Cogent Puts Its Faith in Fiber Optimism

Dave Schaeffer’s seventh start-up is a doozy. Much bigger--and far riskier--than the taxicab-radio spectrum he rolled up and sold to Nextel Communications, or the wholesale wireless-access business he built at Pathnet Inc.

From his office in Georgetown, Md., he is poised to light his own fiber-optic Internet backbone next month and start selling Internet access to tenants inside large office buildings in major cities at 70 times the speed and two-thirds the price telephone companies typically charge.

Schaeffer’s Cogent Communications has committed to spending more than a half-billion dollars to test his belief that a national network built to carry only data--no regular “voice” phone calls--can make money delivering an ultra-high-powered Internet to businesses.

Cogent is among a new breed of telecommunication carriers racing to exploit fiber-optic advances and deliver on the promise of the Internet--instant communication with everyone, everywhere--that remains stubbornly beyond the reach of the average business and consumer. The Internet for the most part is still a rocky back road because its architects can’t agree on how to build the wider highways needed to handle the recent explosion of data traffic.

“The Internet is the most gluttonous consumer of communications resources known to man,” said Carl Russo, who runs fiber optics for Cisco Systems and pioneered the switching box that Cogent is installing in office buildings. “Cogent is offering a cafeteria to the gluttonous. They represent the future of what is going to happen in the Bell telephone space.”

Cogent’s $1,000-a-month, virtually all-you-can-use Internet offer is puzzling to competitors and potential customers, who wonder how the price of Internet access could plunge so deeply. Each Cogent customer will get unshared access at 100-million bits of code per second, a leap up from the 1.5-million bps that corporate T1 lines typically provide for $1,500 a month. Those T1 lines use the phone company’s copper wires, originally designed to carry voice.

How Cogent can make such an offer provides an intriguing glimpse into the fiber-optics revolution, which is cutting the cost of high-speed data connections and spawning carriers with names such as Cogent, Telseon, CoreExpress and Yipes. Win or lose, these gambles show the challenges telephone companies increasingly face from new business models based on breakthroughs in how light is beamed through glass fibers.

“Fiber is doubling its capacity to carry data every 10 months,” said Schaeffer, the 44-year-old scion of a Washington, D.C., taxicab empire. “It’s up 16,000-fold from the beginning of the last decade. Today, we are at less than half a percent of the theoretical capacity of a fiber.”

Advances in the number and power of glass fibers being laid underground allowed Cogent to develop an optical network more cheaply than similar networks of the past. Cogent purchased two fiber strands running cross-country inside cables laid by Williams Communication, plus a single strand in various cities from Metromedia Fiber Networks.

Cogent is exploiting another engineering breakthrough too, one that has allowed the humble corporate network--known as a local area network, or Ethernet--to reach the transmission speeds of fiber optics. In effect, engineers devised a way to plug local area networks directly into the Internet.

Glass fiber, of course, is hardly new in telecommunications. Fiber has carried voice and data underground across the country for two decades. But until recently, it was too expensive to reach all but the largest corporations.

In the 1990s, the carrying capacity of fiber was greatly magnified by prism-like devices that split light beams into colors so each could carry data as a separate channel. The economic repercussions are shaking up the telecommunications industry, which is in a tizzy over what kind of networking gear should carry the next generation of Internet, telephone and television signals.

The Internet’s biggest problem is that it still rides atop a hybrid architecture that uses glass fibers and copper wires designed for voice. This slows traffic because data packets travel as light through fiber, then are converted into electrons to move via copper wires. The bottlenecks are the worst in cities, which have little fiber.

Converting to an all-fiber network could take decades because the Internet has not one but many backbones, sprawling networks that are owned for the most part by phone companies--WorldCom, Sprint and AT&T.; All have a vested interest in maintaining revenue from their copper phone networks.

Change is nonetheless coming fast. As entrepreneurs lay fiber under city streets, other companies are leasing their glass strands and running them inside buildings so they can sell Internet access at rates that undercut phone companies. The new offerings are far faster than cable TV lines or digital subscriber phone lines (DSL). Customers include an assortment of medium and small businesses, schools, hospitals and other institutions.

Some have only the dimmest idea how they might use the extra capacity. Jim Linn, information technology director for the American Gas Assn. on Capitol Hill, was incredulous when Cogent cold-called him a few months ago. “The first thing I thought is, ‘This is too good to be true,’ ” he recalled. “To get nearly 100 times the bandwidth that we get now with our T1 line, at two-thirds the cost.”

Linn admits he won’t have the same comfort level with a start-up that he has with Verizon, the local phone company that partnered with Internet provider Verio to provide his T1 line. But the idea of being on the Internet’s frontier proved irresistible.

“We are exploring new ways of being a trade association,” said Linn, who decided to abandon his T1 and plug in Cogent’s network. “We did a pilot Web-casting of a local meeting last month. We want to do more of that.”

Many new carriers are selling voice as well as data services, piggybacking on the copper wires of local phone companies. Most also are handing their traffic off to national carriers such as WorldCom’s UUNet.

Not Cogent. It bought the pair of fiber strands across 12,500 miles and spent the summer installing Cisco switching boxes in hundreds of cornfields. Schaeffer contends that running his own national network will lead to less data congestion and higher-quality service for customers.

Armed with $116 million in venture funding, Cogent plans to open its network in Washington and three other cities next month, then expand to nine more by spring. So far, it has signed 473 customers in 150 buildings, mostly inner-city office complexes.

Schaeffer projects that his network will break even by 2003 because its data-only focus translates to equipment costs lower than those enjoyed by competitors such as Qwest, Level 3 and Broadwing. They need expensive switching equipment to handle voice that Cogent doesn’t require.

Telephone carriers, meanwhile, dispute the notion that data-focused carriers will win the day.

“Do we feel threatened? We do, but we don’t feel we are in a losing position,” said Rahman Karrier, executive director of the Verizon division serving small and medium-size businesses. Karrier said Verizon is rolling out its own fiber initiatives, and customers eventually will want service bundles that include more than Internet access: “The winners are going to be those companies who can deliver bandwidth in a way customers can use it to meet all of their needs.”

How far these start-ups can get before being taken over by telecommunication heavyweights remains to be seen. But the idea they are chasing, of a network optimized for data, seems inevitable.