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Tandem interconnection provider, Neutral Tandem (TNDM), simplifies network connections within a telecom operator’s network or between carriers by routing traffic through its own switches.  After the Telecommunications Act of 1996 opened the doors to telephony services competition, numerous carriers were established.  Incumbent Local Exchange Carriers (ILEC) became overwhelmed with the increasing amounts of switching volume, and connection costs climbed for the new telcos. Neutral Tandem was founded to mitigate traffic, reduce costs, enhance reliability, and minimize network exhaust or bottlenecks.  

The company was launched on a market-by-market basis with an original focus on the exchange of local telephony traffic among carriers.  Over time, the offerings have developed to include long distance traffic as well, thanks to the rollout in 2006 of a nationwide IP backbone that connected major markets.  This also diversified the client base to include different types of carriers, such as cable companies and wireless carriers.  Currently operating in more than 150 large and mid-sized markets in the United States, expansion activity may slow in the coming years as coverage of secondary cities occurs at a moderating pace. 

Nonetheless, the company is pursuing growth initiatives on multiple fronts. Moving beyond the scope of traditional voice traffic interconnection, the company has launched an Ethernet Exchange product.  At the present time, Ethernet services providers are generally limited geographically based on the network footprint. However, much the same as within the local service exchange, the company has unveiled an interconnection platform, this time for Ethernet traffic, which will likely be in 14 markets by the end of 2010.  Furthermore, a partnership with interconnection company Telx, will enhance the geographic footprint and provide a unified exchange. Streamlining Ethernet traffic provides a more efficient connection, as well as trims costs, since mapping to different networks is no longer necessary.  This strategy will likely receive ongoing investment moving ahead.

Global development is also on the agenda for Neutral Tandem.  Thus far, the connector intermediary has not waded much into international waters, but the wide arena does provide deeper growth prospects.  However, with the recent purchase of Italy-based Tinet SpA, a global carrier within the IP and Ethernet wholesale market, the company is gaining a foothold abroad.  The combination will quickly boost Neutral’s end-to-end Ethernet connectivity solutions, although the deal offers minimal overlap and synergistic savings.   In the short term, the addition should add about $60 million in annual revenues, but the broader potential of global services offerings is the true value of the deal.  The company’s growth prospects will likely be fed strongly from entering mostly untapped international markets.
On the home front, competition within this niche sector of the telecom market is heating up, likely due, in part, to recent economic pressures.  Many telecoms have been hampered by shrinking traditional voice line accesses and have turned to managing costs, including interconnection fees, as one way of shoring up profits.  Companies such as Level 3 Communications (LVLT), Hypercube, and Peerless Network, have entered the tandem interconnection market.  Along with telecom giants Verizon (VZ – Free Analyst Report), AT&T (T – Free Analyst Report), and Qwest (Q) that also provide switching services and in some cases manage their own direct flow of connectivity.  Even so, Neutral has augmented its market share to include a broader swath of telecom carriers, and traffic has climbed appreciably.

Despite the tight field of players, the company is well positioned to capture a growing share of revenues thanks to its strong market position and diverse base on customers.  International expansion, both through traditional voice call routing and Ethernet management, should provide the next wave of growth at Neutral Tandem.  But domestic growth potential is no laggard either, with its widening range of services, new Ethernet partnership with Telx, and additional market coverage. Thus, Neutral Tandem holds much promise for substantial revenue and profit gains in the coming years.  

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.