The Backbone That Grows

This company has yet to see a profit, but that hasn't stopped it from growing rapidly. It's the low cost provider many in the industry love to loathe. We talked to the CEO.

by Alex Goldman ISP-Planet Managing Editor [January 25, 2005]

Generally, we hear the complaints in person, in situations not amenable to attribution. ISPs wonder how Washington, D.C.-based Cogent Communications can offer 100 Mbps at $1,000 per month to end users and $3,000 to ISPs for resale.

Dave Schaeffer, Cogent's CEO and founder, says prices could go even lower. "Our business model contemplates continued price erosion. We already do better than that today. For example, we sell to cable operators in Spain and France for less than that." If you think Cogent is U.S. only, you haven't looked at the company's network map recently. It has grown through acquisition.

At the prices it offers, you'd expect high utilization and bottlenecks. Schaeffer insists that Cogent is the only non-oversubscribed network on the planet, with its unusually fat pipe backbone, 80 Gbps in the U.S. and 40 Gbps in Europe. "We're the second largest carrier of Internet traffic," he says.

The company has been growing, acquiring companies in bids with little competition, sometimes at prices less than the cash on hand. "We have negative goodwill," Schaeffer says.

"We've acquired thirteen companies," Schaeffer notes. "Of the original eight companies when DARPA was privatized, we own three. As a result, we have a full class A [of IP addresses] and run one of the 13 root servers."

Much of the equipment acquired in these transactions has been depreciated, and depreciating still adds tens of millions of dollars to Cogent's reported quarterly loss. "We've depreciated about $5 billion worth of equipment," Schaeffer says.

Some of the acquired equipment is useful nonetheless. "When we acquire a company, we divert traffic off that network and onto ours, redeploying equipment onto our network. PSINet had 135 Cisco GSRs when we acquired them."

The key is adding more enterprise customers in buildings and also adding more high bandwidth data center customers. For its enterprise customers, Cogent is confronted by the fact that its costs are proportional to the number of buildings passed, which is a large number, but its revenues are proportional to the number of buildings served.

Schaeffer says Cogent has 22,000 miles of intercity fiber, 8,500 miles of metro fiber in 157 rings all serving 1,025 buildings. 700 of those buildings are very large commercial buildings, averaging about 600,000 square feet. The remaining 325 buildings are large carrier neutral colocation centers known in the industry by their street addresses (55 Water Street in New York City, 155 North Michigan in Chicago, and so on).

Customers at the data centers are large telecommunications companies such as PTTs (post, telephone, and telegraph providers, a term from Europe, not the U.S.), CLECs, and cable companies. They are content providers like Akamai, Google, Apple's iTunes, and MSN. They are universities like the University of Pennsylvania, Stanford, and MIT. They are government entities. "They do multihome at these locations, but we have the lowest prices, and many manage their bandwidth based on price, so they send the majority of their traffic to us," says Schaeffer.

The challenge of quality with quantity
He has a clear idea of the company's mission. "We started life with the understanding that the service we sell is a commodity: interfaced, switched, or routed bit-mile always destined to the public Internet. We focus on that commodity and only that and deliver it at a high quality and low price."

Go to page two: The challenge of profitability