Dow Jones to Unveil
Telecom Bandwidth Indexes

Will the bold initiative finally take the guesswork out of pricing your next bandwidth deal or does the entire project smack of illegal price fixing?

by Thor Olavsrud of internetnews.com [January 26, 2001]

Challenging the notion that Dow Jones & Co. is the stodgy traditionalist of the financial indexes, the firm this week revealed it will issue its first indexes of telecommunications bandwidth prices sometime in the second quarter of this year.

The Dow Jones index unit last week met with a group of telecom carriers and energy trading companies—including AT&T, Sprint, Global Crossing Ltd., Enron Corp., El Paso Energy Corp., Koch Industries, Dynegy Corp., Aquila Broadband a Utilicorp United Inc. subsidiary, and Williams Communications Group—which are already trading bandwidth. The companies will supply data on the prices of telecom bandwidth between pairs of cities to compile the indexes.

According to Antoine Eustache, global index editor for Dow Jones, the indexes will use the prices from actual sales and purchases of telecom circuits, not prices quoted by buyers and sellers. Each of the companies supplying data will be required to sign an agreement with Dow Jones attesting to the accuracy of the data. Dow Jones will retain the right to audit all participants to validate the data.

The indexes will cover bandwidth prices of circuits connecting major U.S. cities—including New York-Los Angeles, New York-Chicago, New York-Miami, Seattle-San Francisco, Dallas-Denver and Washington D.C.-San Francisco—as well as circuits connecting certain cities in Europe—including London-Amsterdam, London-Paris, Frankfurt-Berlin, and minor routes like Paris-Madrid and Paris-Milan or Rome—and transatlantic circuits connecting New York and London. Eustache said other routes could be added to the indexes if enough data exists.

The capacity of the circuits covered will range from DS3 to OC192 domestically and from DS3 to STM4 in Europe. The transatlantic circuits covered will initially range from DS3 to STM1 but could eventually cover capacity as high as STM16.

The first indexes will cover six-month and one-year periods and will most likely be a three-month lead time between publication of indexes and the delivery date for the bandwidth covered by the index.

Is there is a market for bandwidth futures? Perhaps, but with huge caveats. For example, most networks claim to be "Tier One" but the educated consumer knows better.

So the issues begs the question—if service providers and telecom firms can buy bandwidth at commoditized prices, why would the same companies every choose to purchase bandwidth privately?

The answer is that not all networks are created equally so will Dow Jones & Co. distinguish its bandwidth pricing index in terms of structural quality?

Remember, the trading of forward-priced contracts is not necessarily about another channel of distribution for networks, but a means to manage the price risks inherent in networks.

Over the next few months Dow Jones will have to work with the industry players to determine if standard Service Level Agreements (SLAs) delineating threshold quality standards for circuitry so that everyone can abide by and specified rules to fairly evaluate pricing. The firm will need to also consider what happens when a bandwidth deal does not comply with such a standard.

This means that Quality of Service (QoS) might have to be monitored by an impartial third party, possibly employed by industry carriers in order to maintain minimum quality standards and set compliance. Otherwise the bandwidth index will equate to nothing more than illegal price fixing and would quickly earn the ire of the Department of Justice.

Granted, it's a bold effort on the part of Dow Jones & Co., clearly a trusted force in the investment sector. Whether Wall Street is prepared to justify price differentiation between carrier bandwidth capacity remains to be seen.

Can Dow Jones & Co. take some of the mystery out of purchasing and selling bandwidth? Probably, but the rules of the game must be set before bandwidth futures pricing could be traded and speculated upon like wheat, corn, and oil.

—End