Palm Beach, FL 1/20/12 (StreetBeat) -- Shares of Cogent Communications Group Inc (Nasdaq: CCOI) slumped 23 percent after the U.S. government shut down one of its customers and the Federal Bureau of Investigation (FBI) searched its offices.The government on Friday shut down the Megaupload.com content sharing website, charging its founders and several employees with massive copyright infringement, the latest skirmish in a high-profile battle against piracy of movies and music.
Cogent is an Internet services provider that caters to corporates, carriers, service providers and content providers in over 170 markets across North America and Europe.
In the indictment seen by Reuters, the United States Department of Justice said Megaupload leases about 36 computer servers in Washington D.C. and France from Cogent. Following the shutdown of Megaupload, FBI conducted a search of Cogent's computer systems at its Washington DC headquarters and took information, analysts said. "If a server was to be needed or seized, that's within the scope of the warrant and we would make a determination in the next 24 hours or so if that was required," an FBI official told Reuters.
"It's a very structured approach to go in, to do a slow roll on it, and to make sure that not only do we gain the evidence and protect the evidence but that we protect the interests of all parties concerned," the official said.
After Megaupload shut down, a more significant decline in Cogent traffic has occurred in the European market relative to the U.S. market suggesting that Cogent was a primary bandwidth provider for Megaupload in the European market, said FBR Capital Markets analyst David Dixon.
Privately held Carpathia Hosting was also named in the indictment for hosting Megaupload data. Cogent did not respond to emails and telephone calls seeking comment.
"Megaupload paid Cogent an average of $1 million per month according to the indictment ... as a result, first-quarter revenue could decline sequentially," analyst Dixon said. Megaupload has boasted of having more than 150 million registered users and 50 million daily visitors, according to the indictment. At one point, it was estimated to be the 13th most frequently visited website on the Internet.
Analyst Donna Jaegers at D.A. Davidson & Co said Megaupload could be bringing in 2 percent to 3 percent of revenue to Cogent. "Cogent is a legitimate Internet connectivity provider. They have a lot of legitimate customers," analyst Jaegers said.
Cogent shares were trading down $2.88 at $15.93 on Friday on the Nasdaq.
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