- und Bo.rsenwesen (39th ed.) (pp. 1128–1188). Stuttgart: Sch.affer-Poeschel. Hurley, A., & Rogerson, D. (1997). Pricing Broadband: A Model for Competitive Advantage. London: Ovum. ITU (1999). Direction of Traffic, 1999: Executive Summary. International Telecommunication Union, Genf. Kolb, R. W. (1994). Futures, Options, and Swaps. Miami: Kolb. Langenfurth, M. (2000). Der globale Telekommunikationsmarkt. Frankfurt: Lang. Makris, J. (1999). Not exactly NASDAQ. Data Communications, 28(7), 75–87. Mayfield, R. (1999). New network economics: Real-time trading strategies for carriers (Whitepaper). In RateXchange, http://www.ratexchange.com/news/TelecomBusiness1.Htm. Menges, R., & Barzantny, K. (1997). Die Liberalisierung der Stromm.arkte in Norwegen und Schweden. Zeitschrift fu.r Energiewirtschaft, 21, 39–56. NordPool (1999). 1998 Annual report. Nord Pool, Lysaker. NordPool (2000). The nordic power exchange’s 5th anniversary issue. In Nord Pool, http://193.69.80.130/menu4/elbors/ 198/elb 1 98 eng.htm. OECD (1997). New technologies and their impact on the accounting rate system. Paris: OECD. OECD (1999a). Communications outlook 1999. Paris: OECD. OECD (1999b). Building infrastructure capacity for electronic commerce: Leased line developments and pricing. Paris: OECD. Petershoff, W. P. (1999). Allgemeine Bestimmungen Bo. rsengesetz. In F. A. Sch.afer (Ed.), Wertpapierhandelsgesetz, Bo.rsengesetz mit Bo.rsZulV, Verkaufsprospektgesetz mit VerkProspV: Kommentar (pp. 431–512). Stuttgart: Kohlhammer. Pospischil, R. (1998). Fast Internet. Telecommunications Policy, 22, 745–755. PWC (1999). Telekommunikationsbo.rse. Frankfurt: PricewaterhouseCoopers. RegTP (1999). Ta.tigkeitsbericht 1998/1999 der Regulierungsbeho.rde fu.r Telekommunikation und Post. Bonn: RegTP. RegTP (2000). Jahresbericht 1999 der Regulierungsbeho.rde fu.r Telekommunikation und Post. Bonn: RegTP. Roddy, D. J. (1999). Online B2B Exchanges. New York: Deloitte Research. Rosen, R. (1994). Private Handelssysteme – eine Herausforderung fu. r die Bo. rsen. Zeitschrift fu.r das gesamte Kreditwesen, 47, 1213–1217. Schaaf, J. M. (2000). Telecom eMarketplaces Unfold. Cambridge: Forrester Research. Schmid, B. (1993). Elektronische M.arkte. Wirtschaftsinformatik, 35, 465–480. Schwandt, F. (1996). Internationale Telekommunikation. Berlin: Springer.

610

T.J. Gerpott, S.W. Massengeil / Telecommunications Policy 25 (2001) 587–610

Schwark, E. (1994). Bo.rsengesetz: Kommentar zum Bo.rsengesetz und zu den bo.rsenrechtlichen Nebenbestimmungen. Mu. nchen: Beck. Segev, A., Gebauer, J., & F.arber, F. (1999). Internet-based electronic markets. Electronic Markets, 9, 138–146. TeleGeography (1998). TeleGeography 1999. TeleGeography, Washington. Vogelsang, I. (1996). Deregulierung und Infrastruktur im Bereich der Telekommunikation in den USA. In H. Berger (Ed.), Wettbewerb und Infrastruktur in Post- und Telekommunikationsma.rkten (pp. 137–149). Baden-Baden: Nomos. Yankee Group (1999). Bandwidth Bonanza: Supply and Demand on Transatlantic and Pan-European Backbones. Yankee Group Report, EuroScope Communications No. 11/1999. Yankee Group, Boston.