The State of the Content Delivery Market
That being said, the real question is, "Will the CDNs be able to turn the additional traffic into additional revenue, or will more traffic simply mean the CDNs will have to lower their prices?" As any content owner should know by now, the more traffic you do over time, the lower price you pay per gigabyte delivered. But for most content owners, it’s going to take a few quarters before they see that growth. Lower pricing is not going to come overnight, and for those who aren’t doing huge numbers to begin with, even doubling your traffic may result in only small savings.
Looking at contracts and pricing in the market, a large content owner doing about 300TB a month is going to get only about a 15% reduction in price on average for doubling its traffic to 600TB a month. Commitment levels and contract lengths play a factor in that percentage, but doubling traffic does not mean pricing then gets cut in half. For really large customers who grow their traffic quickly, the price per gigabyte could be cut in half, but if CDNs are doing four to eight times more traffic, then, even with the 50% price cut, they will still be earning more money. Whether or not they can make money is the question, and it goes back to the earlier point of CDNs having to use the economics of scale to operate their networks more efficiently.
Looking Ahead
So what are the long- and short-term opportunities that lie ahead for the CDN market? In the short term, more providers will enter the market, more money will be raised, and more telcos will slowly begin to creep into the market with their own offerings. While acquisitions are possible, I don't see many taking place in the next 12 months. Most CDNs don’t yet have enough revenue to be an acquisition target, and most don’t have any apps or IP that make them really stand out. While there always seem to be rumors on Wall Street that Akamai will be purchased by AT&T or Cisco, it’s pretty unlikely at this time—but anything is possible.
Earlier this year, we did see VeriSign sell the Kontiki business unit back to some of the folks originally involved in Kontiki, but otherwise, the market for acquisitions has been pretty quiet. The only real acquisition I see that has a really good chance of happening in the market this year is someone acquiring Limelight Networks. At the time of this writing, Limelight and Akamai were still dueling it out in court. And while some analysts think no one will buy Limelight because it is being sued by Akamai and Level 3, I still think a telco will take it out of the market before too long, especially since there is a good chance that Limelight will come up with a technical workaround to the Akamai patent (see www.cdnpatents.com).
In the next 12 months, we should see a clear indication of who the top five or six providers are going to be based on revenue. The market for CDN services shows no signs of slowing down, and the demand for video delivery services will only continue to grow as longer form, higher quality content is played back more often and on more devices. Once online video advertising gets its act together and content owners truly are able to make money from their content, more content will be produced for the web and will be delivered by the CDNs.
While I expect the number of CDN providers to drop dramatically in the next 18 months, that’s not a sign of a downturn. The reality is that there are more providers today than the market can bear, and the market will not grow fast enough in the next 18 months to support them all. When this happens, some will try to take it as a sign that the CDN market is slowing down, that customers are going to build out CDNs themselves, or that it’s too hard for the CDNs to operate profitability. This is not the case.
Over time, CDNs will have to diversify into delivering more than just video content; some are already making that transition. While the market will always have some CDNs that specialize in delivering only video content, the more CDNs build out their networks, the more they will have to utilize their investments to deliver newer forms of content. Doing this over time, CDNs become less dependent on just one form of content delivery for their revenue and also begin to focus on the ecosystem components needed for delivering all forms of content. Content delivery will get smarter and more economical for the customer. CDNs will become better at scaling their networks to keep up with the demand and, I expect, they will do a better job of showing what their services are worth. While customers always want the price to be lower and some think that it will eventually evolve to the point where it is free, they will realize over time that all CDNs have a fixed cost and will always have to charge a base line for their services.
Conclusion
This market is really just starting to grow up and mature into a real business. I’m excited to see how the CDNs evolve over the next 24 months when this becomes a billion-dollar market for video delivery in the U.S. sometime next year. If you’d like to stay up-to-date on the CDN market and discuss what is taking place in the industry, you can follow along on my blog at www.contentdeliveryblog.com.
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