The Future of the CDN Market

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As viewers consume more video, more often, for longer periods of time, at higher quality, and on more devices, the content delivery market is as hot as ever. In the past 2 years, we’ve seen the number of CDNs coming to the market jump from about a dozen to more than 50 (www.cdnlist.com), and combined, they have raised almost half a billion dollars.

While all of this growth is great for vendors, content owners, and the industry as a whole, the reality is that the number of CDNs in the market is going to decrease a lot by 2010. The market is not big enough to support 50 vendors. And even with all the new entrants in the market, you can count on one hand the vendors that have the vast majority of the market share based on revenue.

History Repeats Itself
As we look to what the CDN market will be like 12 months from now, it’s clear that many vendors won’t be able to sustain themselves. The fact is, the CDN industry has been through this cycle before. In 2000, about 50 CDNs of all shapes and sizes existed. Two years later, in 2002, there were only about a dozen CDNs; in 2004, that number was only five or six.

Many people are predicting consolidation in the market. It will happen, but not in a positive way for most of the CDNs and the investors who pumped a lot of money into these companies. Most CDNs don’t have enough revenue, customers, patents, applications, or intellectual property to make them worth more money than they spent to launch in the market. We’ve already seen some CDNs such as Panther Express and Grid Networks run out of cash and be forced to merge with others—and more deals like this are on the way.

While some might suggest this will be bad for the market as a whole, I’ll take the opposite stance and say that having fewer vendors would actually be good. In any market, it’s hard for companies to get their messages heard above the noise when there are so many players all pitching the same services. This is especially true in the CDN space, where so many vague terms are used to describe services. The number of vendors that have flooded the market in the past 2 years is one of the main reasons the CDN industry is still so confusing for many. With fewer vendors, companies will be forced to refine their messages and be more transparent, and they’ll actually have to define a lot of the vague words such as "quality" and "performance."

Figure 1
Figure 1. Video Content Delivery Networks Market: Dual Scenario Revenue Forecasts (World, 2007–2013)Source: Frost & Sullivan

The bottom line is that today, the CDN business is not a profitable one for the vast majority of the vendors in the space. The only way for any CDN to be cash-flow positive is to take advantage of the economies of scale, which requires either an investment of hundreds of millions of dollars or becoming a CDN that is very focused and happy to go after a specific segment of the market, such as medium-sized customers or resellers.

While many vendors have talked about giving Akamai or Limelight a run for their money, the fact remains that fewer than five CDNs will make more than $50 million this year in total CDN business. In order to become a real player in the CDN space and make more than $100 million in revenue, you have to spend two or three times that amount to build the business. While some companies are still in a position to spend that kind of money—e.g., telcos—the reality is that most CDNs will never raise enough capital to make $100 million a year in revenue.That said, not every CDN needs to be that large, and content owners need many different solutions in the market provided by small and large CDNs that fit different needs. But the real key point from all of this is that 12 months and even 24 months from now, a handful of companies will still control the vast majority of the market.

Here Come the Telcos?
For all the talk of telcos entering the space, we’re still years away from any telco owning a large share of the market. To date, most telcos and carriers are still reselling a third-party CDN or waiting for another year or longer before they make a serious push in the market. When this happens, we will see some CDNs bought out at a positive multiple—but most CDNs won’t be so lucky.

Telcos may have a shot at dominating the CDN space simply because they control some of the biggest costs associated with a CDN, such as bandwidth and co-location space. But that alone is not enough to guarantee them success. At the Content Delivery Summit held in May, I asked the representatives of many of the major telcos if they felt that owning the network offered any kind of cost savings or advantage in the market regarding the ability to sell CDN services at a cheaper cost. While most of them agreed that it did, none of them have yet to prove this to the market, which is really all that matters.

Until any telco can show the industry it is making money with CDN services while offering lower prices, it’s pure speculation at this point in time. While telcos may have a very legitimate shot at going after the major players in the CDN space, it is by no means a guarantee. They still have a lot to prove to the market before anyone is willing to consider them the winner.

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