Featured Article: The Future Of The CDN Market
Each year I write a featured story for Streaming Media magazine that takes a look at the future of the CDN market and what I expect to happen in the near-term. This article is from the Aug/Sept issue of Streaming Media magazine, which should be arriving in subscribers mailboxes this week. You can sign up for a free subscription to the magazine here.
As viewers consume more video, more often, for longer periods of time, at higher quality, and on more devices, the content delivery market is as hot as ever. In the past 2 years, we’ve seen the number of CDNs coming to the market jump from about a dozen to more than 50 at its peak (www.cdnlist.com), and combined, they have raised almost half a billion dollars. While all of this growth is great for vendors, content owners, and the industry as a whole, the reality is that the number of CDNs in the market is going to decrease a lot by 2010. The market is not big enough to support dozens of vendors. And even with all the new entrants in the market, you can count on one hand the vendors that have the vast majority of the market share based on revenue.
As we look to what the CDN market will be like 12 months from now, it’s clear that many vendors won’t be able to sustain themselves. The fact is, the CDN industry has been through this cycle before. In 2000, about 50 CDNs of all shapes and sizes existed. Two years later, in 2002, there were only about a dozen CDNs; in 2004, that number was only five or six.
Many people are predicting consolidation in the market. It will happen, but not in a positive way for most of the CDNs and the investors who pumped a lot of money into these companies. Most CDNs don’t have enough revenue, customers, patents, applications, or intellectual property to make them worth more money than they spent to launch in the market. We’ve already seen some CDNs such as Panther Express and Grid Networks run out of cash and be forced to merge with others—and more deals like this are on the way.
While some might suggest this will be bad for the market as a whole, I’ll take the opposite stance and say that having fewer vendors would actually be good. In any market, it’s hard for companies to get their messages heard above the noise when there are so many players all pitching the same services. This is especially true in the CDN space, where so many vague terms are used to describe services. The number of vendors that have flooded the market in the past 2 years is one of the main reasons the CDN industry is still so confusing for many. With fewer vendors, companies will be forced to refine their messages and be more transparent, and they’ll actually have to define a lot of the vague words such as “quality” and “performance.”
The bottom line is that today, the CDN business is not a profitable one for the vast majority of the vendors in the space. The only way for any CDN to be cash-flow positive is to take advantage of the economies of scale, which requires either an investment of hundreds of millions of dollars or becoming a CDN that is very focused and happy to go after a specific segment of the market, such as medium-sized customers or resellers.
While many vendors have talked about giving Akamai or Limelight a run for their money, the fact remains that fewer than five CDNs will make more than $50 million this year in total CDN business. (Akamai, Limelight, Level 3, CDNetworks) In order to become a real player in the CDN space and make more than $100 million in revenue, you have to spend two or three times that amount to build the business. While some companies are still in a position to spend that kind of money—e.g., telcos—the reality is that most CDNs will never raise enough capital to make $100 million a year in revenue. That said, not every CDN needs to be that large, and content owners need many different solutions in the market provided by small and large CDNs that fit different needs. But the real key point from all of this is that 12 months and even 24 months from now, a handful of companies will still control the vast majority of the market.
Here Come the Telcos?
For all the talk of telcos entering the space, we’re still years away from any telco owning a large share of the market. To date, most telcos and carriers are still reselling a third-party CDN or waiting for another year or longer before they make a serious push in the market. When this happens, we will see some CDNs bought out at a positive multiple—but most CDNs won’t be so lucky.
Telcos may have a shot at dominating the CDN space simply because they control some of the biggest costs associated with a CDN, such as bandwidth and co-location space. But that alone is not enough to guarantee them success. At the Content Delivery Summit held in May, I asked the representatives of many of the major telcos if they felt that owning the network offered any kind of cost savings or advantage in the market regarding the ability to sell CDN services at a cheaper cost. While most of them agreed that it did, none of them have yet to prove this to the market, which is really all that matters.
Until any telco can show the industry it is making money with CDN services while offering lower prices, it’s pure speculation at this point in time. While telcos may have a very legitimate shot at going after the major players in the CDN space, it is by no means a guarantee. They still have a lot to prove to the market before anyone is willing to consider them the winner.
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.
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.
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.