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Analyze That: The State of the CDN Market

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Each issue, we’ll pose a pertinent question to a group of market analysts to give you a better sense of how the financial services sector perceives developments in the streaming media industry. Here’s this issue’s question:

With more and more content delivery networks (CDNs) entering the market—by some counts, there are close to 50 of them right now—what do you anticipate the rest of 2008 will bring in terms of market consolidation and attrition? Should we be looking for serious M&A action, or is that still a ways off?

There will be, inevitably, a contraction in the number of CDN service providers, but I don't believe the consolidation and attrition will begin in earnest until mid-2009. So far, there is still a good pool of well-funded customers to be served, but a recession could start to claim some victims among the customer base by the fourth quarter 2008. That would impact the CDNs by 2009, which should be about the time that some of the smaller CDN startups will need more funding and will either seek to be acquired or might fold altogether.

Jim Davis
Senior analyst, networks and media, Tier1Research.com

We think the CDN market is saturated or close to it. Only a few CDNs today can handle large-scale content deliveries, which represent the majority of the market. Hence, the smaller CDNs will be competing for a relatively small market share and will find it difficult to achieve meaningful scale or profits. Further, the credit market remains tight, and this could make it difficult to get new funding for all but the strongest players.

Aaron Kessler
Senior research analyst, Piper Jaffray & Co.

The key to a consolidation wave is taking share from the market incumbents. Our checks indicate that pricing has reached unsustainable levels, but that the leading vendor is not chasing after unprofitable business. If this is the case, widespread consolidation is unlikely to occur. Challengers will need to grow their businesses to a size where incumbents are forced to compete on price. Additionally, cash reserves must support the business model so this competitive threat is long-term in nature. By taking revenue from the incumbents and posing the threat of long-term margin decline, it will be cheaper to acquire than compete. That said, there are no signs that it will be happening in the near future.

David Eller
Principal, Reuters

Based on the sizable amount of funding the industry has recently seen, we expect minimal consolidation in 2008. Longer-term, we believe consolidation in the CDN industry will unfold like almost every other industry. In our view, content distribution is more a technology than a stand-alone industry. Therefore, we believe some of the largest CDN providers will offer many services within the content distribution ecosystem, such as management, acceleration, and transcoding. Conversely, we believe this also implies that many smaller CDN providers will be acquired into predominantly non-CDN product offerings. We have already seen early examples of both.

Colby Synesael
Senior VP, equity research telecom and data services, Merriman Curhan Ford & Co.

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