Cogent expanding base through buys

Cogent Communications is continuing to gobble up acquisitions, with its focus now turning more to buying customers rather than physical assets.

Cogent Communications is continuing to gobble up acquisitions, with its focus now turning more to buying customers rather than physical assets.

The company recently inked its sixth acquisition of the year – 13 since 2001 – when it paid an undisclosed price for 2,400 dedicated Internet access customers in 23 U.S. markets from Web hosting service provider Verio, a subsidiary of NTT Communications. Verio says it is narrowing its service line to focus on more-complex managed services for enterprise customers.

The 2,400 Verio customers are being added to Cogent’s network over the next 60 days, says Cogent CEO Dave Schaeffer, bringing to 7,800 the company’s total customer base.

Cogent’s last four acquisitions, including Verio, have been aimed at building up that base, Schaeffer says. Buying PSINet, NetRail and Allied Riser, among Cogent’s first acquisitions, let the ISP expand its network reach so that it now offers services in 85 markets in 11 countries.

The company now is focusing on increasing utilization on that network, Schaeffer says. Cogent was running its network at about 4.5% utilization earlier this year. After the Verio acquisition and growth throughout the year, he expects utilization to be just below 7%.

Cogent is one of a handful of ISPs in the U.S. that only offer dedicated Internet access services to businesses. Cogent offers standard T-1, T-3 and high-speed Ethernet services in 1,000 buildings that are directly connected to the ISP’s network. Its on-network buildings span 21 markets in the U.S. and 14 markets throughout Europe.

Cogent is not offering managed router, VPN or VoIP services, gaps which one analyst says could prove difficult for the ISP.

“Cogent needs to start breaking out into value-add services,” says Daryl Schoolar, senior analyst at In-Stat/MDR. “The cost per DS-0 keeps going down. We’re predicting flat to slightly negative growth [for the dedicated Internet access market] over the next three years.”

If Cogent offers QoS, VoIP or VPN support on top of its dedicated services it will be in better shape, he says. “It’s too easy for users to switch providers for dedicated Internet access today. There’s no stickiness,” Schoolar says.

Cogent says its focus on bandwidth will be successful over time.

“We have made a conscious effort to provide high-speed Internet connectivity and not offer higher-level managed services or hosting or managed router services,” Schaeffer says. The company offers small and midsize businesses quality Internet access at cost-effective rates, he says.

Cogent charges about $200 per month for a dedicated T-1 port. Customers will pay an additional $250 to $1,500 per month for local-loop charges. The ISP says customers in one of its on-network buildings are offered an even better value. Cogent provides a dedicated 100M bit/sec Ethernet connection to the Internet for the same price as its dedicated T-1 service.

Cogent’s buying spree and focus on Internet access has resulted in stronger revenue. The company reported revenue of $3 million in 2001, and by the end of last year that figure had risen to $59.4 million.

Although Cogent is not going after the largest enterprise users, it still has stiff competition from AT&T, Sprint, MCI and smaller players such as Netifice Communications and XO Communications.

According to In-Stat/MDR’s Schoolar, smaller businesses have a hard time getting the attention of an AT&T or a Sprint because those service providers are focusing on Fortune 100 companies. That presents an opportunity for Cogent to offer better customer service, he says. But companies such as XO that offer more than Internet access might be more attractive to small businesses that only want to deal with one service provider for all of their telecom needs, Schoolar says.

Cogent started its buying spree in 2001 and bought its most well-known company, PSINet, in 2002. That acquisition transformed Cogent into the ISP it is today. Before, the service provider focused primarily on offering competitive local exchange carrier services.