Two more startups join the fray to provide broadband access to corporations by glass and by air. But is the already crowded market another dot-bomb in the making?
July 17, 2000

Someone is going to get hurt.
Cogent Communications announced on Friday that it had raised $90 million, whereas Airband is set to announce that it has secured tens of millions in venture funding on Monday, thus entering another couple of upstarts into the broadband access fray.

In the past four months, VCs have poured more than $500 million into at least five other companies in the space -- Looking Glass Networks, CoreExpress, Telseon, SmartPipes, and Yipes. And all of the upstarts have two things in common. They're all trying to subvert Baby Bells in the business of metropolitan area data access, and they all sell to the same customers -- small- and midsize businesses or Internet service providers.

At least one of the companies' founders has no illusions about the challenges that lie ahead. "Competitors? You bet, man -- from AT & T to MCI to Sprint to the Baby Bells," says Scott Ticer, cofounder and VP of business development at Airband.

STRINGING THE SEQUOIAS
The fact is that selling high-speed Internet access services to bandwidth-starved business is a commodity business. There's enough fiber in the ground to string around the Giant Sequoias in Northern California a hundred times over, and microwave communications have been used for transporting voice calls for years. As with every other sector of the communications market, transport costs continue to fall through the floor as technology advances. That means both firms are vulnerable to price wars that rip into margins. And because both Cogent and Airband are focusing exclusively on data access services, there's little room for recourse through differentiation. That sounds a lot like a true dot-com debacle, but investors continue to pony up.

Cogent Communications and Airband are entering the battle with two very different delivery models. Cogent is taking an all-optical approach, whereas Airband is going with a microwave-based wireless one.

Cogent, based in Washington D.C., received its second-round funding from lead investor Oak Investment Partners and co-investors Broadview , Worldview Technology Partners, Nassau Capital, Texas Pacific Group, and others. The funding brings Cogent's total equity raised to $116 million.

Through a $280 million financing agreement with Cisco , 12,400 miles of long-haul fiber from Williams Communications , and 5,000 miles of local fiber leased from MetroMedia Fiber Networks, Cogent is a taking an all-optical approach to service delivery. The company uses optical gear that Cisco acquired when it bought Cerent and Pirelli Optical Systems. "We're building a data network from the core out," boasts Cogent CEO Dave Schaeffer. "There's no voice, no ATM [asynchronous transfer mode], just pure IP over DWDM [dense wavelength division multiplexing] infrastructure."

CUTTING COSTS
By cutting an entire layer of voice-switching equipment out of the equation and adding other efficiencies in data transport, the architecture enables the company to cut bit transport costs down to about half a cent per mile, Mr. Schaeffer claims. That's less than the 1-cent-per-mile cost of renting a line from the phone company, he says.

The low cost enables Cogent to drill down on its core business plan: offering 100 megabit-per-second (Mbps) dedicated Internet access to businesses in "class-A" office buildings (those with 500,000 square feet or more) for a flat rate of $1,000 per month. No contracts. Just a dedicated, pure, clear connection to the backbone network, says Steve Bachmann, a general partner at Broadview Capital Partners.

Cogent's network is currently under construction, but service will be available in some of the nation's largest "retail" markets, including New York, Philadelphia, and Chicago by November 1 of this year, Mr. Schaeffer says. Cogent a plans to roll out to a total of 20 markets where it will sell "wholesale" bandwidth on its network to carriers, ISPs, ASPs, and other large-bandwidth users. Cogent can't run its network at capacity with retail customers alone, he admits. "We need to have a way to monetize other fiber to create revenue."

Even so, Mr. Schaeffer is very upbeat about his company's prospects. He says Cisco has a vested interest in seeing Cogent find success. "We're building a model network for Cisco," he says. "I met with John Chambers, and our networking architecture looks exactly like what Cisco wants for the future. It justifies why Cisco spent $11 billion on buying optical networking companies like Cerent and Pirelli."

Carl Russo, group VP of optical networking for Cisco, is bullish about Cogent. "We love the simplicity of its model. It's either a yes or no sale. 'Do you want 100 megabits per second or not?'" he says.

Still, Cogent will also have to contend with competition from the air -- Airband, that is. Airband execs declined to disclose the specific amount of the venture funding they'll announce on Monday, but a source at Battery Ventures, one of the company's backers, says the round is "substantial." Airband took in $5 million in seed funding early this year from Sevin Rosen Funds and Crescendo Ventures.

MICROWAVE IT!
By using the same microwave technology that carriers used for 10 to 15 years to transmit voice, AirBand beams out data. The company sets itself apart because "there is not one technology that answers every customer's needs in terms of availability and affordability," says cofounder Mr. Ticer.

Using wireless technology only began to make economic sense within the last four months. It was no coincidence that that's when he and three other founders from Adaptive Broadband, Covad Communications, and NextWave, broke ground with the company.

AirBand sells from 1 Mbps to 10 Mbps worth of dedicated Internet access starting at $349 per month and going up to $2,995. The company has service level agreements comparable to private line or DSL, Mr. Ticer says.

Mr. Ticer is not oblivious to the fact that Airband will have to run hard to outpace its competitors. "The broadband service space is an absolute, unequivocal free for all," he says.

Both Airband and Cogent have critics who wonder how the startups will make it over the long haul. "How on earth are [they] going to make money?" asks Promod Haque, managing partner at Norwest Venture Partners, which has backed Yipes, an Airband and Cogent competitor.

He reckons that bankruptcies are on the horizon for some of the companies in the crowded space, unless they can find other value-added services to sell to their business customers. "We learned our lesson with Verio ," he says. "Connectivity gets commoditized very, very, very, quickly. Therefore, when you build your business, you want to make sure you know that access will be a commodity."

After two years selling plain, high-speed data access to its customers, Verio realized that money wasn't going to be made on access, Mr. Haque says. So it started offering value-added services, such as Web hosting, domain name registration, electronic commerce services, and application-hosting services. Mr. Haque, the lead investor in Yipes, another optical connectivity firm, says he constantly challenges the startup's executives to come up with new services, but he's tight lipped about what they will be, noting that he doesn't want to tip off competitors.

Peter Wagner, a general partner at Accel Partners , and one of the premier VCs in the telecom space, agrees: "Bare bones Internet access is a good model to get started, but you need to have a vision of the value-added data services you're going to provide."

So what happens to the broadband providers that don't make it? They won't have the numbers to go public, and it's unlikely that they'll be bought out by competitive local exchange carriers and incumbent local exchange carriers. Because the broadband providers will likely be losing money, shareholders of CLECS and ILECS will disapprove of a purchase because it will hurt earnings per share, Mr. Wagner says.