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Morningstar | Cogent's Low-Cost Network Sets It Up to Thrive as Technology Allows Business Connections to Evolve

Cogent provides Internet and private network connections for enterprises, and it carries Internet traffic for Internet service providers, content-producing companies, and other websites. Both businesses face challenges as technological advancements allow those functions to be performed at lower cost. However, in that challenging environment, we think Cogent's strategy leaves it positioned to succeed.Cogent's advantages arise from its leased, low cost, Internet-specific network and the opportunistic buying it did to form its network. Rather than building a network itself by putting fiber into the ground, which we think often fails to justify the steep expense due to oversupply over many geographies, Cogent has signed long-term leases to procure the rights. We believe the firm is paying below-market rates because it added major portions of its network during times of industry distress and before technology allowed so much capacity on fiber strands. When combined with a network architecture that was optimized for the Internet and a lack of legacy products to support, it is in a superior position to most competitors, which include major telecom companies.Cogent's network connects to roughly 1,700 high-rise buildings in North America. It serves enterprise customers in those buildings only, as its model is not profitable in less dense areas. Enterprises typically seek connections for both Internet service and private networks. Private networks have evolved significantly in recent years, as firms can use Internet-based, virtual solutions rather than more expensive legacy products. This shift is shrinking the market, but Cogent's lack of legacy offerings leaves it with more opportunity rather than the shrinking prospects of the industry.Internet transit is a small addressable market--about $1.5 billion according to Cogent--and rapid price deflation mutes market growth despite the huge increases in data consumption. The small market has driven some competitors away and likely will keep others at bay, as they wouldn't be able to compete without an existing, low-cost network like Cogent has.