Cogent (CCOI) recently announced that it was offering secured notes for $206M. The unusual part is what it’s using as security: some of its IPv4 addresses and the leases on those IPv4 addresses.

IPv4 Addresses

IPv4 addresses are the identifiers used to send and receive data in version 4 of the Internet Protocol. The protocol uses a string of 32 ones and zeroes as an address for the specialized computers (called routers) to figure out how to forward packets of data. Those 32 bites mean there are only 4.3 billion possible IPv4 addresses, which seemed like a lot when there were only two million personal computers and only a few thousand capable of networking. The growth of the internet has led to scarcity, creating value in addresses that were originally distributed for free to whatever networks needed them.

Cogent Leasing

Cogent has been leasing out addresses for several years. All internet service providers (ISPs) give IP addresses to their users, but Cogent was among the first to lease those addresses independently of internet access. (Internet access customers normally require a unique address as part of their service.) Sources are hard to find, but prevailing wisdom is that they have over 10M addresses leased for about $0.30 per month, or $36M per year in revenue.

The Secured Note

The notes are expected to be repaid in five years. It’s important that Cogent is creating a special-purpose, bankruptcy-remote subsidiary for this security. The registry in charge of IPv4 records in North America is ARIN, the American Registry for Internet Numbers, and while they allow transfers, they are only allowed if the recipient can demonstrate need, or if the recipient owns the entire organization or network that holds the addresses. By placing the addresses in a subsidiary, even if Cogent were to go bankrupt or stop paying on its secured note, the note holders could claim the addresses from the subsidiary, and sell them off through a marketplace like IPv4.Global by Hilco Streambank.

The underlying value of the addresses is only as strong as demand for them. In a worldwide sale market of about 40M addresses per year, the largest buyers have consistently been the “hyperscaler” cloud companies. With last year’s announcement by Amazon Web Services (AWS) that they would begin charging customers for every IPv4 address used, that dynamic may change. AWS users may buy their own addresses to Bring Your Own IP (BYOIP), or they may lease for a few years while migrating to IPv6.

IPv6

IPv6 is the newer (dating to the 1990s) Internet Protocol. With 340 trillion trillion trillion possible addresses, there is no scarcity, so it is essentially free. However, those with IPv6-only can’t communicate with those with IPv4-only unless someone installs a translator. IPv6 adoption is wide, with 45% of hits on Google properties using the newer protocol, but projections still put it ten years away from being above 90% of the internet.

Other pricing risks to IPv4 include potential surges in supply from the U.S. government’s hoard of a few hundred million addresses, an effort to reclassify 240M experimental addresses, or other publicly traded companies feeling pressure from shareholders based on Cogent’s offering. Indeed, prices have recently eased, and there are signs that will continue, at least until prices of large and medium blocks converge.