What’s The Barrier To Entry In The CDN Business? A Few Hundred Million
One of the most common questions I get asked from those who track public CDNs in the industry is what the barriers to entry are for new CDNs who enter the space. With so many new content delivery networks popping up in the last 24 months and the technology having evolved quite a bit over the past ten years, it's a fair question.
Today, the online video platforms and the necessary hardware that is required to run a CDN are completely commoditized and delivering video on the web is not as hard as many CDNs make it out to be. That said, it's pretty easy to enter the CDN market with an investment of tens of millions of dollars and offer a solution in the market that gets some decent customers. But that alone is not enough to seriously compete with any of the major CDNs in terms of scale or revenue. While many of the newer CDNs coming to the market always want to say they are going to "challenge Akamai", the fact of the matter is they won't challenge Akamai's revenue, scale or market share, ever. Sure, if you are Level 3 and you put hundreds of millions of dollars into building out a CDN offering, you have a chance over many years to compete with Akamai. But most CDNs aren't raising and spending that kind of money.
It takes hundreds of millions of dollars to become a major CDN in the market, not to mention years to build it all out. It's taken Limelight five years to go from $20M to roughly $150M and taken Level 3 almost three years to go from zero to a projected $100M in CDN revenue. And that's with both companies spending hundreds of millions of dollars on their CDN offerings to compete in this space. It's also why Akamai, Limelight and Level 3 do the vast majority of all large-scale live events on the web, because they have spent a lot of money to have the scale needed. Some want to imply that with CDNs having been around for over ten years now, it's cheaper than ever to build a CDN and you don't need a much capital to do it. I would agree that it is cheaper today to build a CDN than it was five years ago and you get more for your money. But you can't build a CDN to compete with the major players today simply by spending $50M. Even AT&T who spent at least $70M last year to build out their CDN, has roughly less than 15% of Limelight's total capacity today. That's puts things into perspective.
At the Content Delivery Summit last month, Jeff Cohen from Microsoft stated during his keynote speech that it took "several hundred million dollars" to build out a CDN that has the scale and performance that Microsoft needed. While he said you could build a CDN for probably half that, he questioned what kind of performance it would have and what level of service it would provide. That gives you a good indication of just how expensive it is to build, operate and run a CDN, from a company who has spent hundreds of millions in the past three years to build it out. You can't just stick a bunch of boxes out on Internet like some people suggest.
While some are going to suggest that there will be a lot of major players in the CDN market through consolidation, that's not reality. Today, Akamai, Limelight, Level 3 and CDNetworks control more than 80% of the market, globally, based on revenue, for video delivery. And while many of the telcos will enter the market in a bigger way next year, most of them will do so via acquisitions of the bigger players. And if they acquire smaller players, someone like EdgeCast, they will then have to sink a lot of money into the network even after the acquisition to build it out to scale. The market will never have ten major CDN players accounting for the vast majority of the revenue. We're always going to have four or five vendors tops, who make up the vast majority of the video CDN market, based on revenue.
Not every CDN offering on the market needs to be at the scale or size of what Akamai, Limelight or Level 3 offer. There is nothing wrong with having smaller CDNs in the market that focus on small and medium sized customers or are trying to attack a specific vertical. We need them in the market just as much as we need the major players. But when most financial analysts ask questions about the barriers to entry, they are asking from the perspective of new entrants grabbing significant market share or revenue from any of the public CDNs, which is something that's not just not going to happen.