Stream This!: Pulling Back the Curtain on Level 3

I traded some emails with Level 3 Communications CEO Jim Crowe recently, and he was nice enough to spend some time answering questions about his company’s CDN business. While the company has been pretty quiet regarding this area and the customers it has been winning, make no mistake that it plans to be a serious competitor. And I’m not just repeating the company line. I see it from talking to customers, learning of new contract wins, and seeing all of the pieces of the CDN ecosystem Level 3 is finishing putting in place.

While Level 3 still has some work left to complete before it makes the hard push into the market, reading the company’s 2Q 2008 content delivery network newsletter gives you a good indication of just how much it has gotten done. Its CDN is now running Flash Media Server 3, it added a CDN footprint in Asia, it finished the build-out and launch of its origin storage offering, it added the ability to limit the download speeds for progressive files, it added byte-range request functionality (or the ability to seek into a file even if it has not been fully downloaded or stored on the Level 3 network), it added geo-intelligence rules to block access to media, and it enabled reverse proxy ingest, among other things. Shortly, the company plans to roll out detailed URL-level reporting and support for Silverlight HD, enable better customer self-servicing options, implement live WM push functionality, improve its live reporting features, and add the ability for customers to move content from hot to cold storage.

If you look around, you’ll see that Level 3 is already pushing out its new CDN messaging. On the company’s new website, the main message on its homepage is "Connecting Content Creators to Content Consumers," and it’s talking about its content ecosystem strategy. A new Flash-based presentation on the site titled "From Creation to Consumption" really lays out the strategy Level 3 is taking; and it’s a smart one: Don’t just push bits; figure out how to help customers create, ingest, store, manage, track, and deliver the content. It’s a good presentation, and come 4Q of this year, you’ll start to hear a lot more details about Level 3’s CDN offering. By 1Q 2009, I expect Level 3 will be a serious player in the CDN market.

The following is an edited transcript of the questions I asked Crowe and his responses:

While Level 3’s CDN business does not contribute much to your overall revenue today, what impact do you see it having on revenue 2–3 years out? How big of a business can CDN become for Level 3?

Crowe: We anticipate that the CDN business will become a major revenue source for Level 3 over the medium term. We expect the delineation between our internet transit business and our CDN business to blur in the fairly near term. At the very least, we expect our CDN business to compare in size to our internet transit business within the next few years.

At what point do the economics of scale really begin to kick in for Level 3 regarding owning the network and having a cost advantage for the CDN services? Many telcos say it is cheaper to own the network, specific to CDN. But can you quantify yet just how much cheaper it really is?

Crowe: We benefited from the economic advantage of owning a network from the time we entered the business—we will enjoy our cost advantage from the first bit carried to the last. Consider that our network (all layers) has been operating at scale for some years now and we don’t need to wait for CDN traffic to grow materially to enjoy that advantage.

Two things are useful in trying to quantify that: most CDN providers break out, as a percentage of their overall costs, what they spend on network services (usually comprised of collocation, power, and bandwidth). That portion of their total cost is the differentiating element. The advantage to us comes from the difference between the retail rates they pay, on a recurring basis, and our internal costs.

As you know, many CDNs are entering the market and focusing only on price, even if they say they aren’t. Since your costs should be lower, will you come to market anytime soon with a really cheap price, undercutting everyone else so that you can grab market share faster? While others are trying that model and will lose in the long run, you own the network. So can you win on price and still make money, or at least break even?