Cogent’s Schaeffer sees 'no significant cable competition' in on-net fiber footprint

Cogent is aware that cable is moving up the business market chain, but the service provider says its focus on selling symmetrical Ethernet-based internet gives it an ongoing advantage. 

Dave Schaeffer, CEO and founder of Cogent, told investors during the company's fourth-quarter earnings call that when cable operators come into one of Cogent's markets, the MSOs won’t wire up buildings unless they have already won a customer.  

“The cable plant tends to be in other geographies and they have been unwilling as cable operators to enter into license agreements with the building owner and pre-wire the building speculatively,” Schaeffer said, according to a Seeking Alpha transcript. “When they come in to compete with us if they are in the area, they have to use the tenant's right of entry and have to home run to each tenant.”

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Schaeffer added that unlike cable operators, Cogent continues to focus its business sales solely on selling Ethernet-enabled internet pipes.

Seeking to gain higher ARPU, cable operators have carried over their consumer-focused mentality to business customers, he said. “The cable operators, both residentially and to their business customers, have been very reluctant to sell just internet; they want to sell a bundle of services,” Schaeffer said. “Increasingly, the customers want just that dumb pipe.”

Fiber-centric focus

While cable operators are leveraging a mix of coax and fiber to target businesses, Cogent uses fiber exclusively for every customer connection.

Today, Cogent has about 1,600 buildings on its fiber network, which is equal to 860 million square feet of on-net multitenant office space. 

“That's a small number of buildings but a large amount of square footage representing 9% of the market,” Schaeffer said. “And in that footprint, we are truly unmatched and our definition of on-net is actually very different than cable or telco in that we have full fiber infrastructure throughout the building and can distribute to every customer on every floor.”

Focusing on on-net business customer growth continues to pay off. Cogent’s on-net revenue was $83.5 million for the fourth quarter, up 2% sequentially and up 9.1% from the fourth quarter of last year. Cogent’s on-net revenue was $323.6 million for the year, which was an increase of 9.8%.

The service provider ended the quarter with over 52,800 on-net customer connections on its network in its 2,373 total on-net multitenant office buildings and carrier-neutral data center buildings.

But even if Cogent has to go off-net, the service provider will only leverage fiber from 90 provider partners to connect customers.

“We do not use Ethernet over copper, fixed radio or any other technology. No coax, only fiber,” Schaeffer said. “We have approximately 325,000 on-net buildings that are in our off-net quoting tool so they're on-net for one of our 90 off-net providers.”

Cogent’s off-net revenue was $31.9 million for the quarter, up 2.9% sequentially and 12.1% year-over-year. The service provider ended the quarter serving over 8,590 off-net customer connections and over 5,400 off-net buildings, and these buildings are primarily in North America.

Symmetrical advantages

Besides selling bundled service packages, Cogent contends that by using only fiber to connect business customers it can offer the symmetrical services that cable can’t over its existing coax plant.

“In that footprint, we absolutely see cable and some incumbent telco competition, but those companies are typically focused on selling a bundle of services,” Schaeffer said. “They are still oversubscribing the services, and their services are not symmetric.”

Cogent cited how Charter was sued by the New York Attorney General for allegedly failing to deliver internet speeds in the New York service area the MSO acquired in its purchase of Time Warner Cable. 

Additionally, the AG said that TWC provided older modems to 900,000 customers, knowing that they were incapable of delivering speeds necessary for applications like streaming video.

“As a result of all that, I think cable has proven itself to be an inferior product,” Schaeffer said. “It does compete with us, but we continue to win against it.”

Here’s a breakdown of Cogent’s key fourth-quarter metrics:

NetCentric customers: Cogent’s NetCentric customer revenues rose sequentially from the third quarter by 1.3% to $45.1 million and increased by 6.1% from the fourth quarter of 2015. As of the end of 2016, Cogent had 29,383 NetCentric customer connections on its network.

Corporate customers: Revenue from Cogent’s corporate customers grew sequentially by 2.9% from the third quarter to $70.5 million and grew by 12.5% from the fourth quarter of last year. The service provider had a total of 32,439 Corporate customer connections on its network at the end of the year. 

Churn: Cogent noted that its churn rates for on-net and off-net customer connections were “relatively stable” during the quarter. The company’s on-net unit churn rate was 1.4% compared to 1.3% last quarter, while the off-net unit churn rate was 1.1% this quarter compared to 1% last quarter. Cogent offers discounts related to contract term to all of its Corporate and NetCentric customers. It also allows volume commitment discounts to its NetCentric customers.

Financials: Service revenue for Q4 2016 increased by 2.2% from Q3 2016 to $115.6 million and on a constant currency basis increased from Q3 2016 by 2.9%.