If you have been following this blog for the past week or two, you will know that there is a running dispute between my good friend Dan Caruso and myself over whether the wholesale Internet access business is growing quickly, in revenue terms. I say it's not, Dan says it is.
Dan thought he had me cornered with a post on Sunday about Cogent Communications, noting how the company is growing quickly in revenue terms. However, Dan is stretching when he claims that Cogent's revenue is evidence of rapidly-growing wholesale Internet access revenue, because Cogent's revenue is not limited to pay-per Mbps wholesale Internet access. The company also operates data centers and has colocation revenue, and they also sell local loops, and these revenue streams are likely to be growing faster than their wholesale Internet access revenue, masking weaker growth there, too. Plus, Cogent could be growing faster than the market, meaning they are taking market share as they grow.
How could Cogent's local loop revenue be growing faster than their wholesale Internet acccess revenue? Let's look at a sample network to show how this can happen:
| Transport Annual Price Compression | 10% | |||
| 2007 DS3 Monthly Transport Price | $ 2,000 | |||
| Internet Annual Price Compression | 30% | |||
| 2007 Monthly Price Per Mbps | $ 25 | |||
| Sample Network | ||||
| Number of Sites | 1000 | |||
| 2007 Peak Internet Bandwidth Demand/Site | 38 | Mbps | ||
| Annual Growth in Bandwidth Demand | 55% | |||
| 2007 | 2008 | 2009 | 2010 | |
| Bandwidth Demand Per Site (Mbps) | 38 | 58.9 | 91.295 | 141.50725 |
| Total Mbps needed | 38000 | 58900 | 91295 | 141507.25 |
| Number of DS3s needed | 1000 | 2000 | 3000 | 4000 |
| Price per DS3 | $ 2,000 | $ 1,800 | $ 1,620 | $ 1,458 |
| Price per Mbps | $ 25 | $ 17.50 | $ 12.25 | $ 8.58 |
| Transport Revenue | $2,000,000 | $3,600,000 | $4,860,000 | $5,832,000 |
| Internet Revenue | $ 950,000 | $1,030,750 | $1,118,364 | $1,213,425 |
| Total Revenue | $2,950,000 | $4,630,750 | $5,978,364 | $7,045,425 |
| Year over Year Growth, Total Revenue | 57% | 29% | 18% | |
| Year over Year Growth, Transport Revenue | 80% | 35% | 20% | |
| Year over Year Growth, Internet Revenue | 9% | 9% | 9% |
In this example, Internet bandwidth utilization is growing at 55% per year, but because wholesale Internet price compression is 30% per year, Internet revenue grows at only 9% per year.
Transport revenue (local loops, and in some cases long haul circuits sold in order to get to the Internet) grows much more quickly, thanks to a slower price compression rate of 10%.
Indications from presentations from companies in the business indicate that transport price compression has indeed slowed down, and on some routes prices are even going up. So, a 10% price compression rate on transport is may actually be more price compression than what is really happening in the transport market as a whole.
From this example, you can see how Internet bandwidth demand can drive a boom in transport revenue at the same time as truly pure wholesale Internet access revenue is growing more slowly.
That's part of what I think is going on with Cogent. Rapid growth in transport and colocation revenues are masking weaker growth in per-Mbps Internet bandwidth fees. Plus, Cogent may be seeing faster growth than the market.
Nice try, Dan, but you will have to do better than that to get me to pay for dinner!
you must have missed my saturday post...click here for explanation of your narrowing of the scope
Posted by: Dan Caruso | April 22, 2008 at 04:16 PM
Dan, this time, it is you who should check your re-reading skills. Even in my original post on the topic (here: http://ikeelliott.typepad.com/telecosm/2008/04/is-an-internet.html)
I was very clear that I was talking only about wholesale Internet Access. Where were my original claims more far reaching? My posts are on display for your perusal. Read them and weep!
Posted by: Ike Elliott | April 22, 2008 at 02:42 PM
Ike. Are you serious? Late in our debate, you changed your claim to be narrowly focused on "wholesale Internet Access". I pointed out this Obama-ism (as your original claims were more far-reaching) but went along with it. Now you have further qualified it as "pay-per Mbps wholesale Internet Access" and "truly pure wholesale Internet access". To top it off, you made up a hypothetical example of why Cogent--as pure a play as there is in the wholesale Internet access market--on how it might be conceivable that despite its rapid growth and profitability, your ascertion (using more tightly defined definitions) might possibly still be true. Even Elliot Spitzer knew when it was time to resign.
Telecosm readers--help!!!! Is it time for Ike to buy dinner?
Posted by: Dan Caruso | April 22, 2008 at 01:45 PM