Cogent throws down pricing gauntlet
Cogent Communications, the competitive Ethernet service provider which has always been a pricing maverick, is cutting its prices further in a bold move intended to put some competitive distance between Cogent and its closest rivals, Level 3 Communications and Global Crossing.
Cogent this morning is announcing new discounts for customers who commit to three-year contracts and for higher volume service provider customers. The new three-year price for Ethernet service is a flat $7 a megabit, a dollar less than the previous rate for contracts of two years or more. For service providers who buy Ethernet services at volumes between 100 megabits per second and a Gigabit, rates are as low as $6 per megabit for a three-year contract. Service providers who buy between one Gigabit and 10 gigabits will enjoy a three-year contract rate of $5 a meg, and those that consume a full 10 gigabit port can pay as little as $4 a meg on a three-year contract.
Cogent is making the pricing changes both to stimulate more growth in Internet traffic and to more strongly differentiate its pricing from its competitors, said Dave Schaeffer, Cogent founder and CEO.
“We have seen Internet traffic growth slow over the past year as measured by a couple of references,” Schaeffer said. “The rate of growth in percentage terms has slowed and that is because of a number of factors. The casual video and social networking sites that drive a lot of traffic are maturing and we have not seen the huge wave of displacement by professional video services that would cannibalize cable and satellite TV. Part of the new price points is to stimulate that business and new business in general.”
Competitively, Schaeffer said Cogent today competes mostly with Level 3 and Global Crossing and less and less with AT&T, Verizon, Sprint and other backbone network providers. “The price per megabit has gotten so low and the Internet consumes so much backbone resources that they have concluded they’ll get a better return on capital deploying it in the edge, on things like their wireless networks, U-verse and FiOS,” Schaeffer said. “They are reserving their backbone networks for private IP which generate 10 times more revenue per bit mile than public internet products. It’s a rational reallocation of capital to what they view as a more profitable product set.”
As a result, the competitive dynamic for Cogent comes down to trying to trump Level 3 and Global Crossing.
“The price differential between ourselves and our two active competitors has shrunk to 2.5 to 1 as opposed to 30 to 1,” Schaeffer said. “We should be able to use out network to accelerate our market share.”
Cogent can still be profitable at the new pricing tiers, Schaeffer said, and he believes his competitors can’t be.
“Our advantage boils down to really four factors – the first two are balance sheet related and deal with how we acquired assets to build Cogent, but those will disappear as we consume that initial capacity, and will eventually go away,” Schaeffer said.
Cogent’s other advantage is that it has only eight products, while its competitors have thousands, according to Schaeffer. “Those thousands of products come at a very high cost, consuming a huge amount of people and infrastructure,” he said. “A Cogent employee produces 20 times as many bit miles as a Level 3 employee.”
The latest price cuts are a natural extension of what Cogent has always done – use price to accelerate market share gains and lower the cost of revenue acquisition, Schaeffer said. “We sell based on price, our sales staff is more productive as a result and we continued to gain scale.”
As a bottom line guarantee, Cogent continues to offer a 50% discount over any competitor, based on any invoice a potential customer can produce, Schaeffer added.
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