It’s a familiar comment in the telecom industry: “We’re not sure we want to be first, but we sure as hell want to be second.” It’s a comment that the new president and CEO of InvisibleHand Networks, Jim Brown, has heard frequently about adoption of the firm’s Merkato automated transaction platform.
Brown is excited because that “first” – Telehouse America, a major carrier-neutral collocation firm that’s one of a handful of Merkato beta-testers – is about to launch live commercial deployment of the technology as a liquid IP exchange. Brown believes the market’s struggles, and the solutions he offers will make the second-to-market crowd put their money where their mouth is, just in time for the rollout of Merkato 2.1.
“We believe we have a revolutionary technology but we’ve tried to be wise, taking an evolutionary path to getting it adopted,” says Brown, a JP Morgan telecom financial veteran and former InvisibleHand board member who came to the firm from Polaris, its largest investor.
While Telehouse marks the first commercial use of the software, InvisibleHand will reach cash-flow positive in the next two quarters with its own StreamingHand, an IP reseller that uses Merkato to arbitrage wholesale bandwidth prices and resell at retail. The proof of concept business is selling capacity at tow or three times the purchase price – but its 60-plus customers are saving an average of 30 percent, he says. These are content providers, gaming firms and others whose costs are 90 percent bandwidth.
“The traditional pricing models were killing them-high fixed cost and variable revenue line,” brown says. “Now they buy the bandwidth they need when they need it at a market-based price and aren’t locked into any long-term contracts.”
Merkato interests Telehouse customers for the same reason: “They want to make their cost variable with their revenues, to make their business model work.” But carriers have now latched onto the product as well, in part because the product keys in on some increasingly popular telecom terms: increased revenue and reduced opex on existing infrastructure.
“With all of the financial pressures the service providers are under…these folks are desperate for a story with some substance, to tell the investment community they’ve got a sustainable business model.” He says. “What’s been exposed here is that circuit based business models don’t work. You can’t throw more fiber at the problem. You can’t throw more boxes at the problem. In fact, the more you do, the worse the problem gets.” The business model works better when companies can dynamically price and bill for what goes through the pipes themselves, Brown says.
Service provider’s capex budgets have flopped over the last few years, now typically decreasing 30 percent a year, so “they’re not looking for another pieces of expensive equipment to put it,” Brown says. Merkato installation is in the high five, low six-figure range.
The existing infrastructure angle doesn’t hurt either, since most service providers already own the switches and other network hardware needed to interface with Merkato. Most service providers utilize about 15 or 20 percent of their capacity, but InvisibleHand claims capacity utilization can be bumped up “immediately” to the tune of 60 to 80 percent, “depending on how aggressive you want to be for unpredictable, bursty traffic,” Brown says.
Merkato also enables IP providers to use price to manipulate demand – an opportunity to smooth traffic in a way that’s common to the voice market but hasn’t been available on the data side. Voice customers tend to follow the rules of price elasticity: They talk longer during cheaper off-peak hours. That’s good for service providers because they can attract callers by virtue of price, but even better because it frees up much of the peak capacity for high dollar customers who need reliable service during business hours. “This software allows IP folks to have that luxury for the first time,” Brown says.
Among added features in the new release of the transaction software is a feedback valuation that captures historical data from recent bandwidth allocations and uses that to automatically acquire capacity based on actual usage patterns. The buyer sets the parameter for the historical data, from five minutes to a day or more, allowing increased efficiency in pricing allocation and selling of bandwidth, he says.
He expects Telehouses’s plunge into live commercial deployment to stimulate action from Merkato’s other beta testers, which include a Tier One provider and a group of colocation and exchange facilities providers. Colo firms in particular are already wired to take advantage of the platform, he says.
“These are exchanges that exist in nature. They’ve got multiple service providers, multiple content providers and other high bandwidth-using enterprises coming in,” he says. “For the most part, [colocatiion] has been a real estate play. So while they have a unique advantage of having all of the right participants already collocated to put a marketplace in motion, they are at the same time desperate for new revenue streams because the leasing of rack and floor space isn’t getting it done.”
Telehouse is the prototype for this. The firm plans to use the Merkato technology to create an IP exchange free of traders and the attached overhead, with a provisioning time of five minutes. Look for the further announcements of new colo and exchange customers over the next two quarters –and wait for a Merkato user to go public in the carrier space as well. A major Tier One service provider s in lab trials with the software, as are several other Tier one and Tier Two carriers.
“As soon as a Tier One provider stands up and says this meets technical muster, I think those [carrier announcements] are going to accelerate,” he says. Brown compares the industry in its current shakeout to a sacred herd: When one “forward-thinking Tier One provider” darts toward a field trial, the rest of the herd will immediately move with it in order to survive.
Over the next year, business models based on IP flow rather than pipes will become a survival mechanism, Brown says. “This has the potential to become the de facto standard in the industry.”
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