OTT Services By Apple & Verizon Won’t Have A Big Impact On Akamai, Here’s The Numbers
Last week I saw two reports published by Wall Street analysts suggesting that Apple’s still non-existent live OTT service will mean a lot of revenue for CDN provider Akamai. Of course neither of the reports gave out any numbers, provided any estimates of revenue or even showed the formula anyone can use to get a rough idea of what the business would be worth. These reports need to stop being so vague and provide real numbers considering it’s easy to estimate the value of the business using very simple math, which I detail below.
When it comes to the topic of Apple’s own CDN, I still see quite a few who says that Apple is “reportedly building out its own CDN network”, and they speak about it as if it’s speculation. Apple is not “reportedly” building a CDN, they already built it and continue to expand it. Don’t take my word for it, simply do a traceroute and look at how Apple is delivering their content. Apple has a CDN, with massive scale, which is not debatable. Suggesting otherwise, or implying that they “might” have one is simply ignoring the facts.
In one report an analyst said, “we believe that Apple has used Akamai’s CDN capabilities in the past.” You believe it? Why don’t you confirm it? Doing a traceroute shows Apple is still using Akamai for a portion of their content delivery. They also say that Apple “requires significant scale that its own CDN may not yet be able to handle,” but don’t say what that statement is based on. Stop using generic and vague phrases to make it sound like you know what you are talking about when you have no idea at all as to the size and scale of Apple’s CDN. And while we are on the topic of OTT services, the launch of Verizon’s new OTT service will not be a “big deal” for Akamai or provide any “upside” to the company as some suggest. Verizon’s new service will run over their own CDN EdgeCast and not on Akamai.
Whenever Apple rolls out their live OTT service, there are many ways they can handle the distribution of the video. They could use multiple third-party CDN providers like Akamai and Level 3 to deliver everything, or they could use them in combination with their own CDN, splitting traffic amongst multiple providers. Apple could also use their own CDN as primary, and then use third-party CDNs for overflow and extra capacity. Apple could also simply not be involved with the delivery at all and let the content owners in the OTT service deliver the streams themselves, via contracts they already have with third-party CDNs. There are a lot of ways the video delivery can be managed and based on Apple’s history, it’s a safe bet that multiple providers would be involved.
But for revenue calculations, let’s just assume Apple uses Akamai to deliver 100% of the streams. The average HD stream delivered to a TV is about 3Mbps. To tablets and phones, it’s about 700Kbps. We don’t know how many users Apple would sign up for their service, so I’ll use a number of 3M subs in the first month. Then we need to calculate how many hours per month each sub would use and for this example I’ll use 30 hours a month. Then we have to decide what percentage of playback would be on the TV versus a mobile device. If we assume an even split of the traffic, it means one user, in one month, would consume 24.95GB.
[3000Kbps x 60 minutes = 1.35GB per hour X 15 hours = 20.25GB. For the 50% that comes from mobile, 700Kbps x 60 minutes = 315MB per hour, x 15 hours = 4.7GB]
If the traffic was being priced on per GB delivered, at a penny per GB, the value of one customer would be worth $0.25 to Akamai. Multiply that times 3M users and the value of the contract would be worth $750,000 a month. But, Apple doesn’t pay the CDNs based on a per GB delivered model, they pay per Mb/s (95/5). So if you assume that at any given time only 1M of the 3M users will be watching a stream concurrently, with 50% at 3Mbps and 50% at 700Kbps, it means that Apple would be using about 1.5Tb/s. Even at $1 per Mb/s, which is a high price for Apple to pay, the value to Akamai would be $1.5M a month. The numbers get bigger if you calculate them with more than 3M users a month and/or more than 30 hours a month consumed per viewer. But Apple won’t get 3M subs in the first month and there is almost no chance that Apple would give Akamai 100% of the delivery.
Part of the speculation of Akamai’s involvement with Apple on a new OTT service is due to Akamai’s recent earnings call, where the company said that their CAPEX spend would be higher than normal as they added more capacity for OTT video. But Akamai does not break out the percentage of money spent per service and at no time did they say they were adding capacity for a “new” OTT service. All CDNs, including Akamai, don’t keep a ton of extra capacity available just sitting around unused. They operate their networks with a certain level of overflow capacity, but not more than necessary so as not to incur costs for capacity they aren’t using. Akamai could simply be looking at their customers traffic growth and spending money now to put in place the capacity they need for the overall growth of the OTT business for the next 12 months.
Apple’s OTT service will not be a big revenue driver for Akamai or any other CDN right out of the gate. If Apple signs up tens of millions of subscribers and gives a large percentage of the delivery to third-party CDNs like Akamai, then the numbers could start to add up. But Apple would be lucky to get a few million subs, within a few quarters, with what is expected to be such a pared down selection of content available. Based on my calculations, Apple is already spending between $75M-$100M with Akamai this year. So adding a few hundred thousands dollars more a month to that for a new OTT service, or even $1M more per month, it really doesn’t have a big impact on Akamai’s overall numbers.