Cogent Communications views overbuilding a network footprint with fiber-to-the-premises (FTTP), whether it be a home or business build, to be very capital intensive. To-date Cogent notes that it has not seen any examples globally of a company generating a return on capital greater than its cost of capital, when overbuilding fiber.

Cogent Communications CEO, Dave Schaeffer, notes that the fiber construction market is currently in a “golden age”. Indeed, there is enormous social benefit from fiber deployments. However, Schaeffer states that it is not clear that there is a great benefit to investors.

Overall, this problem is exacerbated because the Internet, which is the key driver of bandwidth demand, was designed as an overlay network. Indeed, the Internet can sit on top of a telephone network, cable (hybrid fiber-coaxial) network, or a mobile phone network.

Fiber Networks

Purpose-built fiber networks are clearly superior to other network technologies. However, the fiber provider’s capital is proportional to the homes or businesses passed. In turn, revenue is proportional to homes or businesses served. Therefore, the better network product offering does not always succeed in generating the most revenue or highest returns.

Verizon Fios – Case Study

Cogent Communications points to Verizon Fios’ 100% fiber-optic network as clearly being superior to cable’s hybrid fiber-coaxial offering. Still, the Fios product never achieved enough market penetration to be profitable for Verizon. As a result, Verizon effectively halted their fiber build program for Fios.

Currently, Verizon builds fiber under its One Fiber program which largely serves other purposes. Primarily, Verizon’s fiber builds supply backhaul for its 4G/LTE and 5G wireless networks.

Fiber Strategy – Cogent Communications

Overall, Cogent Communications has chosen to be a buyer of fiber capacity, not a builder of fiber infrastructure. Specifically, as of Q1 2021, the network backbone of Cogent is leased on Indefeasible Right of Use (IRU) contracts from 280 different dark fiber suppliers around the world.

Cogent Communications “buys” fiber through these long-term IRUs, which have 20 to 30 years in duration. This structure allows the company to reap all of the technological benefit of fiber, without the sunk capital cost from building the fiber.

Customer Approach

Strategically, Cogent Communications is very selective about where it buys fiber and what buildings it serves. Using third-party networks, the company attempts to get as physically close to its customer as possible. Indeed, Cogent will only build a very short extension of this third-party fiber, into a specific building and up that building’s riser.

As of Q1 2021, Cogent Communications serves 1,274 carrier-neutral data centers with its fiber network. Additionally, the company’s network connects to 2,939 total buildings, including 1,796 large multi-tenant office buildings in major North American cities. Notably, the average building that Cogent serves is 550k sqft and has 51 tenants. This differs significantly from the average office building in the U.S., which is 11k sqft and has 2.1 tenants.

Jonathan Kim covers Fiber for Dgtl Infra, including Zayo Group, Cogent Communications (NASDAQ: CCOI), Uniti Group (NASDAQ: UNIT), Lumen Technologies (NYSE: LUMN), Frontier Communications (NASDAQ: FYBR), Consolidated Communications (NASDAQ: CNSL), and many more. Within Fiber, Jonathan focuses on the sub-sectors of wholesale / dark fiber, enterprise fiber, fiber-to-the-home (FTTH), fiber-to-the-premises (FTTP), and subsea cables.

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