InvisibleHand Networks Inc. is hoping that Telehouse America’s imminent launch of an exchange for the trading of IP (Internet protocol) bandwidth will be followed by a string of similar implementations at other carrier-neutral collocation facilities.

“Our hope is that every 60 days we’ll be able to have other announcements,” said CEO Jim Brown in a recent interview. Several of Telehouse’s “industry peers” are testing the software, as are a few service providers, said Brown. “And we have a tier-one carrier, whose name I can’t disclose, who is finishing up a lab trial.”

Tomorrow, InvisibleHand is releasing the next iteration of its Merkato software, its near-real-time platform for buying, selling and allocating IP capacity. The software packages is designed to help service providers manage their capacity inventory and enable flexible pricing for spot purchases, such as off-peak weekend use. It allows what InvisibleHand calls “open-market pricing in 5-minute increments,” and supports a reservation system for future bandwidth needs.

Brown took the reins of the Burlington, Mass-based company in January, having served as general partner for information technology investment at Polaris Venture Partners. A one-time investment banker with JP Morgan & Co., Brown doesn’t mind the risk involved with being at the forefront of another attempt to create a market for bandwidth.

“Bandwidth in and of itself is a unique commodity in that it’s perishable and shareable,” he said. “If I have a pipe, what flows through that pipe is infinitely divisible. At the same time, once it flows through the pipe it’s gone. You either use it or your lose it.

“And what folks haven’t gotten right on the bandwidth side is that they were trying to trade the pipe rather than what flows through it. Pipes are not infinitely divisible. If I allocate a circuit to you-definitely I can’t allocate that same circuit to someone else.”

Telehouse’s plans for an IP capacity exchange, to be located at its 25 Broadway facility, date from last year, when the neutral collocation provider first announced it would adopt Merkato, which means “marketplace” in experimental language Esperanto.
A formal announcement of the IP exchange could be made as early as this week.

Brown thinks Telehouse’s deployment of Merkato might help it attract new carriers and service providers, “the buyers and sellers of bandwidth,” to colocate at their facility. Current tenants include AT&T Corp., Verizon Communications Inc. and WorldCom Inc.

“It’s beneficial for the buyers obviously because they get to buy what they need when they need it,” Brown said. “And it’s beneficial to the sellers because they’re able to offer their excess capacity on a market and get revenue for that with no additional significant capex cost. And they don’t have to have a bunch of sales people running around knocking on doors to fill that excess capacity.”

The Merkato software allows a seller to set a floor price and the amount of bandwidth they are willing to sell. “Then the software will walk you through some detailed strategies based on algorithms that basically allow you to optimize the amount you are willing to sell and get the maximum price for it on the sellers’ side,” Brown said.

“Similarly, on the buyer’s side, they would go in and set up their buyer agent, determine how much they are willing to buy, and what they are willing to pay for it.

“Then they turn those agents loose into the Merkato server, and the server acts as a marketplace where buyers and sellers are able to bid and ask in real-time for bandwidth.”

“Those auctions are continuous. They close every five minutes, and as soon as those auctions close, the allocations are made to the winners instantly. Then it’s provisioned through the router and the folks get that bandwidth.”

Brown isn’t too concerned about the institutional resistance of the incumbent carriers to market-based pricing and an exchange for bandwidth. Even some of the RBOCs (regional Bell operating companies) have circuits on which they operate “at 15-20% utilization up to 50-60% and they bring in a ton more revenue – which falls directly to the bottom line- they look like a hero,” he added.

And Brown doesn’t expect that the availability of an exchange will result in current customers trying to get out of their fixed contracts to participate in the marketplace.

“It’s actually not a great idea to have all of your bandwidth dependent on this exchange,” he said. “One could imagine a Verizon customer saying `I want 40% of my bandwidth needs to be set because this is the minimum amount I need. I want to make sure that it’s there, and I’m willing to pay more in a fixed term contract to get it.’

“But for the other 60% - all of that bursty stuff which sort of defines what IP bandwidth is – they want to be able to buy it either on a spot basis or in a reservation marketplace.”

InvisibleHand offers “some standard pricing for exchanges and service providers, but more often than not it really depends on the application they’re using it for,” Brown said. “So it’s more of a negotiation based on implementation by the customers.”  Still, the cost of entry is relatively low, described as “$100,000- plus,” by Brown.

In addition to the upfront payment to Merkato, InvisibleHand get a royalty of sorts. “Telehouse takes a piece of the transaction and then we take a piece of their piece, Brown said. “The reason we do that is to lower the capital cost, a lower barrier to adoption. So we don’t make money unless the buyers and sellers make money.”