Neutral Tandem: the world’s a stage
Guy Matthews examines the plans of the relatively unknown US interconnect specialist Neutral Tandem which, in acquiring Tinet, has been catapulted onto the global stage.
Chicago-based network interconnection specialist Neutral Tandem offered scant evidence of international ambition during the first seven years of its existence.
From its outset in 2003, the company was focussed on allowing competitive operators in the US’s fixed, mobile and cable sectors to exchange traffic with each other without the expense of recoursing to an ILEC, steadily building a nationwide footprint through an entirely organic growth process.
Everything changed in October 2010 when Neutral Tandem made its first ever acquisitive play, stunning the telecoms world with the purchase of Italian carrier Tinet for $94.9 million, vaulting itself into global data services and at a stroke extending its reach all over Europe and Asia.
Until May 2009, Tinet had been known as Tiscali International Network, the global wholesale arm of Tiscali Group. Then came the division’s acquisition by Italian venture capital firm BS Private Equity, and a rebrand to mark its separation from the rest of Tiscali. Satisfied that it had pared the operation down to its essentials, BS sought a buyer and found Neutral Tandem.The move gives Neutral Tandem an international end-to-end wholesale voice, IP and Ethernet capability, in particular adding global credibility to its still fledgling initiative in the Ethernet exchange market – the core rationale for the Tinet buy-out.
Recognising that Ethernet exchanges might represent a natural opportunity for an interconnection company, but not wishing to go it alone, Neutral Tandem struck a deal in June 2010 with co-location veteran Telx. In the interests of maximising compatibility, the two agreed to build their exchange systems for the US market based on a common fabric, namely the Cisco ASR 9000 router and accompanying software. Neutral Tandem’s 14 exchange sites have joined the five just launched by Telx, with all 19 seamlessly linked.
Tinet now gives Neutral Tandem the platform to take things to the next level, making its Ethernet exchange offer global, and putting it head to head with other exchange players with a worldwide footprint, like CENX and Equinix.
Neutral Tandem president and chief operating officer Surendra Saboo acknowledges that the Ethernet exchange market is rapidly filling out with competitors, but insists that the company is approaching the market with a plan and not on a purely opportunistic basis. “The whole idea of our Ethernet exchange strategy is that it’s based on a network, rather than localised exchange operations,” he explains. “We’re in multiple locations around the globe. It’s all about delivering wholesale services to provide benefits for customers looking for off-net connections. Where a customer doesn’t have a footprint, we provide that solution for them. We’re a network company, not a local exchange company.”
Saboo says the two networks – Neutral Tandem’s US-based one and Tinet’s global assets – are now fully integrated, even with the ink on the contract barely dry: “We’ve got reach into Europe and Asia, going back into the US,” he says. “With Tinet, we’ve now got over 100 exchangecompatible PoPs internationally. You can get on and off the network at any one of those points and connect to another carrier. We’ve got a complete global footprint.”
As with the Telx arrangement, the success of Neutral Tandem’s international exchange play appears to hang to a degree on the technology platform that underpins the service: “All Tinet’s routers are also switches,” Saboo explains. “They are designed that way by Juniper to make exchange services available at any node.”
Also essential to Neutral Tandem’s international exchange proposition is the ability to provide varying levels of service to customers: “If they’re just after a local connection, that’s fine,” says Saboo. “But if they want something more extensive, say from Chicago to Amsterdam, we can do that too. We’re a one-stop shop where they can either connect from exchange to exchange, or end-to-end right down to the level of the building. That was always Tinet’s original strategy. We will take responsibility for everything, including the SLA.”
Second tier cities
A further area of differentiation from other Ethernet exchange operators is a focus away from the more obvious hubs: “We believe that what customers really want from us is connections in second tier cities,” says Saboo. “We help them get to the hard-to-reach places, and that’s where we’re doing the hardest work to establish NNIs. The need we’re answering is not just in places like New York, Chicago and LA – people are already connected there. We’re looking at places like Las Vegas and Bucharest, solving the problem of complexity as well as reach as we go.”
With a view to automating a lot of the processes customers have to go through when using an exchange, Neutral Tandem has launched a supporting web portal. “It’s about simplifying the manner in which customers conduct business over the exchange,” says Saboo. “The portal empowers Ethernet exchange customers, allowing them to find Ethernet connectivity solutions for their global off-net needs, place orders and view order status, as well as monitor service levels and trouble tickets on an end-to-end basis.” He says the portal offers custom security layers, allowing customers to control which user groups are permitted to view, edit and update content.
So is Saboo satisfied, not only that his exchange offer stands up against that of rivals, but also that the exchange sector offers opportunities as a long-term play for a newish entrant like Neutral Tandem? “The market for Ethernet services that carriers provide to enterprises is growing, while other areas like TDM are not,” he rebuts. “It’s all going to Ethernet. Those carriers will continue to need off-net solutions. Maybe out of 50 buildings they need to reach, 20 will not be on their network. There’s a good future for the Ethernet exchange market, as no one carrier has a global footprint. As long as exchanges can provide real value and simplification, they’ll be winners.”
Saboo points to the voice interconnection market, Neutral Tandem’s original bread and butter, as an example of successful defiance of the naysayers: “We stayed in it, even though everyone said it would be right to get out,” he says. “We’re still doing it seven years later. Voice however is a mature market, while carrier Ethernet is just beginning. The sheer global nature of the market means that the need for Ethernet exchanges will continue to grow. If we were just talking about a US market, it would be different.”
Camille Mendler, VP and senior research fellow with analyst company Yankee Group, believes that while the Ethernet exchanges look like a fertile opportunity, the long-term winners in the sector will be those with the deepest pockets and most exciting ideas. “If you look at existing exchange operators like CENX and Equinix, they are forging into value-added areas, beyond just the simple provision of exchange services. More competition in the market is a good thing, but it will require both capital and skill. Is Neutral Tandem already looking over the horizon, like CENX and Equinix are?”
Henry Bohannon, Ethernet product manager with European carrier Colt, which has just signed up to participate in CENX’s exchanges, believes it is too early to declare any winners in the exchange market: “If we thought we’d identified one exchange player who’d got the model all right and everybody else was all wrong, we’d go with them,” he says. “But as it is, we’ll be looking to connect through multiple exchanges – until the market consolidates. I can see a stage when there might be too many people in the market.”
In addition to exchanges, Saboo says Neutral Tandem remains committed to staples like voice interconnection, as well as IP transit. “In IP transit, Tinet was number five globally,” he says. “They did a really good job in that area. Exchanges though are clearly our next big growth area. All three main areas for us run on the same network.”
Saboo is not ruling out the possibility of future M&A moves to grow faster than tried and tested organic means could ever allow: “It’s too early to talk about that yet,” he pleads. “We’re focussed on combining the two businesses, but no doubt we’ll be open to new strategic ideas in the future. We’ve got enough on our plate growing our exchange business right now.”
Service provider investment in carrier Ethernet is growing faster than overall telecoms capital expenditures, making it one of the few areas to have defied the economic downturn. Service providers worldwide invested a total of $21.6 billion in carrier Ethernet products in 2009, and experts believe this spending will increase over the next five years or more.
Source: Infonetics Research
History: Neutral Tandem was set up in 2003, opening for business the following year with a carrier-neutral tandem network to allow mobile, CLEC and cable operators to exchange voice traffic. Originally serving the Chicago area, it soon expanded to other US regions and eventually developed a nationwide backbone network serving most major US cities. The company came to global attention in 2010 through buying Tinet.
Ownership: Publically quoted on Nasdaq, Neutral Tandem is owned 5% by institutional investors and 95% by other investors.
CEO: Rian J Wren
Revenues: Neutral Tandem’s most recent full year results are for 2009, showing revenue of $168.9 million, up 39.7% from $120.9 million in 2008. Pretax income on this revenue was $64.8 million for the period, up 76.1% from $36.8 million for 2008.
Customers: In the US, it serves around 100 wireless carriers, cable companies, CLECs and broadband service providers, and through Tinet now has a global customer portfolio.
Network: Existing all-IP, pan-US network now augmented by Tinet’s reach across Europe and Asia.
Products and services: Local and national transit services, Ethernet exchange services, Ethernet private line services, hosted services, IP transit.