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NewsGlobe: Interviews
Cogent’s clean sheet Ethernet approach
Finds success as a low-cost Internet access provider
by Sean Buckley
If anything, Cogent Communications’ rise as an Ethernet-based Internet
access provider has been nothing short of opportunistic.
It was founded in 1999—a time when a bevy of emerging ISPs and CLECs
with bright ideas but short business sense chased after the Internet gold
rush. Many of these ISPs could not scale their business effectively and
had to fold.
But what was one man’s trash became Cogent’s treasure. Over a period
of three years, Cogent acquired the assets of some of the original ISPs,
including PSINet, NetRail and Aleron at bargain basement prices.
Currently, Cogent’s network reaches into 95 markets throughout the
United States and Europe. The service provider can offer each data
center or building it serves with up to 80 Gbps of dedicated capacity.
Throughout 2007 and going into 2008, Cogent plans to extend its service
throughout all segments of Europe and the U.S., while expanding the
capabilities of its network. (See Figure 1.)
Still, Dave Schaeffer, Cogent’s CEO and founder, admits the company’s
business model of providing low-cost Ethernet access really isn’t all that
glamorous.
“You know, in many ways, Cogent may be a little bit of a boring story in
that it is still doing the same thing it set out to do eight years ago,
which was to deliver very affordable, high quality Ethernet interfaced
Internet access,” he said.
No legacy baggage here
What continues to be surprising to outsiders looking at Cogent is that
even in a market where new competitive service providers have come
and gone, Cogent can survive selling Ethernet-based IP Internet services
at the rock bottom price of $10 per megabit.
Thus far, Cogent’s strategy appears to be paying off. At the end of last
September when it reported its Q3 results, Cogent’s On-Net revenue was
$37.6 million, an increase of 37.1 percent over the same period in 2006.
So what’s Cogent’s secret? The answer is simple, argues Schaeffer:
unlike its traditional incumbent competitors, Cogent does not carry the
same baggage of legacy services.
On average, incumbent carriers such as AT&T or Verizon must maintain
hundreds, if not thousands, of legacy TDM and next-gen IP services.
Meanwhile, Cogent has about eight flavors of Ethernet-based Internet
access products to maintain and operate.
“If you look at the Internet, it’s kind of a dirty little secret in telecom
that the Internet is the service provider’s worst nightmare,” Schaeffer
explains. “It forces them to spend huge amounts of capital upgrading
their networks to handle the volumes, and two, it’s simultaneously
cannibalizing all of their other proprietary networks and applications,
whereas we started with a clean slate and focus only on Internet
access.”
Cogent had enjoyed somewhat of a luxury because from day one it could
build an all-IP-over-DWDM network with fiber. Then, it decided to use
Ethernet as the ubiquitous customer interface. It’s these factors that Schaeffer says enables its model to be successful.
“By making those choices, we have been at the forefront of being able
to adopt new technology and remain the lowest cost provider,”
Schaeffer said. “I think the second advantage we have is that we chose
to use Ethernet ubiquitously as our customer interface and not need to
deploy any TDM gear and the translations back and forth.”
Staying focused
To maintain its focus as the lowest cost Ethernet provider, Cogent is not
looking to handle every customer that needs Ethernet service.
An estimated 56 percent of Cogent’s business is wholesale, while the
remaining 44 percent of revenues comes from larger businesses that
reside in tall shiny buildings.
“We tend to focus on large multi-tenant office buildings in the central
business districts of big cities, or we focus on data centers where we
sell to other service providers,” said Schaeffer. “Our network is not
trying to be ubiquitous, it’s not trying to offer a full range of products.
Our philosophy is to remain focused on the fastest growing and most
commoditized part of the market.”
Outside the enterprise and wholesale service domains, Cogent has also
found a growing audience among the large broadcasters and sells its
services to all the major broadcasters and video providers, including YouTube, NBC and Sony.
Although Schaeffer recognizes that voice and other services are
profitable, don’t expect Cogent to stray from its focus any time soon.
“When we add incremental revenue, we have tremendous operating
leverage with 95 cents of every dollar going to cash flow because we
don’t have to buy anything from the RBOCs,” Schaeffer said. “Most
people who are running competitive companies get addicted to the high
revenue voice business because it generates a lot of revenue, but the
problem is it has a high cost and a high interface and management cost
associated with it.”
A new competitive wave
The competitive communications market continues to operate amid
ongoing consolidation and uncertainty.
After the heady of days of the dot.com boom ended, many CLECs and
ISPs that had emerged during the rise of the Internet and the Telecom
Act of 1996 either went into bankruptcy and disappeared or
restructured. At the same time, the large traditional phone companies
have just gotten bigger in a U.S. regulatory environment that has not
been completely dedicated to fostering competition.
Meanwhile, Schaeffer believes these factors will contribute to yet
another round of market correction.
“Many of the competitors still left are really trying to not focus on
traditional telecom services but rather move up into the application
stack, which generally does not have as favorable incremental
economics,” he said. “I think another wave of distress/realignment [will]
occur because companies that emerged from bankruptcy are still burning
cash.”
And while it’s true Cogent is an alternative Ethernet provider, it
unsurprisingly does not see the traditional phone company or any of the
CLECs as its direct competition.
During the Internet’s emergence, there were more than 200 Internet
backbones. Now, besides Cogent, there are barely a handful of Internet
backbone providers left in the market.
Instead, Schaeffer argues the real competition will be traditional video
broadcasters, a result of how the Internet is evolving into more of a
content delivery mechanism.
“The Internet started as an e-mail network then a file transfer then kind
of a file viewing network, and the Internet is now becoming a content
delivery network,” Schaeffer said. “It’s becoming a replacement for
television, for cable and for satellite. In many ways we believe our
competition is not so much the phone companies anymore, it really is the
CBSs, NBCs or people that had a model distributing content through
these special purpose networks.”
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