Cogent Communications: LAN on Steroids

This telco-free network has an 80 Gbps nationwide backbone and sells bandwidth at one percent of the prices charged by the telcos. The company can deliver, but can it stay in business? We asked the founder.

by Alex Goldman ISP-Planet Associate Editor [February 6, 2002]

Cogent Communications has a simple, compelling advertising tag line: "100 Mbps for $1,000 per month." It's a good price, but can the company really make money selling a Fast Ethernet line at the price the local phone company charges for a T-1 line (1.5 Mbps)?

Furthermore, like many competitors, Cogent is deep in debt. It raised $178 million in equity and obtained $409 million in vendor financing from its technology partner Cisco—and the company was founded only three years ago, in August, 1999. Can Cogent stay in business? To get the answer, we talked to the founder and current CEO, Dave Schaeffer.

When we asked whether Cogent had chosen Cisco because it was able to provide significant vendor financing, Schaeffer demurred. "We evaluated 53 vendors before we chose Cisco. We looked at the technology, the product road map, and we chose Cisco. We currently have eight wavelengths on each fiber pair, but the network is capable of handling 128 wavelengths. Adding colors is expensive in terms of the price of the EDFAM (Erbium Doped Fibre Amplifier Module), but as soon as you add colors, you start to defray the cost of the fiber and the rest of the network, so the per-bit cost actually goes down."

One exciting aspect of optic fiber netoworks is the possibility of expanding capacity by simply shining a different data frequency down the same fiber cable. Equipment that can handle two data streams in a single fiber is more expensive than equipment that only has to handle one data stream, but the upgrade cost is far lower than the price of laying additional fiber lines. Costs continue to increase as additional wavelengths are added, and equipment that could transmit 128 different data streams (128 colors of laser light) down a single fiber optic cable would be very expensive indeed, but Schaeffer is pointing out that as long as he can sell that added capacity, his costs actually do go down as he adds more wavelengths to his network.

Schaeffer assured us the company's economics are sound. "We're a next generation business ISP. Our typical customer has 8000 square feet and at least 30 desktops. We've used less than half of the capital we raised. We still have about $140 million in cash and $200 million in borrowing privileges. We have a backbone that's 12,400 route miles carrying eight OC-192s [definition], which makes it 32 times the capacity of our nearest rival. The bulk of our ongoing expenses is connecting new buildings, and to do so we've obtained 5,000 route miles of metro fiber through 25 and 30 year Indefeasable Rights of Use (IRUs)." The IRUs were acquired from a variety of providers. Eight OC-192s adds up to a backbone capacity of 80 Gbps, expandable to 1,280 Gbps with 128 wavelengths.

He explained that Cogent chooses the buildings it connects to very carefully. A typical Cogent building will have 41 potential customers, and Cogent expects to sign up at least 8. Some customers will sign up for multiple lines or even for 10 100 Mbps lines. 10 100 Mbps lines have the potential capacity of a 1 Gbps line, but the ten lines should be more fault tolerant than a single line. You would think that Cogent could save money when provisioning bundles of pipes but Schaeffer says that 10 pipes are too small a bundle, and that Cogent experiences little cost savings on volume orders.

The company does, however, cut costs in short haul metropolitan areas by using Light Emitting Diodes (LEDs) instead of lasers. LED equipment is less fragile and far cheaper than true lasers.

The Cogent business plan calls for 800 buildings in order to achieve a profit. Since Cogent sells its product at a single price, Schaeffer was unwilling to reveal the number of customers it has signed up, because revealing the number of customers would mean revealing exact monthly revenues. If the company's goal is 800 buildings with 8 customers each, that would be a monthly revenue stream of at least $6.4 million (8 customers x 800 buildings x $1,000). In fact, some customers order a lot more than a single 100 Mbps pipe. Furthermore, some buildings will supply far more than 8 customers, further increasing monthly revenues. Finally, service providers pay different prices depending on what portion of the Cogent network they use. The full list of Cogent service provider prices is here.

In order to get there, Cogent has made two key purchases recently. In September of 2001, Cogent acquired NetRail, a national, Tier-1 ISP that was in bankruptcy, for $11.7 million. The company made the purchase in order to start building the peering agreements that a national ISP needs to avoid depending on the ILECs. Since then, Cogent has added other peering agreements, most recently, for example, signing an agreement with PAIX (a subsidiary of Metromedia Fiber Networks (MFN)) on January 22, 2002.

Cogent has been signing Settlement Free Peering agreements. Schaeffer explained that these agreements allow backbones to exchange traffic without a settlement payment as long as boundary conditions are met (usually, that the traffic volume not exceed a 2 to 1 ratio in either direction).

More significanly and more recently, the company purchased Allied Riser, a company that was seeking the same customers that Cogent is courting, but which went bankrupt because it depended on the ILECs to supply connectivity, and frequently paid more to connect customers than it earned in revenues. The Allied Riser all-stock buyout closed on February 1, 2002.

Although Allied riser had about 900 buildings, some of them were poorly chosen, and Cogent may only be able to serve about 430 former Allied Riser buildings. Still, the addition of 430 buildings would be a significant boost to Cogent.

Cogent's merger with Allied Riser has also brought the company public through a "reverse merger" as Cogent acquired Allied Riser's stock listing in addition to Allied Riser's assets. Cogent will retain its name and be listed on the American Stock Exchange (AMEX) under the symbol COI.

Asked if Cogent is supplying services, Schaeffer responded heatedly, "a number of ASPs do ride on top of our network and we can refer customers to them, but we do not intend to move up the stack and become an xSP. Others can offer services on our network. We will continue to offer connectivity. Our network is a relatively fixed cost and we believe that we can bring costs down as we add customers. Our business plan even assumes that over time there were be additional price erosion."

He continued, reiterating the basic business plan on which Cogent is founded, "we take a layer-3 protected network. It's simple. It has no distance sensitivity and no connection to the ILEC. It has a single product and a single price point. On a unit basis, that price is about 1 percent the going rate. Although a T-1 is 1/65th the rated speed of our 100 Mbps product, our product is not oversubscribed. The observed speed of a T-1 is usually lower, so we feel we are supplying 100 times the observed speed of a T-1."

He explained that Cogent's 80 Gbps backbone is very stable. "Every connection is dedicated, multiplexed into fatter pipes. As soon as we leave the building, we're not running native Ethernet. We're running Ethernet over DWDM [defintion] but the customer interface is always Ethernet. Because it's layer 3, if a fiber cut occurs, packets are rerouted but not lost. This total independence from the existing telco network gives us resiliency. Every connection is dual routed and our network is not capacity-constrained."

Continuing to slam the telcos' outdated networks, he said, "We're not trying to re-utilize existing infrastructure. Trying to overlay a data network on one designed for voice is much more complex than a network that is, from the ground up, built for data only. Our costs are lower because we can eliminate all of those redundant layer 1 SONET [definition] switches. Our network resembles a corporate LAN, except on steroids, across the entire country."

—End