Cogent scores by losing a customer

Cogent Communications found one way to benefit from a sagging economy in the third quarter by scooping up the end-user clients of a service provider customer that fell on hard times. In the process, Cogent actually ended up with a greater share of recurring revenue.

Alpha Red, a hosting provider based in Texas, had been a Cogent customer for the last four years. In May 2007 Alpha Red announced having added its fourth 10-gigabit link from Cogent. According to some reports, the company ran into legal trouble in October and agreed to be acquired by CWIE Holdings only to see that deal fall apart days later.

Cogent had noticed that the company had fallen behind in its payments and switched it from a monthly to a weekly payment schedule. “We had kept them on a fairly short leash, though it can never be short enough,” said Dave Schaeffer, Cogent’s chief executive officer.

Cogent ultimately disconnected Alpha Red’s service (which had risen above 40 Gb/s total), and when that happened, according to Schaeffer, Alpha Red’s customers asked Cogent for help. Cogent then began actively soliciting Alpha Red’s customers, at least those being served from Alpha Red’s two Texas facilities as well as a third one elsewhere that Alpha Red was subleasing.

“We were able to sign up most of their very large customers and get a greater percentage of their business than we previously had,” Schaeffer said.

In addition, many of those customers opted to diversify their service, adding capacity with Cogent in Europe and on either US coast.

“The traffic wins we got from those customer bases were spread over half a dozen locations as opposed to three,” Schaeffer said. “As a percentage of dollars spent, those customers, because of the volume-based price structure we have, were highly incented to give us a greater percentage of their business.”

Cogent did lose about $600,000 in unpaid bills from Alpha Red for nearly a month’s worth of service, which is part of the reason Cogent missed its earnings target for the third quarter (though a major factor was related to changes in foreign exchange rates). And some time was needed to install the new individual customers. But not only is Cogent expecting greater recurring revenue over the long term from Alpha Red’s customers than it got from Alpha Red, it also replaced a single customer that paid (or didn’t) by the week with several who paid in advance.