Cogent sees first-ever quarterly traffic decline

Cogent Communications lowered its revenue and earnings expectations for the year today following the company’s first-ever quarter of negative traffic growth.

Cogent saw a 1% sequential decline in network traffic in the second quarter, primarily due to a 3% decline in the month of June, caused in part by a drop in usage from schools amid summer vacation. (In July, however, traffic grew 1%.) In addition, said Dave Schaeffer, Cogent’s chief executive officer, “We saw a series of video and social networking sites exhibit much more modest traffic growth than they had been.”

Cogent has seen summer traffic slowdowns before. Internet traffic growth was negative in August 2007, for example. But the second quarter 2008 was the first time in the company’s history that traffic growth has been negative for a full quarter.

Cogent began seeing the rate of Internet traffic growth decelerate early this year. In both April and May the company saw 1% sequential traffic growth, far below its historical levels, which, compounded over the past five years, have been around 120%. And the company’s observations coincide with the latest worldwide Internet traffic measurements from the University of Minnesota, which indicate growth continuing at 50% to 60% annually but perhaps at a slightly slower rate.

“The Internet will continue to grow, but it is in a period of transition,” Schaeffer said, adding that he believes some of Cogent’s competitors have not been “forthright” in acknowledging this widespread traffic deceleration in their anecdotal comments on the subject.

“It would be easy to use the economy as a shield to explain the lower traffic growth,” he said. “We don’t see that. Our sales cycle time has not expanded.”

Internet traffic deceleration is being driven by industry business models, Schaffer said. Broadband penetration is high in the Western world, and current speeds are generally not a current bottleneck on growth. To grow Internet traffic consumption, he said, “You need more applications that consumers want to use more and more.” In particular, he said, growth will come from Internet video, which is still in its infancy.