Cogent sees OTT provider customers are accelerating NetCentric business growth

Cogent Communications may not be exactly where it wants with its NetCentric service business, which sells service to large over the top providers like Netflix (NASDAQ: NFLX) and Amazon (NASDAQ: AMZN), but as it makes progress in getting last mile providers to upgrade their infrastructure that connects to the internet, revenues will continue to rise, its CEO says.

Speaking to investors at the Jefferies Communications conference, Dave Schaeffer, CEO of Cogent, said that it is making progress with getting adequate connectivity with four out of five of the largest U.S. ISPs.

The service provider's NetCentric business, one that provides wholesale Ethernet and optical transport to content and OTT providers, have lagged in recent years due to last mile providers like the ILECs not upgrading their last mile and connections to the internet.

"The NetCentric business has averaged a 10 percent growth year over year growth rate for the past 15 years," said Schaeffer. "Over the past three years, that growth rate has been depressed due to the fact that certain last mile network operators refused to upgrade their facilities to the greater internet."

The service provider has also seen traffic growth decline in recent years due to the ISP port issue. During the past three years, industry traffic growth dropped 25 percent, while Cogent's dropped to 40 percent.

Despite the near-term issues, Schaeffer said that "we have seen traffic growth accelerate due to over the top video and as the lowest cost provider we have continued to capture market share which has resulted in our long term growth in that business."

Cogent currently has adequate connectivity to four of the five major North American ISPs and expects CenturyLink to be largely upgraded by the end of the second quarter. By relieving port congestion, Cogent has been able to drive 44 percent year-over-year traffic growth.

However, Cogent is in the midst of litigation with Deutsche Telekom in Europe. In December 2015, filed a suit against DT claiming that the service provider has allegedly congested the internet connections Cogent's content provider customers use to deliver services to their customers in Germany.

Although it has made progress with many last mile providers, two have entered agreements with Cogent but have not fully upgraded their connectivity to Cogent and the rest of the internet. Schaeffer said that these two providers is "accounting for about 25 to 30 percent of the global problem."

Besides the port issues, the adoption of net neutrality rules in the U.S. and Europe have driven a number of new applications.

"The concept that all applications are treated equally across the internet means that the high bandwidth applications are attracted to Cogent because of our pricing model and as a result we're seeing our revenue growth rate in the NetCentric business grow from zero back up to 5.8 percent," Schaeffer said.  

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