Cogent Communications Group, Inc.

1015 31st Street Northwest
Washington, D.C. 20007
U.S.A.
Telephone: (202) 295-4200
Toll Free: (877) 926-4368
Fax: (202) 338-8798
Web site: http://www.cogentco.com

Public Company
Incorporated: 1999 as Cogent Communications, Inc.
Employees: 200
Sales: $51.9 million (2002)
Stock Exchanges: American
Ticker Symbol: COI
NAIC: 513310 Wired Telecommunications Carriers; 514191 Online Information Services

For companies involved in transmitting high-speed Internet-based data, the so-called “last mile” is considered the most difficult. The phrase refers to the final link of connectivity between a customer and the high-speed optical network that connects it to the Internet. Since Cogent Communications Group, Inc. owns its own network, it specializes in making that last-mile connection and, more specifically, in providing highspeed Internet access to businesses located in multi-tenant buildings in the central business districts of major U.S. cities.

Cogent provides its high-speed services through its own facilities-based national optical network, known as an Internet backbone, that connects to its customers’ own local area networks (LANs) through metropolitan fiber rings. Cogent created its national network in 2000, acquiring the rights to dark fiber, or unused fiber-optic strands, that connected large cities. Through an agreement with Circuit City Stores, Inc., Cogent used Cisco’s equipment to light or activate those strands of dark fiber, making them capable of carrying Internet protocol (IP) data at capacity up to 80 Gbps. Within the cities it services, Cogent acquires dark fiber rings known as metro rings. Cogent then acquires the rights to make the fiber connections linking the customer to its metro rings, the so-called “last mile.” Cogent’s flat-rate pricing model garnered national attention for its low rates, which were $1,000 per month for 100 Mbps service and $10,000 per month for 1 Gbps service.

Offering Low-Cost Internet-Based Data Transmission: 1999–2000

The company was founded as Cogent Communications, Inc. in August 1999 by David Schaeffer. Schaeffer was a serial entrepreneur who had founded several companies before launching Cogent, including Mercury Message Paging and Pathnet, Inc., a broadband telecommunications provider that he established in 1995. He served as Pathnet’s CEO from 1995 to 1997 and as its chairman from 1997 to 1999. Schaeffer severed his association with Pathnet in 1999, and afterwards in 2001 Pathnet filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code.

Cogent’s business plan was to offer high-speed Internet access over its own IP data-only network, thus bypassing the traditional voice-based networks operated by the Regional Bell Operating Companies (RBOCs). Cogent planned to reduce the cost to transport bandwidth by two orders of magnitude, or 99 percent, and offer it at radically reduced prices while still making a profit. The company’s initial product was 100 Mbps of Internet access on a non-oversubscribed basis at $1,000 per month. The service was initially offered in 13 major U.S. markets.

During 2000 Cogent successfully completed two rounds of venture capital financing. In the first round, completed in February, the company raised $26 million from a group of venture capital firms, including Jerusalem Venture Partners, Worldview Technology Partners, Oak Investment Partners, Boulder Ventures, and C. Blair Asset Management. James Wei of World-view Technology Partners and Erel Margalit of Jerusalem Venture Partners subsequently joined Cogent’s board of directors. The second round of funding, completed in July, was led by Oak Investment Partners and raised an additional $90 million. Ed Glassmeyer, founder of Oak Investment Partners, joined Cogent’s board of directors.

Cogent established significant partnerships in the first half of 2000. In March the company announced it had selected Cisco Systems to build its high-speed optical network. Under the $280 million contract, Cisco would provide all the technology necessary to construct a nationwide network optimized for Internet traffic. The network, Cogent’s IP backbone, would connect 13 cities using OC-192 long-haul Dense Wavelength-Division Multiplexing (DWDM) and use OC-48 metro DWDM connections within each city. Cisco’s technology would allow Cogent to offer high-capacity Internet access at 100 Mbps, 100 times faster than a T-l connection, directly to business customers situated in major metropolitan areas at less than the cost of a T-l line. In a separate agreement announced in April, Cisco was selected to provide real-time end-to-end monitoring of Cogent’s network infrastructure and service-level agreement (SLA) management through its Cisco Info Center monitoring and diagnostics tool.

Another significant partnership was with Williams Communications Group. In April Cogent announced a long-term agreement with Williams to lease its nationwide dark fiber backbone totaling more than 12,400 route miles and to obtain access to Williams’ network services. As a result of the agreement, which was valued at $215 million, Cogent would be able to activate and operate a nationwide OC-192 backbone that would transmit data at speeds of 10 Gbps and scalable to 640 Gbps. A third partnership with Metromedia Fiber Networks gave Cogent the rights to purchase single-fiber rings in 50 major metropolitan markets. Metromedia was in the process of building an optical network using more than 29,000 miles of fiber to connect 67 cities in North America and Europe.

As a result of these agreements, Cogent was able to announce in November 2000 that it had lit up or activated its all-optical, national facilities-based network. The initial activation included the company’s national IP backbone and four cities: New York, Chicago, Philadelphia, and Washington, D.C., with service to begin January 1, 2001. One of Cogent’s first customers in the Washington, D.C., area was the American Gas Association, which noted that Cogent provided it with 100 times the bandwidth of its current T-l service at about two-thirds of the cost.

Expanding Service to Additional U.S. Cities: 2001

Cogent began offering all-optical, non-oversubscribed 100 Mbps Internet access capability for $1,000 per month to multi-tenant commercial properties in the cities it serviced in January 2001. While Cogent’s pricing undercut that of T-l service, the company was also competing with DSL service. Commercial customers could order DSL service of up to 7 Mbps from Qwest Communications International, Inc. or Verizon Communications Inc. for between $190 and $400 a month. For many small and medium-size businesses, that was sufficient capacity. Cogent promoted the view that DSL, being a copper-based technology, offered a low-quality connection and would soon be outpaced by market demand. By February 2001 Cogent had attracted some 2,800 customers for its low-cost service.

Cogent enhanced its network’s reliability in January 2001 through an agreement with American Power Conversion Corporation. Cogent selected the company to provide power solutions that would guarantee uninterrupted service over Cogent’s network.

With service now available in four major cities, Cogent’s next task was to sign access agreements with the owners of large commercial buildings in those cities’ central business districts. In addition, Cogent began signing agreements with fiber-optic companies that had already established access to commercial properties in those cities. An agreement with New York-based FiberNet Telecom Group gave Cogent the right to use FiberNet’s existing connections to commercial properties to provide high-speed Internet access in New York City. A deal with Rudin Management Company, one of the largest privately held real estate firms in New York City, gave Cogent the rights to equip 16 commercial properties totaling 10 million square feet. As part of the agreement, Cogent’s New York hub would be located in one of Rubin’s properties at 32 Sixth Avenue.

At the end of March 2001 Cogent announced a national co-location agreement with Switch and Data, which operated 34 co-location centers in the United States. Switch and Data’s co-location centers, called Convergent Network Centers (CNCs), offered a variety of networking infrastructure for telecommunications providers to deliver broadband services and applications. Located in urban centers, the CNCs enabled providers to quickly and cost-effectively enter new markets and deploy their services. Under its agreement with Switch and Data, Cogent gained access to 12 of Switch and Data’s CNCs in 10 major metropolitan centers.

Around this time Cogent underwent a corporate reorganization. Cogent Communications Group, Inc. was formed to become the parent company of Cogent Communications, Inc. Effective March 14, 2001, Cogent exchanged all of its outstanding shares for an equal number of shares of Cogent Communications Group and became a wholly owned subsidiary of Cogent Communications Group.

In April 2001 Cogent announced that it would expand its network capacity to 80 Gbps due to larger than anticipated customer demand. With each OC-192 wavelength operating at 10 Gbps, Cogent began work to add seven additional wavelengths to increase its network capacity. The expansion was completed in November 2001. Around this time Cogent also received the first preferred service provider designation from Cisco Systems, its new IP + Optical Cisco Powered Network designation. Over the past year Cogent had received some $310 million in vendor financing from Cisco.

Company Perspectives:

The Cogent solution offers the unique combination of higher quality at a lower price. Data-only network technology combined with end-to-end network ownership allows Cogent to offer ultra-high speed Internet access at prices never before offered in the industry.

With its fiber-optic IP backbone and multiple metropolitan area network stretching some 17,400 miles, Cogent announced in May 2001 that it had secured access to its 525th building, representing more than 161 million square feet of commercial office space. Cogent had been successful in signing contracts with large real estate firms in major cities, including Rudin Management, The Trump Group, The Lurie Company, Jamison Properties, Crescent Real Estate Equities Co., and Carlyle Realty, among others. These contracts enabled Cogent to approach individual tenants to sell them high-speed Internet access.

Cogent continued to add service to more cities in 2001. In June it added service to its 10th urban market, Santa Clara, California. Within each city it served, Cogent also established one or more hub offices. Other cities serviced by Cogent included Dallas, Denver, Kansas City, Boston, and San Francisco, in addition to its original four cities of New York, Chicago, Philadelphia, and Washington, D.C.

In July 2001 an agreement with Level 3 Communications, Inc. gave Cogent access to Level 3 data centers and other buildings in 18 major business markets. The deal expanded Cogent’s depth in those 18 markets and enabled service provider customers to connect with Cogent in Level 3’s co-location centers. Later that month Cogent launched its service in Dallas and Houston and set up hub sites in both cities. By the end of July Cogent had gained access agreements to more than 50 multi-tenant office buildings and co-location centers in Dallas, including six of the city’s 10 tallest buildings. Another agreement with TXU Communications gave Cogent fiber access to 20 additional buildings in downtown Dallas. Through its agreement with TXU, Cogent was able to offer customers high-speed Internet connectivity within 60 days in those buildings.

In August 2001 Cogent introduced its Value Added Services Program. Through the program customers could gain access to a select group of vendors who provided value-added services compatible with Cogent’s high bandwidth Internet connectivity. Unlike many other Internet service providers (ISPs), Cogent did not offer additional bundled services along with its Internet connections. Rather, the company remained focused on providing customers with low-cost, high-speed fiber-optic access to the Internet. Around this time Cogent introduced service in Los Angeles, its 12th market.

In September 2001 Cogent acquired the assets of NetRail, a Tier One ISP that was in bankruptcy. Cogent planned to continue service to NetRail’s customers and integrate its service into Cogent’s national backbone. NetRail provided Cogent with crucial peering relationships that allowed Cogent to become a Tier One ISP and exchange traffic with other providers on a settlement-free basis. Cogent’s new Tier One status enabled it to offer cost-effective Ethernet Internet access to small and medium-size businesses in major metropolitan markets. In November the company announced it had completed the upgrade of its system to handle Internet access up to 80 Gbps. By the end of 2001 the company had reached its goal of serving 20 cities by adding service to Atlanta, Orlando, Tampa, Jacksonville, Miami, San Diego, Sacramento, and Seattle.

Another significant acquisition involved Allied Riser Communications Corp., a financially troubled ISP based in Dallas. Completed in February 2002, the acquisition gave Cogent more potential customers through networks that Allied Riser had already installed in large office buildings in the United States and Canada. Following the merger-acquisition, Allied Riser became a wholly owned subsidiary of Cogent, with Allied Riser’s shareholders receiving equivalent shares of Cogent. Since Allied Riser was a publicly traded company, Cogent became a public company when the transaction was finalized, and Cogent was subsequently listed on the American Stock Exchange. Around this time Cogent announced that it had landed more than $200 million in additional venture capital financing, including significant equipment financing from Cisco Systems. At the time Cogent had about 4,000 customers.

Acquiring Financially Troubled Competitors: 2002-03

Once Cogent’s acquisition of Allied Riser was completed, the company’s stock began trading on the American Stock Exchange on February 5, 2002. Later that month Cogent announced it would acquire, for $10 million, the major U.S. operating assets of PSINet Inc., an ISP in bankruptcy. PSINet was established in 1989 and was the first company to provide commercial Internet access. Included in the U.S. assets Cogent acquired from PSINet were its customer base, backbone network, associated equipment, three co-location facilities, and rights to intellectual property. Cogent planned to support and build on PSINet’s brand name by continuing to offer PSINet services. In October Cogent announced it had upgraded PSINet’s three data centers located in Los Angeles, New York, and Herndon, Virginia.

Other ISPs specializing in high-speed Internet access for businesses were also filing for bankruptcy. At the end of March 2002 competitor Yipes Communications filed for Chapter 11 protection. In April Cogent acquired a portfolio of real estate access agreements from OnSite Access, Inc., a high-speed communications provider that had been in Chapter 11 for nearly a year. Most of the access agreements pertained to buildings in New York City, with others located in cities serviced by Cogent.

Key Dates:

1999:: Cogent Communications, Inc. is founded by David Schaeffer.
2000:: Cogent completes two rounds of venture capital financing, enters into a $310 million partnership with Cisco Systems to construct its optical network, and activates its all-optical facilities-based network.
2001:: Cogent completes roll-out of service to 20 cities and expands capacity to 80 Gbps over its entire network; secures third round of financing totaling $62 million and bringing Cisco partnership to $409 million.
2002:: Cogent completes several acquisitions and gains listing on the American Stock Exchange.

In the second half of 2002 Cogent was selected by Merit Network, Inc. to deliver ultra-high speed Internet access to all 13 of Michigan’s publicly funded universities. In September Cogent acquired key assets from New York-based FiberCity Networks, including its customer base and building access agreements. Following the acquisition FiberCity ceased operations. Cogent entered the Canadian market in October by opening an office in Toronto. Service in Canada would be delivered by Shared Technologies of Canada, a wholly owned subsidiary that Cogent obtained as part of its acquisition of Allied Riser Communications. Cogent made another acquisition in February 2003 when it purchased the ISP business of Fiber Network Solutions, Inc. (FNSI). Based in Columbus, Ohio, FNSI was an Internet access and co-location service provider to businesses in Ohio, Michigan, and Pennsylvania. As part of the deal Cogent acquired five co-location facilities, including those located in Columbus, Pittsburgh, and Detroit.

At the beginning of 2003 Cogent adjusted its marketing plans to reach small and medium-size companies that did not need Cogent Classic service of 100 Mbps of bandwidth for $1,000 a month. In January the company launched a 500 Kbps service for $249 a month that competed directly with DSL service. According to Cogent CEO and Chairman David Schaeffer, “We did an awful lot of market research and discovered only 45 percent of the tenants in our on-network buildings would be good candidates for our Cogent Classic service. The rest were too small to need that much bandwidth, but of that remaining 55 percent, we discovered about 40 percent fell squarely in the DSL space.” Cogent’s 500 Kbps service enabled it to compete with DSL carriers without having to make similar capital investments. Another benefit that distinguished Cogent’s new service from DSL was that customers gained access to Cogent’s entire network.

While Cogent had made several acquisitions that provided new revenue streams, the company continued to operate at a loss in 2002. For 2001 Cogent had an operating loss of $61.1 million and revenue of only $3 million. For 2002 Cogent’s sales rose significantly, to $51.9 million. However, losses also rose, this time to $91.8 million. Schaeffer forecast that the company would achieve a positive cashflow sometime in 2004. Meanwhile, Cogent was surviving on venture capital financing.

Principal Subsidiaries

Allied Riser Communications Corp.; Cogent Communications, Inc.; Shared Technologies of Canada.

Principal Competitors

AT&T Corp.; Cable & Wireless plc; Genuity Inc.; Sprint Corp.; WorldCom Inc.

Cogent Communications Group, Inc.

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Cogent Communications Group, Inc.

1015 31st Street Northwest
Washington, D.C. 20007
U.S.A.
Telephone: (202) 295-4200
Toll Free: (877) 926-4368
Fax: (202) 338-8798
Web site: http://www.cogentco.com

Offering Low-Cost Internet-Based Data Transmission: 1999–2000

Expanding Service to Additional U.S. Cities: 2001

Company Perspectives:

Acquiring Financially Troubled Competitors: 2002-03

Key Dates:

1999:: Cogent Communications, Inc. is founded by David Schaeffer.
2000:: Cogent completes two rounds of venture capital financing, enters into a $310 million partnership with Cisco Systems to construct its optical network, and activates its all-optical facilities-based network.
2001:: Cogent completes roll-out of service to 20 cities and expands capacity to 80 Gbps over its entire network; secures third round of financing totaling $62 million and bringing Cisco partnership to $409 million.
2002:: Cogent completes several acquisitions and gains listing on the American Stock Exchange.