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Cogent sticks to Ethernet connectivity strategy

The name of the game for Cogent is Ethernet connectivity at a low price and CEO Dave Schaeffer says that companies pursuing a strategy of layering services are doomed to fail.

Cogent is persisting in its strategy of providing Ethernet connectivity at a set price to small and medium-sized businesses, even as sales remain miniscule, committing the company to selling a commodity service. And that suits CEO Dave Schaeffer just fine. He contends that few other service providers can match the operating costs of its network, and claims that companies pursuing a strategy of layering services are doomed to fail.

Cogent has built a national backbone and a presence in 20 US cities through a long-term lease of two strands of optical fiber from Williams Communications. The company has installed routers to connect the end user to the metro network and the metro network to the long-haul network, helped by an expanded vendor financing deal from Cisco now amounting to more than $400m. To extend its penetration into the access market, Cogent has proposed a merger with insolvent competitive local exchange carrier Allied Riser - after some tough negotiations it expects to close this in the coming quarter - and has acquired failed ISP NetRail.

Schaeffer's arguments about the cost advantages of its network have been difficult to verify, since Cogent has managed to get connections to only 700 customers out of the 3,000 it claims to have signed up, and some of those are from NetRail. Still, Schaeffer told the451 that after another infusion of cash - $62m in equity funding from previous investors and a $100m increase in its vendor financing from Cisco in October - the company's business plan is fully funded.

Schaeffer founded Cogent in August 1999, after heading up Pathnet, a broadband ISP that filed for Chapter 11 bankruptcy in April of this year. The company has been offering its connectivity service - 100Mbps for $1000 a month - since April. Cogent has so far raised $587m in funding, including $409m from Cisco Capital and $187m in private equity from Broadview Capital Partners, WorldView Technology Partners and Jerusalem Venture Partners. The last cash infusion was the $62m at the end of October.

The majority of its funding has come from Cisco in the form of vendor financing. The relationship with Cisco extends beyond the vendor relationship, particularly since the vendor financing agreement is essentially a credit facility. Since Cogent has built a network that relies on Cisco's networking architecture, there's a clear incentive from Cisco's side for the venture to succeed. Cisco executives frequently cite Cogent as an example of the disruptive effects its technology can have on service providers' business models.

Cogent is one of a slew of insurgent service providers predicated on the strategy that next-generation equipment like optical Ethernet allows them to offer connectivity and other services, such as virtual private leased lines and transparent LANs, at far lower operating costs. The list includes Yipes, Telseon, IntelliSpace, LookingGlass Networks and GiantLoop Networks. However, Schaeffer argues that the company is the only one pursuing a pure ISP model. Still, it has to contend with Yipes to get its service into buildings in metro areas and to establish relationships with real estate management companies. Yipes, in fact, tried to goad Cogent into a shouting match with a release claiming that Allied Riser customers had switched to its network. Cogent didn't respond in kind.

In contrast to other metro network service providers, Cogent has built its own metro network using leased fiber from Williams Communications. The reason, argues Schaeffer, is that Cogent can only ensure quality of service and control over the technology on the network if it owns the entire network. Cogent uses packet over Sonet or wavelength division multiplexing transport and then terminates the connection at an Ethernet port. The company was one of the earliest customers of Chromatis, the metro DWDM player that Lucent acquired for $4.5bn in the middle of last year and subsequently shut down.

Also, Schaeffer noted, apart from the fact that Cogent eliminates costs by not having to support ATM in both the long-haul and metro elements of its network, it can take advantage of developments in optronics.

Where Cisco's routers come is at the edge of the network, and while many service providers shy away from the IP layer because of its complexity, using Cisco's Layer 3 routers as the interface between the end customer and the long-haul network brings down the network's operating costs significantly.

"It's impossible to achieve the price points and the network overprovisioning [without the Layer 3 routing]," Schaeffer said. Cogent's connections are about 40% cheaper than a T-1 line, he added.

Cogent stops at connectivity, and partners with other service providers for the services that rivals like Yipes and Telseon are embracing, such as transparent LANs. "We feel moving up the OSI stack [from Layer 3] has typically proven to be a failed strategy," Schaeffer said.

Cogent can afford some bluster, given that the company has raised almost $600m and has access to Cisco's deep pockets. In theory, Cogent's simple product positioning is a selling point, but rivals like Yipes may contend that bandwidth on demand is more appealing than a fixed pipe. In any case, the company has to start signing up customers if it wants to prove there's value in a volume model and that the Allied Riser acquisition hasn't been a major distraction.

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