The Backbone That Grows — continued

He says the network has had a 99.99 percent reliability at layer 3. Most backbones, he says, refuse to report reliability statistics at layer 3 because layer 1 statistics are more flattering. "You can have a connection at layer 1 and have a failure at layer 3."

He adds that the statistics that the RBOCs use at the FCC explicitly leave out significant outages, those that last longer than 30 minutes and affect more than 30,000 people.

Nevertheless, we have heard complaints about the quality of Cogent's backbone. Schaeffer lists a number of potential reasons. Number one is this. "Our competitors do spread misinformation."

Number two is peering agreement. "Our peers are capacity constrained. One large U.S. ISP has a volume restriction in the Bay Area. They may drop packets or route traffic sub optimally through their network, forcing us to hand off to them elsewhere."

Number three is that Cogent does disconnect some customers. "We, like any ISP, have an AUP. We allow no spam, child porn, or terrorist information. We disconnect all violators. We disconnect about 10 content or network providers per month for repeated violations. We have to because there's no number portability on the 'net. If you let people do bad things, your legitimate customers suffer."

Number four is about peering. In 2003, ISP-Planet reported on a peering fight between AOL and Cogent (see War at the Core). Schaeffer cannot discuss details but admits that there have been other instances of this problem.

"We have 920 peering session in 41 locations," Schaeffer says. "Service providers have to maintain a balance between push and pull traffic. ISPs pull traffic, and content providers push traffic."

Cogent will have a tough time keeping this balance because its customers push so much traffic. "Our largest customer is 8 Gbps," Schaeffer says. He breaks down the bandwidth use of his customers this way (he's just come from an investor meeting where he presented the same data):

	% of customer population	% of revenue	% of bandwidth
Service providers	19	50	86
Enterprises and universities	81	50	14

The challenge of profitability
Cogent still needs more revenue. One encouraging sign, Schaeffer says, is that customers are happy and are ordering more. "40 percent of sales in the service provider segment are additional sales to existing customers. This is rare in the enterprise segment because few enterprises need more than the initial 100 Mbps."

Although the revenue trend is upward, the company will need to control costs as it adds customers. The latest SEC filing seems to suggest that the combination of operating expenses (the cost of the network) and selling, general, and administrative expenses (the cost of sales and of employees) are rising as fast as revenues. This will have to change.

Schaeffer believes it will change during 2005. Although the company has never throughout its history issued earnings guidance, it plans to begin doing so this year. "We're still cash flow negative but we're showing a strong trend line," he says.

— End

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