Cogent Hedges Fiber Bets

RCN Corp. and its joint venture company, Starpower Communications LLC, said Thursday that Cogent Communications Inc. had purchased a 20-year, multimillion-dollar dark fiber lease so Cogent could connect parts of its network in New York City and Washington, D.C. (see RCN to Supply Cogent). The move is fairly run of the mill for Cogent; the company leases all its backbone fiber from other carriers.

However, it's worth asking whether Cogent is leasing the RCN fiber because its business is growing or because, with several fiber providers facing serious financial troubles, it must hedge its bets.

The answer, according to Cogent, is a little of both. Cogent says it's not distancing itself from any of its fiber providers. "Cogent goes into every market with as many options as possible," says Jeff Henriksen, a company spokesman.

Cogent must keep its options open in each metropolitan market it serves. At least three of the 21 companies from which Cogent leases fiber have filed for bankruptcy protection. These include its largest supplier of metropolitan fiber networks, Metromedia Fiber Network Inc.(MFN) (Nasdaq: MFNX); ACSI Network Technologies Inc.; and Williams Communications Group Inc., its main supplier of national backbone fiber, according to Cogent's SEC filings.

"In these or other cases of bankruptcy or financial collapse, our rights under our dark fiber agreements remain unclear, although to date there has been no interruption of service," Cogent's filings with the Securities and Exchange Commission (SEC) say.

Analysts also say that because Cogent provides Internet connections of 100 Mbit/s for $1,000 a month, the company must always look for ways it can cut operating costs out of its network. For the three months ending March 31, 2002, Cogent's network operations costs were $3.4 million more than its revenues for the same period.

"The company just went through a network upgrade about six or so months ago," says Jason Knowles, an analyst at Current Analysis. "I can't see [Cogent's RCN deal] as a [new] capacity issue."

Cogent's latest fiber lease, or indefeasible right of use (IRU), includes more than 50 miles of backbone fiber from RCN and Starpower that connects about a dozen commercial properties with Cogent's points of presence (POPs) or network hubs, in Manhattan and Washington. Each building that Cogent serves has a Cisco Systems Inc. (Nasdaq: CSCO) router that connects the customers in the building to the metropolitan fiber that Cogent leases. The connections are made via a fiber optic cable running from the customer's local area network to Cogent's gear, which is usually housed in the building's vertical utility shaft.

Not only has Cogent been shopping for additional dark fiber partners, it is also branching out to selling T1 (1.5 Mbit/s) and T3 (45 Mbit/s) connections in 33 markets via its PSINet Inc. acquisition (see Cogent Acquires PSINet).

Other experts in the field have indicated that copper-based Frame Relay services have gotten held up while the optical Ethernet services market is taking its time to materialize.

"I think the [bandwidth] demand and the [network's] edge didn't show up, for the most part," OnFiber Communications Inc. CEO Danny Bottoms told Light Reading last week. "We have a lot of medium to fairly large businesses still sitting on a T1 or multiple T1s. Our competitive product to that is [bandwidth connectivity via] Ethernet. And the Ethernet business, for various reasons, hasn't really materialized either."

— Phil Harvey, Senior Editor, Light Reading
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BobbyMax 12/4/2012 | 10:03:48 PM
re: Cogent Hedges Fiber Bets It is hard to figure out Cogent's business model> It is also not obvious as to how Cogent would stay in business and be profitable. It will also difficult to compete with RBOCs if when they deploy Metro Network. RBOCs requirement for Metro would be different from that of Cogent. Their metro will be based on SONET that is compatible with legacy geara and the ring nodes will perform the functions of SONET ADM, Digital Cross Connects and Ethernet transport, although Ethernet need is questionable. Every thing must fit into the OSS architecture. Alll services will be mapped to SONET.

It appears the Cisco is not the appropriate gear for what cogent is trying to accomplish. Perhaps Optera Metro would have been much better.
cfaller 12/4/2012 | 10:03:45 PM
re: Cogent Hedges Fiber Bets Cogent's business plan isn't working because there isn't enough demand. Cogent has only a handful of customers who have actually bought the $1000 100Mbps internet service. They need more than 20-30 customers to cover the billions they borrowed.

I can't believe they've lasted this long, but they will fail...
BuckStopsHere 12/4/2012 | 10:03:45 PM
re: Cogent Hedges Fiber Bets I disagree. Cogent's business model is very simple. Build an inexpensive network that offers a specific service rather than a complex, expensive network that offers all services. Then underprice the competition because of lower expenses. The real mystery here is why isn't it working? If Optical Ethernet gear costs 75% less than full-service SONET gear, what is happening to all the extra revenue? This business model actually may have a chance of saving the industry since you should be able to fund growth with revenue instead of debt. Yet, all who try are failing. WHERE IS ALL THE EXTRA MONEY GOING??
boozoo 12/4/2012 | 10:03:40 PM
re: Cogent Hedges Fiber Bets 1000$ for 100 Mbps sounds great. But why we did not see customers flocking to this offer?
It's probably more than about bandwidth, isn't it?
How about service availablity 24/7? Can Cogent be trusted to acheive such availablity?

KeyMan 12/4/2012 | 10:03:38 PM
re: Cogent Hedges Fiber Bets Its about last mile fiber availability, or lack thereof. Very few companies have or can provide dark fiber into MTU's in these markets. The service might do very well once fiber is brought into the buildings.
threeiron 12/4/2012 | 10:03:35 PM
re: Cogent Hedges Fiber Bets they go into a city, build a hub (spending millions). They run last mile into multi tenant office buildings (spending millions) They run up into the risers and run laterals across the floors (spending millions). They get sales reps w/ little or no experience to knock on doors in these office buildings and say "hey, want to get 100mbps for $1,000 month?" The tenant says "we are only a small law firm and we have a dial-up and spend $19.00/month". They go to the next door and it is a dentist and he does not use the Internet at all. Cogent does zero research on who is in these buildings, they look at square footage. They spend millions to get into a building without knowing if they will get one customer. The intial land grab was back in October of 2000. Sales reps were told to go and sign anyone in any building, no matter how far it was from fiber, no matter if they were never going to get fiber out to that building. Cogent just wanted to report that it had all these customers. 98% of all reported "customers" were signed up this way. They were promised free installs, first 6 months free, month to month terms. No penaly if they chose not to accept the order when it was ready. Why not sign up? Sales reps had plenty of bogus orders signed as well because they were being paid on these "orders" and had ficticious companies filled in. No one at Cogent was checking these orders, they were just reporting them as customers, no questions asked.
BuckStopsHere 12/4/2012 | 10:03:28 PM
re: Cogent Hedges Fiber Bets So it would seem as though few or no buildings hold enough 100MB users for Cogent to reach the break-even costs of going into the building? Somebody give me an honest opinion here: Can Optical Ethernet work in an MTU environment if instead of selling 100MB for $1000, you instead sell customers double their current bandwidth for half their current price? For example, a customer currently paying $300/month for a T-1 could have 3MB for $150. Who would turn that down? Obviously, anyone getting by on a T-1 is not going to want to jump to 100MB for 10x the price. The 3MB customer can then grow at 1MB intervals as needed. Can the scalability of OE equipment be profitable on the low end? In a building where Cogent's sales reps can only sell one 100MB connection, could a qualified rep sell 5 or 6 3MB connections?
buliwyf 12/4/2012 | 10:03:28 PM
re: Cogent Hedges Fiber Bets 1: The operating model is all wrong.
2: Everyone seems to realize this which is why in this age of telecom bombs enterprise customers want services from someone that will be around for a while (ie. not cogent).

They may well get bought by someone for the assets at some point but how is management protecting the interests of the investors and staff with this plan?

Also can someone tell me how Cogent will avoid having Cisco pull the plug on the financing given the lack of revenue and high leverage that Cogent is showing?
joestudz 12/4/2012 | 10:03:27 PM
re: Cogent Hedges Fiber Bets I am a lowly mechanical engineer, but I would think the 100Mbps service could be subdevided. If not possible directly then I believe it could be done using Coarse Wave Division Multiplexing (CWDM)
boozoo 12/4/2012 | 10:03:26 PM
re: Cogent Hedges Fiber Bets Look, it's hard for me to understand how somebody can throw milions of dollars on the window like this.
I don't believe they did not do their homework before laying fiber like crazy. They must have had some real stuff in their hands.
Also, I don't believe they are targeting the T1 market. Prices my vary widely, but my understanding is that you san lease a T1 with a couple of hundred dollars, even less than that.
If a T1 is about all you need, why bother paying more and upgrade 100 times more bw when you can just buy another T1?

The reasons to switch to 100 Mbps must be compelling enough to justify it and I think we are missing something here.

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