“Who are these people?” That petulant question kept running through Emma Wells’s mind as she flipped through a 30-page business plan. As a Herndon, Virginia-based account manager for Cisco Systems, the world’s leading maker of Internet routers and switches, she was supposed to gather intelligence about potential clients and their online ambitions. But Wells, 32, had never encountered anything as brash as the proposal that arrived in November of last year.
Officials at Cogent Communications, a virtually unknown Washington, DC-based company, claimed that it intended to build a new national backbone for Internet service. On a price-performance basis, it declared, the new service would leave every known competitor in the dust. Cogent’s customers, business users in big, urban office buildings, would enjoy Internet connections of 100 megabits a second — fast enough to download full-length movies in seconds. For such an enormous increase in speed, Cogent would not jack up prices. Rather, it would undercut the standard charges for business Internet connections by 30%. To make such a vision come true, Cogent founder Dave Schaeffer declared, he merely needed 12,000 miles of fiber-optic cable and several-hundred-million dollars’ worth of Cisco equipment.
“That’s a huge business concept,” Wells said. “That’s the kind of thing that AT&T or Worldcom might do.” Curious to see who would sketch such big dreams, she decided to visit Cogent’s offices in the Georgetown section of Washington, DC. To her consternation, the company turned out to be a three-person startup. There weren’t even enough chairs to have a proper meeting.
Yet Wells and her bosses at Cisco’s San Jose, California headquarters couldn’t rule out the possibility that Cogent might be onto something big. Schaeffer, they learned, was no newcomer to startups. He had founded six companies, most of which had a telecom twist. He was involved in detailed talks with Lucent and Nortel — two of Cisco’s rivals — for the network equipment that he would need this time around. And Cisco’s top optical-networking experts declared that, from a sheer technical perspective, Schaeffer’s big vision wasn’t so crazy.
Still, what equipment supplier would bet heavily on a company whose workforce could squeeze inside one Mazda Miata? Cisco executives deliberated for a few weeks. Then Schaeffer startled them into action by clinching the first major piece of his plan: negotiating to buy roughly $200 million worth of fiber-optic cable from Williams Communications Group Inc. “At that point,” Wells recalls, “we knew he was serious.”
One year later, Cogent is about to activate its network. Its fiber-optic cables crisscross the United States, connecting hundreds of cities. Cisco has agreed to sell a whopping 800 of its routers to Cogent, which is installing them at urban sites to serve what it hopes will be swarms of business users. Cogent now boasts more than 125 employees and $116 million in venture-capital funding.
Cogent isn’t assured of victory yet. It faces intense competition from at least a dozen other companies trying to exploit similar new technology. Cogent could stumble as it tries to deliver reliable Internet service on a nationwide scale and then tries to woo enough business customers to absorb its costs. But its rollout so far has been fast enough to turn heads in the telecom industry. Now Cogent must struggle to outpace its competition in a world where technical ingenuity alone doesn’t win the game — it just lets you come back for the next round.
Speed (Still) Wins
Cogent’s dash to become a substantial company is partly a reflection of its founder’s personality. As a teenager, Dave Schaeffer raced through the University of Maryland in just 2 years, taking classes all 12 months of the year and packing as many as 25 credits into each semester. He graduated at age 19 with a degree in economics and with a minor in physics. For much of his twenties and thirties, Schaeffer helped run a family taxicab business. By the early 1990s, he had diversified into the paging and mobile-radio industries. Now Schaeffer, 44, is coming at his new career with all the zeal of a midlife executive making up for lost time.
Of course, new technology is opening major opportunities for anyone who can provide businesses with speedy Internet connections. And that means anyone willing to spend heavily and to move fast. The two crucial elements of Cogent’s network — nationwide fiber-optic cable and high-speed routers — are available to anyone who can pay for them. At least a half-dozen upstarts are buying such equipment by the truckload.
In this race, speed wins. Perhaps 40,000 office buildings across the United States are big enough to justify installing high-speed Internet service. Most of those buildings already are served by traditional Internet-service providers. If tenants or building owners rip out those connections for something cheaper and faster, they are likely to do so only once. The first company to arrive on their doorstep with a strong case for making a switch will get their business.
Ironically, when Schaeffer began kicking about the ideas that led to Cogent, he didn’t feel great urgency at first. He’d just stepped down as chairman of Pathnet Inc., a telecom company that he’d founded in 1995. From his own dabbling in the commercial real-estate market, he knew that many tenants weren’t happy with the speed or the price of their Internet connections. In March 1999, he and two aides, who had joined him from Morgan Stanley and from Andersen Consulting, began researching new ways to link business customers to the Internet. Gradually, they realized that there was a huge opportunity to build something cheaper and faster.
Wanting to test his theories, Schaeffer booked a meeting with Brad Kummer, a long-time researcher at Bell Labs whom he had wanted to hire at Pathnet. As Schaeffer sketched out his ideas, Kummer didn’t snicker. Instead, he declared: “Surely somebody must already be doing this.”
When Schaeffer assured him that the answer was no, Kummer goaded Schaeffer to act fast. Schaeffer did — and recruited Kummer to be Cogent’s chief technology officer. Since last February, Cogent’s workforce has been climbing by nearly an employee a day. One of the duo’s first priorities: sketching out the design of Cogent’s backbone, starting with the fiber-optic cable.
On its own, Cogent couldn’t hope to install roughly 12,000 miles of fiber in a matter of months. But major long-distance carriers had been overhauling their own networks, and many had put in so much capacity that they had plenty of strands of unused, or “dark,” fiber that Cogent could buy. A single strand of fiber, no thicker than a piece of human hair, can carry more than a trillion bits of data per second.
Schaeffer and his team quickly settled on Williams Communications, based in Tulsa, Oklahoma, as the major source of their fiber network. Williams, a onetime gas pipeline company, had shrewdly used its rights of way to diversify into telecommunications. At times, Williams had strung fiber-optic cable inside its old pipelines. In other regions, Williams needed dozens of backhoes to dig afresh. Its network didn’t provide comprehensive rural coverage, but that didn’t matter to Cogent. For linking to big downtown office towers across the United States, Williams’s network was perfect.
By early September of this year, Cogent had bought or had leased strands of fiber that covered much of the United States in a huge, sideways figure eight. Starting from a midpoint in Kansas City, Missouri, one giant loop reaches east to connect such cities as Dallas, Miami, Atlanta, New York, Boston, and Chicago. Another loop stretches west to connect Denver, Phoenix, Los Angeles, San Francisco, and every major city between.
In order to offer such high-speed service, Cogent needed to own that Internet backbone itself. Typically, coast-to-coast Internet traffic takes about 13 “hops” from one network to another, searching for routing paths that will get data to its destination. Each hop creates a slight delay in moving the data along. In aggregate, those hops can slow transmission to a crawl. Cogent, by contrast, aims to eliminate almost all of those time-wasting hops — thereby speeding up users’ connections — by keeping data on its own network for nearly the entire journey.
But Cogent’s nationwide Internet backbone would be splendidly useless if it stopped at the outskirts of each big city, like an interstate highway system without off-ramps to local roads. Thus, Schaeffer’s company has bought 5,000 miles of short-haul urban fiber from Metromedia Fiber Network Inc. of White Plains, New York. Cogent also is using Cisco’s optical routers to manage traffic, so messages get to the right place.
A few years ago, it would have taken $3 billion or more to install enough equipment to keep Internet traffic running smoothly nationwide. That’s why only a handful of national Internet backbones have been built to date — and those were done chiefly by long-distance phone carriers that could afford the massive outlays involved. Instead, traffic is often handled by a bucket brigade of regional networks, pitching in to move data from origin to destination.
But now, with routers and other equipment getting faster and more powerful, even a startup can think of covering the entire United States on its own. Schaeffer also decided to keep costs down by building a network that could handle only Net traffic, without being able to carry voice calls as well.
Cogent’s financial forecasts suggested that the new system could break even if it were used by seven to nine tenants each in about 800 office towers across the United States, with each user paying $1,000 a month for its Internet connection. By contrast, corporate Internet users typically are paying about $1,400 a month for the telecom industry’s current benchmark for high-speed service: a T-1 connection that functions at slightly more than one megabit a second — barely one-hundredth of the Internet speed that Cogent promises.
Easy Pitch, Tough Sell
You would think that the stunning price-performance advantages of Cogent’s service would be enough to sell it. Schaeffer thought so too; then he had to think again. In July, the company’s newly formed sales force began knocking on doors. Many decision makers were enchanted by Cogent’s story, the sales force reported — but finding the right person within a law firm, a bank, or a property-management company could be maddening.
Receptionists are trained to ward off any vendor without an appointment, observes Michael McGuire, 47, Cogent’s director of retail sales. Corporate telecom managers have heard so many pitches about cheaper phone service that they steer most salesmen into voice mail and don’t return calls.
Unwilling to give ground, McGuire and Barry Morris, 41, Cogent’s vice president of sales, set up regional sales offices in 13 cities and then told the company’s newly hired sales reps to make 250 cold calls a week. That pace might sound grueling, McGuire conceded, but he thought that a good salesperson could hold to the target count. In fact, he said in August that he wanted representatives to make 17 face-to-face visits each week as well. The top salesperson each quarter in each office would get the keys to a Porsche sports car for 90 days — before giving up the car to the next quarter’s ace.
By September, Cogent had decided to slow down the sales treadmill a bit. In Chicago, sales manager Jim Bubeck said he was happy when representatives made about 200 calls a week. In less than two months of prospecting, Bubeck’s team had already won more than 20 accounts, mostly by offering customers two free months of service, with a third free month if customers urged their landlord to tell other tenants about Cogent.
More and more, the Cisco connection became a big part of the Cogent story. Not only did Cisco sell routers to the startup, but it helped introduce the little company to big potential customers. Cisco also provided $280 million in financing — which let Cogent buy the routers without needing to borrow money from banks or from the capital markets. Such support wasn’t merely a gesture of kindness. In the hotly competitive market for optical equipment, Cisco didn’t have nearly the dominance that it had shown in other markets. If Cogent did well, it stood to reason, the spillover benefits for Cisco could be huge. As Kummer, Cogent’s CTO, gleefully put it: “We’ve become the poster child for Cisco’s optical strategy.”
To attract customers, Cogent is now unleashing a second sales strategy as well: trying to get major landlords to offer the service to all their tenants. Cogent quickly landed Jamison Properties Inc., which owns several buildings in Los Angeles, and it zeroed in on some East Coast prospects. But Cogent’s VP of real estate, Scott Stewart, 37, says he needs to keep cautioning colleagues that such prospects aren’t won overnight. The culture of the real-estate industry is to haggle over deals for nothing more than the sheer fun of haggling, he observes. That can take months, even when talks are going well. And if Cogent ever gets impatient and pleads for a quick decision, the other side smells blood, he warns. “They’ll start making all kinds of new demands.”
Rivals in the business-Internet connectivity market haven’t done nearly as much to build high-speed networks, but they may be farther along in wooing developers. BroadBand Office Inc., a San Mateo, California company, is partly owned by more than 80 commercial real-estate companies, including giant Hines Interests LP. Such competitors as Allied Riser Communications Corp., Cypress Communications Inc., Eureka Broadband Corp., and Yipes Communications Inc., are targeting the same customers that Cogent wants. Those companies typically offer Internet connections of up to 20 megabits per second, with a sliding price scale that lets customers match T-1 performance and save money, or else lets them go for a somewhat faster connection and perhaps pay a premium.
By contrast, Cogent’s sales proposition involves a leap of faith — that at some point business users really will want to access the Internet at 100 megabits a second and will feel that even a T-1 line is unbearably slow. It’s hard to make that argument for most current Internet applications. Static Web pages and standard applications, such as email, work fine at lower speeds.
But Cogent executives argue that Internet users for the past decade have constantly wanted faster and faster connections as new applications were released. In particular, if online videoconferencing takes off, they contend, then Cogent’s speed advantage will have immediate, practical benefits.
While Schaeffer himself isn’t going on many sales calls, he is getting a sense of the company’s dual battles — to prove that its technology works and then to snap up enough paying customers to justify the business model. This past summer, he spent nearly an hour on a conference call briefing Lee Doyle, an influential industry analyst at International Data Corp. in Framingham, Massachusetts. Almost all of their conversation focused on the technical features of Cogent’s system.
A month later, Doyle pronounced himself impressed. “Every company’s got a high-speed Internet offering,” he said, “but Cogent is offering the highest speed. They’ve got a compelling story.” Yet Doyle wasn’t completely ready to let go of his traditional skepticism. “Getting their customer base is the hard part,” he declared. “They have to go to each building and then win people over, one by one. That’s going to be a lot of buildings.”
George Anders (email@example.com) is a Fast Company senior editor based in Silicon Valley. Contact Dave Schaeffer by email