Cogent throws down pricing gauntlet

Cogent Communications has always been an Ethernet maverick, pricing high-volume Internet access at flat per-megabit rates and refusing to discuss moving up the value chain. But when the company saw growth in Internet traffic start to slow and analysts begin to downgrade Cogent stock, its CEO Dave Schaeffer decided to push that original strategy and go one step further in cutting prices.

Last week, Cogent announced new discounts for customers who commit to three-year contracts and for higher-volume service provider customers. The move lowers Cogent's price for Ethernet-based Internet access to as low as $7 per megabit for enterprise customers and $4 per megabit for its highest-volume service provider customers, both prices requiring three-year contracts. Initial analyst response was positive, as firms such as RBC Markets boosted Cogent's stock rating to “outperform.”

What's uncertain is how these rate cuts will affect the market in general.

Cogent's goal is to stimulate Internet traffic, particularly video traffic, and also to siphon market share from its two primary competitors, Global Crossing and Level 3 Communications, according to Schaeffer. He sees public Internet access in high volumes as a three-horse race, claiming other competitors such as AT&T and Verizon are focused on their local loop upgrades, video services and private IP offerings.

“Our goal is to use this new pricing to accelerate our gain in market share,” Schaeffer said. “The price differential between ourselves and our two active competitors has shrunk to 2.5 to 1, as opposed to 30 to 1. We should be able to use our network to offer lower prices and accelerate our market share.”

Cogent can still be profitable at the new pricing tiers, Schaeffer said, and he believes his competitors can't be, as they pay to support much more complex product lines than Cogent's eight products with their flat-rate prices.

“Level 3 and Global Crossing have thousands of products, and those 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,” he said.