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An Online Market for Overseas Connections

Arbinet wants to play matchmaker for long-distance phone companiesWhen your next call to London goes through smoothly, it might be appropriate to thank a middleman with a strange name: Arbinet-thexchange. The New Brunswick-based firm is an electronic marketplace for international wholesale telecommunications capacity; it negotiates the completion of some 30 million telephone calls per week
As more players like cable and Internet companies have gotten into the long-distance calling market, the need has grown to match carriers who originate calls with their overseas counterparts who complete the calls. For the person making the phone call, Arbinet is as invisible as the signal traveling along a telephone line or through the Internet. ?This is like a Nasdaq for international long-distance minutes,? says CEO J. Curt Hockemeier.
The company went public last December and has managed to keep growing in an industry that has seen its share of failure?AIG Telecommunications, for example?which was was created in 1999 by financial services firm American International Group in New York City. The short-lived subsidiary was quietly folded in late 2000 after it failed to generate adequate returns.
By contrast, Arbinet has been growing. For the quarter ended March 31 it reported net income of $1.3 million on $12.3 million in fee revenue. That compares with net income of $836,000 on $10.1 million in fees for the prior-year period. The bulk of Arbinet?s fees accrue as it negotiates the completion of calls between two carriers, collecting an average of three-tenths of a cent for each call.
The service Arbinet provides is relatively new to the telecom industry. Most phone companies still form agreements for completing overseas calls by bargaining with international carriers on a one-to-one basis. ?In the old days, that worked?until competition became prevalent in the late 1980s,? says Hockemeier. Electronic exchanges like Arbinet allow communications carriers to use the Web to set parameters for buying and selling telecom capacity much like investors do for stock trading with an online brokerage. Carriers can set up rules for the rates they want to pay and the level of quality they need to connect calls to various countries.
?The process is automated,? says Hockemeier. ?What we are selling against is the legacy methods and convincing telecom companies that this is a more efficient process.?
So far Arbinet has exchange delivery points in New York City, London, Los Angeles, Hong Kong and Frankfurt, Germany. The company?s network operations center is in Herndon, Virginia. Hockemeier won?t reveal any of his members? names due to nondisclosure agreements, but says Arbinet has 375 companies using its online market to buy, sell and resolve telephone- and data-connection services. That is up from 105 member companies in 2000.
Despite this, investors have cooled to Arbinet in the months since its IPO. Its stock is trading at around $12.85 per share, less than half the closing price of $29 on its first day of trading last December 16. This may reflect questions about the company?s business model.
?Our research suggests that this is not a business for the long term,? says Robert Rosenberg, president of Insight Research, a Boonton-based telecom-market research firm. ?You can make money at it right now, but this business will probably disappear in five or six years.?
Rosenberg expects pricing on telecommunication services exchanged among providers to decrease, reducing the value of shopping through an electronic marketplace. ?The prices of service which had been artificially inflated are now being reduced all around the world,? says Rosenberg. ?This arbitrage play that they count on will gradually become less compelling.?
Hockemeier sees the broadening of the international long-distance industry as an opportunity for Arbinet to gain a greater share of the market. He expects the international long-distance market to grow to $970 billion by 2007 as more than 5,000 providers of international long-distance service are joined by new players. ?You only have to look at the cable-television operators today,? he says. ?Five years ago they weren?t in the telephone business.?
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