Q&A: Neutral Tandem – Ethernet Exchange

10:00 AM -- In preparation for Ethernet Expo Americas 2010, I recently had the opportunity to chat with two executives of Neutral Tandem Inc. (Nasdaq: TNDM): Surendra Saboo, president and chief operating officer, and Jeff Beer, regional VP of sales and business development. Saboo will be speaking on Expo panel session "Carrier Ethernet Exchanges: The Catalyst for Market Growth" on November 3. Neutral Tandem is also participating in Light Reading’s Ethernet Expo 2010 Digital Summit on October 26.

Headquartered in Chicago and publicly traded on the NASDAQ(TNDM), Neutral Tandem is a well-established provider of global interconnection services. In October 2010, Neutral Tandem acquired Tinet , a global carrier exclusively committed to the IP Transit and Ethernet wholesale market. The acquisition combines Neutral Tandem’s interconnection services for wireless, wireline, cable, and broadband companies with Tinet’s global IP backbone. Collectively, Neutral Tandem provides voice, IP Transit and Ethernet solutions to carriers, service providers, and content management firms worldwide.

With 14 announced Ethernet exchange markets, Neutral Tandem has launched exchanges in more US metro areas than any other exchange player thus far.

Neutral Tandem’s corporate revenue increased 8.5 percent year-over-year from US$41.2 million in the second quarter of 2009 to $44.8 million in the same quarter 2010, and the firm had net income of $8.5 million in that quarter, with no debt.

Below are highlights of Heavy Reading’s interviews with Saboo and Beer.

Heavy Reading: Over the past year, we have seen a handful of Ethernet exchange companies emerge and start to line up participating service providers. What motivated Neutral Tandem to join the game?

Neutral Tandem: It was driven by a combination of overall demand combined with our core competencies. The demand for Ethernet is growing at an extremely rapid pace. Enterprises today are demanding greater access to Ethernet connectivity for all their bandwidth needs, especially data and video. That’s why you’re seeing analyst projections for worldwide Business Ethernet Services revenue to grow 20 percent annually. Demand is also growing from wireless carriers that are turning to Ethernet for mobile backhaul solutions to address the dramatic increase in data traffic on their networks. In fact, in the Cisco Visual Indexing Study, they predicted that globally, mobile data traffic will double every year through 2014, increasing 39 times between 2009 and 2014.

When we announced the introduction of our Ethernet exchange service offering back in February 2010, we believed we were well positioned to offer a compelling Ethernet exchange solution. Neutral Tandem’s business has always focused on streamlining connections among facility-based CLECs, MSOs, IXCs and wireless companies. And of the 100+ carriers we were doing business with, almost all of these same companies also happened to be buyers and sellers of Ethernet services. In addition, we have 32 physical sites in the US that are owned and operated by Neutral Tandem and all of these sites are interconnected, supporting our voice services. Interconnecting each of these sites is our highly redundant and scalable all-IP, MPLS network. We also have the technical expertise with our existing staff with decades of experience building, managing, and maintaining voice and data networks with five 9s of reliability. Therefore, we had the physical space, the network, the existing customer relationships, and the technical prowess to cost-effectively deploy and launch Ethernet exchange services with a relatively low level of capital investment that leveraged our core strengths.

HR: What strengths do you believe you bring to the Ethernet exchange market?

Neutral Tandem:The advantages of our Ethernet exchange offering center around making it easier for customers to do business with us. So, first and foremost, that involves maximizing the markets where customers can buy and sell services. Neutral Tandem does that by offering our Ethernet exchange service in more markets in the US than our competitors -- comprising both Tier 1 and Tier 2 markets. You add to that the capability to support 85 additional POPs across the world via the Tinet acquisition, plus the seven additional locations via the Telx Ethernet Exchange Alliance, and you have what we believe will be the most accessible Ethernet exchange.

Next, we increase the customer’s value of connecting to our exchange by increasing the number of connection points accessible. Metcalfe’s Law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system. So, we have shifted the market dynamics by interconnecting each one of our exchange locations over our global IP MPLS network to one another. So, instead of a customer connecting to an exchange in LA that is in effect an island -- where they can only connect to other members connected to that particular exchange -- our customers can connect to every member connected to any one of our exchanges. That enables service providers [buyers] to easily discover Ethernet services in markets outside their footprint. It also enables access providers [sellers] to advertise their building lists to all service providers across Neutral Tandem’s network.

Finally, we provide a range of managed off-net solutions with the flexibility to meet our customers’ needs depending on the scenario. This gives customers the ability to negotiate their own commercial agreements or -- if they elect -- to rely more heavily on Neutral Tandem for everything from handling support calls for the OVCs and tail circuits they order, to even negotiating one commercial arrangement with NT that enables them to receive one bill from NT and facilitates their orders with other exchange participants. The goal is to simplify and expedite the ordering process by reducing lengthy time frames to establish a connection with another carrier by streamlining the negotiation, ordering, provisioning, and service management processes.

HR: How many service providers do you have involved in the exchange?

Neutral Tandem: In late July, we announced we have 10 companies involved in our charter customer program. This includes Sidera Networks (formerly RCN Metro Optical Networks), Paetec, Broadview Networks, US Signal, Mosaic NetworX, Wilshire Connection, and ION Holding Company, not to mention Tinet whom we have since acquired. Since that announcement, we clearly have signed additional customers.

HR: You mentioned that you had initially 32 physical sites. Do you eventually intend to have all of those be part of the exchange?

Neutral Tandem: Since we acquired Tinet, a global wholesale IP Transit and Ethernet provider, we announced the launch of 14 enabled Ethernet Exchange locations and -- combined with Tinet’s global footprint -- now have 99 global Points of Presence (PoPs) for our Ethernet exchange. In addition to this global footprint, we had and continue to have customer input regarding potential additional cities. One thing we have heard from our charter customers is that they would like to have an exchange provider in Tier 2 cities. Most already have connections in Tier 1 cities like New York, Los Angeles, and Chicago, and they are looking for help in Tier 2 markets like Seattle, Detroit, Philadelphia, and Charlotte. When you look at our exchange list, you see we address top cities -- which are table stakes -- but we also have a number of Tier 2 locations.

HR: Are you deploying new equipment to get the exchange sites up and running?

Neutral Tandem: Currently we have 14 commercial sites up and running with new Cisco ASR 9000 Ethernet switches in Atlanta, Boston, Chicago, Dallas, Denver, Detroit, Houston, Los Angeles, Miami, New York, Philadelphia, San Francisco, Seattle, and Washington, DC. Tinet’s global PoPs are enabled with Juniper MX series gear, which is already capable of Ethernet switching and interoperable with the Cisco gear we are deploying in the US.

HR: You have a relationship with Telx, which is another exchange player. Can you explain how that is working?

Neutral Tandem: In June 2010, Neutral Tandem and Telx made public our plans to connect all our Ethernet exchange sites into a unified network exchange service offering so as to provide greater value to our combined end customers. Telx has some great strategic data center locations and a great customer set, while Neutral Tandem brings a network and operational expertise to the game. Combined, we’ll be able to offer a 21-city footprint throughout the US -- 14 from Neutral Tandem and 7 from Telx. We also bring a unified approach to our exchange web service portal and back office capabilities.

HR: The Tinet acquisition is big news for you. Can you explain how that fits into your overall Ethernet services strategy?

Neutral Tandem: This acquisition redefines Neutral Tandem from a strictly voice-centric company into a global IP-based network services company focused on streamlining interconnections across a variety of media, including voice, data, and video. As I mentioned, it increases Neutral Tandem’s 14 domestic Ethernet exchange sites to 99 PoPs worldwide. It also leverages Tinet’s highly complementary Ethernet business lines including Tinet’s ENNIs that provide interconnections to carriers in hard-to-reach countries. The acquisition will transform Neutral Tandem into a global solutions provider in the voice and data space and make us one of the largest Ethernet Exchange providers in the world. As a result of the acquisition, Neutral Tandem positions itself to take advantage of the explosive growth in service with a global presence and access to hundreds of relationships with service providers around the world.

HR: Thanks for taking the time to chat. I look forward to catching up with both of you during the upcoming Digital Summit and Ethernet Expo.

— Stan "EtherMan" Hubbard, Senior Analyst, Heavy Reading, and Chairman, Ethernet Expo Americas 2010

Interested in learning more on this topic? Then come to Ethernet Americas 2010, Light Reading's eleventh Ethernet event, designed to meet the information needs of service providers and enterprises that are working out what next-generation services and applications to deploy, and what infrastructures will help them do this in the most cost-effective and productive manner. To be staged in New York, Nov. 2 & 3, admission is free for attendees meeting our prequalification criteria. For more information, or to register, click here.

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