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The Future of the CDN Market

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Moving Up the Stack
The big change coming to the CDN space in the next 12 months (which we have already started to see) is how CDNs are trying to sell more than just delivery to move up the stack and diversify their revenue. CDNs are now starting to offer more than just video delivery; they are focusing on small-object delivery, content management, live event management, mobile video solutions, and other pieces of the ecosystem. Their hope is that they can continue to build their businesses up around doing more than just delivering bits; they really want to take control of the entire ecosystem.

While it sounds like a good plan on paper, it will be hard for most CDNs to accomplish this. CDNs don’t typically have the mentality for software-based services or the skill set to design video platforms. That’s one of the reasons most CDNs have partnered with platform providers such as Brightcove, thePlatform, The FeedRoom, and others. Trying to build it themselves won’t work out. Before long, we’ll see some of the CDNs acquiring platform providers and bringing the technology in-house. Video platform providers are starting to get a lot of exposure lately; come next year, they will be the hot new thing in the industry, taking some of the spotlight away from the CDNs.

Opinions vary on whether or not the business of delivering bits on the internet is commoditized. But the fact is that commoditization is a good thing. When basic building blocks such as storage, encoding, and delivery get commoditized, the work can truly begin on all of the applications and business models that can be built on top of that foundation. That’s not to say that having scale and performance on a CDN is commoditized, just that the act of delivering bits over different protocols is.

While many still think this business is all about "the low cost leader," it’s not. Bandwidth prices do continue to drop, but content delivery will never be free. There is a direct cost to operating a CDN and providing a valuable service. And as more content owners actually start making money on the web, words such as performance and quality will become even more important to their businesses. For those who think customers only buy for the price, ask yourself why there hasn’t been a new CDN in the past 3 years to displace Akamai or Limelight. If all it took were low prices to win business, then companies such as Panther Express would still be around. The fact that they aren’t still here proves that CDNs can’t give it away in order to grab market share and be a profitable business at the same time. Many over the years have tried.

Right now, most CDNs separate out delivery based on different protocols or the nature of the content they are delivering. But CDNs are already working to make their platforms more agnostic and flexible so they can deliver video, games, software, small objects, applications, and any other kind of content the market demands. While that won’t happen overnight, it will help the CDNs evolve, changing what we think of when we say CDN. Even for a content owner who has a video business online, a good deal of other content surrounds the video that has to be thought of as part of the viewing experience. Dynamic applications, ads, ecommerce, and many other pieces of content are going to start playing a larger role in the future as those components are directly tied into video assets.

Figure 2
Figure 2. Content Delivery Networks Market: Revenue Forecasts By Geographic Regions (World, 2007–2013)Source: Frost & Sullivan

Continued Market Growth Ahead
Last year, the entire global market for video delivery services was only $400 million, according to Frost & Sullivan. That’s a really small number when compared to the overall CDN market size or to many of the other segments of the infrastructure market. It shows that the CDN market still has a long way to go and that many opportunities still exist. Most content owners still don’t make any money with their content, but just imagine what the CDN market will look like when they do. CDNs will be even more crucial down the road as content owners rely on them to help them generate revenue. In the next few years, as more devices come to the market, consumers will begin to adopt them in large numbers—then the market will change. See Figures 1 and 2 for Frost & Sullivan’s CDN revenue forecasts.

While many ask me when this is going to happen and what the next tipping point will be that gives CDNs the next surge of traffic, I try to remind them that it does not happen overnight. Many use the example of YouTube and 2007 as being the year that the CDN market really blew up. But what most people didn’t see, or don’t know about, is all the work that was taking place in the CDN space leading up to that event in the years before. Companies worked very hard from 2004 to 2007—none of that perceived growth in 2007 truly happened overnight.

Today, we’re building the market size every single day. Even with the poor economy, you don’t see less content online; you see more. You don’t see poorer quality video; you see HD. You don’t see fewer devices; you see more platforms than ever before. This is what we’re building on. So when it seems like there is a sudden surge in the CDN business years from now, with or without telcos, remember that it did not happen overnight.

Tough times are coming for many of the vendors in the CDN space. But note that when it happens, it is not a reflection of the entire industry, and there isn’t anything wrong with the business of delivering video on the web. All industries need corrections, and the CDN industry is no different. The bottom line is that the CDN industry has never been stronger, has never been more needed, and will only continue to evolve to help do more than just deliver some bits from point A to point B.

In the future, some CDNs will be profitable, some will be worth acquiring, and many content owners will be willing to pay more for a service that makes them money. We’re all waiting for this time to come. And while it won’t come overnight, I think it will happen sooner than many people may realize.

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