Dirt cheap broadband
grabs market share
Cogent Communications
sells bandwidth to corporate clients for
a fraction of the cost of traditional
telecoms and cable companies. Many of
the usual suspects are not happy, says
Fortune's Stephanie Mehta.
By Stephanie Mehta, Fortune senior
writer
March 22 2007: 10:35 AM EDT
NEW YORK (Fortune) -- Dave Schaeffer
seems like an awfully nice fellow. The
physics major-turned-CEO has founded
seven successful companies, yet he
displays none of the brashness of other
tech entrepreneurs. He is mild-mannered,
unfailingly polite and speaks with the
deliberate manner of a college professor
trying to explain a particularly
difficult concept.
Yet Schaeffer is the first to volunteer
that he and his company, Cogent
Communications (Charts), aren't exactly
beloved in the telecommunications
industry.
The reason: Cogent, which gobbled up a
bunch of busted Internet service
providers at fire-sale prices, sells
bandwidth to corporate customers for as
little as $10 per megabit per second per
month. (In comparison, cable operators
and telcos charge consumers roughly $40
a month for broadband that clocks in at
1.5 megabits per second, and businesses
can pay $550 a month for a dedicated T-1
connection.)
Competitors, ranging from Level 3
Communications to AT&T, aren't fond of
Cogent's bargain-basement rates, and
some investors wonder how the company
can make money charging such low prices.
Indeed, Cogent doesn't turn a profit:
last year the company posted a loss of
$46.5 million, and it expects to lose
money again this year.
Schaeffer and Cogent, however, do have
their share of fans. Customers,
especially heavy-duty data users such as
Google's (Charts) YouTube and eBay
(Charts), have been flocking to Cogent
for cheap onramps to the Web.
Picture-sharing site Photobucket
recently said it would double its
bandwidth connections with Cogent, and
YouTube apparently increased its
connections some 30 fold in 20 months,
according to a report by Wachovia
Capital Markets.
Wall Street has taken notice of Cogent's
popularity with the online cognesceti.
The company's stock now trades at about
$24 a share, close to its 52-week high.
Shares have tripled since August.
In many ways, Cogent is reaping the
rewards its predecessor companies had
hoped to sow. Back in the late 1990s,
dozens of companies raised billions of
dollars to aggressively build Internet
networks. Some, such as Global Crossing
and 360 Networks, built huge backbones
to carry data traffic around the country
while others, such as Allied Riser,
installed fiber optic cable in and
around office buildings. They all
figured huge streams of Internet traffic
would fill all those pipes, enriching
investors along the way.
Can Clearwire take on the big telcos?
The pipe dream, of course, turned into a
nightmare. The companies built much more
capacity than customers could ever
absorb, and many of the promising
upstarts failed or sought protection
from bankruptcy courts. A few, such as
Global Crossing (Charts) and XO
Communications, emerged from bankruptcy
(though many stockholders were wiped
out).
Others sought white knights: Schaeffer
was one such savior, picking up the
assets or operations of 13 failed
providers, including Internet pioneers
PSINet, NetRail and Aleron.
Today, Washington, D.C.-based Cogent is
seeking to be the low-cost, high volume
player in the Internet world. And that,
Schaeffer contends, rankles competitors
who have higher overhead or legacy
telecom businesses to protect.
"I think people look at Cogent and their
gut reaction is akin to the way an
American factory worker might look at
the Chinese," Schaeffer says in his
professorial way. "They think there's
something unfair about the way we do
business, when in fact, they're the ones
who aren't doing the right things to
compete."
Cogent has tussled with a few of its
competitors in the past, mostly over
concerns that Cogent essentially was
"dumping" traffic onto others' networks.
Cogent has been "de-peered" on occasion
by rival ISPs France Telecom, AOL and
Level 3. Large ISPs traditionally
"peer," or exchange traffic with each
other for free, but a few years ago
Level 3 concluded Cogent was sending way
more traffic to Level 3 than Level 3 was
sending to Cogent's network. Level 3
briefly pulled the plug on Cogent
traffic, causing the two companies '
customers to lose connections to
considerable Internet content.
Cogent and Level 3 (Charts) eventually
resolved their differences, but you can
bet other Web operators are closely
watching the amount of traffic it
receives from Cogent, with its business
model built around volume.
Schaeffer doesn't seem to care about
winning popularity contests in the
clubby world of Tier 1 telecom players.
Indeed, he stops short of accusing the
other operators of collaborating on
pricing. "I won't call it price fixing,
I'll call it price signaling," he says.
"We have not played by all the
established rules that are in place that
relate to price."
Nor is he interested in copying rivals'
strategy of selling add-on services or
getting into the business of managing
customer's networks, the way AT&T
(Charts) and Verizon (Charts) do. "If
you're Google or Apple's iTunes or eBay,
what value added service would they want
from Cogent?" Schaeffer says. "They just
want the pipe; they're the ones adding
the value to the customer."
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