Items actually were closer than they appeared. That is the message Cogent got in the first quarter, when they saw slowing traffic growth and reduced sales productivity and I remarked on the change at the time [1]. For years, Cogent’s $10/Mbps offer on 100Mbps of IP Transit was by far the lowest bar in the industry – when introduced the pricing norm was $50 or so. In essence, Cogent forward priced the market in order to transform themselves into a top-10 network, and they didn’t make many friends doing it as can be seen by their frequent peering disputes [2]. Over the years, as Cogent’s network performance has improved steadily, the competitions’ pricing has come down steadily until we reach the present day.
Now, pricing between $10/Mbps and $20/Mbps is common in major datacenters from a variety of carriers, and since winter there has been skirmishing below $10 by some players. On the higher speed end, Level 3 and XO have been increasingly aggressive, but on the low speed end Tier 2 players such as Hurricane Electric [3]are known to be challenging Cogent’s pricing as well. So Cogent faced a choice, do they lower prices to stay on the bleeding edge of bandwidth pricing? Or do they let let the field catch up while they let their improved network performance and service do their talking for them?
Well, Cogent has made its choice. According to various reports, their $10/Mbps firewall is now history, at least in the datacenter – their enterprise business remains untouched by this of course. Cogent has chosen to maintain its familiar position as price leader, with *list* pricing on higher bandwidth services for longer contracts dropping below even $5/Mbps – actual contract pricing of course may be lower depending on the buyers’ negotiating power. Of course, this means Cogent must face price compression both in future sales and in renewals, something they have not experienced the way the rest of the industry has over the past few years, and that means to maintain their revenue growth rate they need even faster traffic growth than they have attained over the past few years. That’s why their stock is under pressure, in terms of EV/Ebitda Cogent has been consistently valued above the rest of the sector because of their steady and high revenue growth rate. Threaten that growth rate and the premium comes down, and so it has.
9 Comments To "In Cogent's rear view mirror"
#1 Comment By Parkite On June 6, 2008 @ 4:53 am
What a horrible, commoditized business. They have basically admitted that their offering has no competitive advantage at all. In this kind of a business, lowest cost provider wins at the end of the day. Who is it? L3?
#2 Comment By Transit Broker On June 6, 2008 @ 5:14 am
On the other hand, what is the value add from providers that charge considerably more for transit, ie Sprint and ATT?
Cogent built a better network from day 1 and always sought to commoditize the industry – they certainly accomplished that.
Next stop – $1 / MB.
#3 Comment By Frank A. Coluccio On June 6, 2008 @ 5:29 am
I’d argue that latent value actually does exist in low-price bandwidth providers if they have the vision and wherewithal to partner with, or organically evolve their customer services, to include cloud computing and a growing list of remotely-manageable enterprise (and even residential-level, albeit not as enticing) services: i.e., MSP functions.
Any low-ball provider of bandwidth that doesn’t recognize this opportunity will either be doomed, or doesn’t deserve to remain in business in the first place at this stage, IMO.
Mobilizing for such a perch, of course, is easier blogged than executed, granted, which is where the partnering component comes into play.
#4 Pingback By IP Traffic and Pricing Trends On June 14, 2008 @ 3:29 pm
[…] revenue for the last few years at a fixed price, having forward-priced the market. Those chickens came home to roost recently with slower traffic growth at Cogent, leading to pricing changes there – but as a proxy […]
#5 Pingback By More on IP transit plus peering On June 18, 2008 @ 2:08 pm
[…] faster than the IP transit market, and I see no reason why this won’t continue, even after Cogent’s latest pricing gambit.Share this articleSubscribeBloglinesDiggdel.icio.usRedditStumbleUponTechnorati ← […]
#6 Pingback By Cogent makes the big leagues On June 27, 2008 @ 10:02 am
[…] don’t want to. Cogent has been a major player for some time now in IP transit, although the competition has been getting fiercer lately, it was natural for Tier-1 status to happen sooner or later. I wonder if now that they have […]
#7 Pingback By Carriers to Acquire CDNs, again? On July 10, 2008 @ 9:57 am
[…] might be a buyer of a smaller CDN. Cogent likes to be the price leader on IP transit but has been facing pricing pressure lately. And since much of future internet growth seems likely to go through CDNs and not through someone […]
#8 Pingback By No Recession Here On July 30, 2008 @ 9:19 pm
[…] A good quarter or two for that segment would do alot toward restoring their reputation. Cogent revamped its pricing structure during the quarter, an action which mathematically must change its growth projections – but whether […]
#9 Pingback By Cogent Feels the Pain On August 8, 2008 @ 7:38 pm
[…] of this should really surprise anyone. Back in June, Cogent took drastic action on pricing, cutting rates on its in-datacenter bandwidth by 30-60%. They did so in response to pressure from […]