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.

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I've been bombarded with calls and e-mails all morning asking me if I know anything about the the rumor that AT&T is looking to take over Akamai. For the record, I have not heard anything substantial and every few months we keep hearing a rumor like this. Funny thing is, you never seem to know where the rumor started or who it was started by. It seems that every quarter, for at least the past two years, rumors have circulated that AT&T, Cisco, IBM or Microsoft is going to take Akamai out of the market. Sure, it could always happen, (well not Microsoft) but I don't know of anything currently taking place.

Yesterday, Apple released an update to the Safari browser, version 4.0.3 that included stability improvements for webpages that use the HTML 5 video tag. I've downloaded and installed the update and do see a difference when viewing sites that use the HTML 5 video tag. In the past, Safari would often crash or hang for me but all seems good now. Anyone else notice a difference?

While many of us in the industry have been trying to figure out what exactly Google will do with On2 after the acquisition, we may be getting ahead of ourselves. Some On2 investors have filed separate lawsuits in New York and Delaware looking to block the acquisition, claiming that On2's board essentially agreed not to shop the company around and look for a higher price. Many of On2's investors are already banding together to stop the deal and have launched a website at Vote4On2.com to make their opinions heard.

While Google announced the deal would close in the fourth quarter of this year, they have yet to announced a date for when On2 shareholders will vote on the deal. Google has agreed to acquire On2 for $0.60 a share but the vast majority of On2 shareholders I have spoken to since the announcement think the company is worth a lot more than that and have said they will vote down the deal. With On2 on a run rate to do around $20M in revenue for 2009, Google's offering price of $0.60 a share puts the deal at $106.5M, or roughly five times revenue, which is not a bad multiple. While I don't know if On2 is worth more than Google is offering and am not a shareholder in any public company, from what I can tell, it sounds like Google may have a real fight on their hands from a large percentage of On2 shareholders.

As of April 7th 2009, there were 175,510,794 shares of On2 common stock outstanding and current directors and named executives only owned 6,001,222 shares, or about 3.33% according to a proxy statement. If all of the individual investors who have voted down the deal on Vote4on2.com do in fact own the number of shares they list, as of today they represent 37,716,990 shares or about 20% of the total outstanding shares in the market.

If there is one thing I have learned about many On2 shareholders in the past it's that they are very opinionated, do a good job of talking to one another and sharing info, are very aggressive in trying to get their message across and always seem to be up for a fight. Not something that works very well on a blog, but maybe just exactly the kind of thing needed to block the acquisition by Google or get Google to raise their offer price.

At midnight last night, Roku and MLB publicly announced that baseball fans who have a MLB.TV Premium account can now stream live and on-demand games to the Roku. For those in the Roku developer program, the MLB.TV app showed up a few weeks ago and we've all been eagerly awaiting to try it out. My Roku unit got the upgrade a few hours before it went live (thanks Roku!) and I got to spend a few hours testing out the interface and studying the video quality.

Like everything else on the Roku, the interface is easy to use with the MLB.TV app icon showing up on the home screen alongside Netflix and Amazon. Once you connect your Roku to your MLB.TV account via the computer, you then have the option of picking live games or those on-demand simply be scrolling through the date at the top of the Roku screen. All game match-ups are shown with team logos and when you select a live stream, you have the option of starting the game from the beginning or joining the game live in progress. Just like on the PC, you have the option of selecting the home or away feed and as expected, the same blackout restrictions that apply on the PC apply via the Roku. One thing that doesn't work on the Roku is the audio only stream when you are in a blackout area. For audio only streams, the Roku delivers you a message telling you to access the audio stream via your PC.

As for the video quality, it's really good. On a 50" plasma the quality is impressive and while not clearly as good as the HD broadcast TV signal, that would not be a fair comparison since the Roku stream maxes out at 3Mbps. While I noticed a slight lag at times and very slight pixelation, I would imagine that on a smaller TV, it would look even better. That said, the quality is really very good and I can't see any baseball fan having anything to complain about. The one thing I did notice that is different than watching a movie via Netlfix is that when you fast-forward any on-demand game, you don't get the little screen grabs at the top that shows you where you are in the video. I would imagine that since the screen grabs of a baseball game would look the same no matter what inning the game is in, it would be pretty useless as compared to a movie.

While I've always personally been a fan of MLB's video service, it's something that to date, you've always had to watch on your computer. Being able to move the experience to the TV, which is the whole reason I bought a 50" screen to begin with, really makes the experience that much better. Overall I can't find a single thing wrong with the offering and over time, I imagine the video quality will get even better as MLB continues to encode the games at higher bitrates.

While some have said the Roku box is simply too "dumb" to really be successful, since it can't play games or store content like some of its more expensive competitors, the fact it's still only $99 and does one thing really well is the whole reason why it can succeed.

Related Posts:

– Review: Hands-On With Amazon On The Roku, Close To 300,000 Units Sold

– Roku Adds HD Streaming, SD Upscaling, But Drives Netflix's Costs Up

– Roku To Stream Netflix HD Movies By End Of The Year

– Roku Capable Of HD Streaming, Netflix HD Content Only On Xbox 360 For Now

While the larger CDN vendors targeting the media and entertainment market are still having problems growing their business, over in the enterprise vertical, many vendors involved with the video ecosystem inside the firewall continue to grow. The latest is Ignite Technologies, who last week told me they have now been "profitable for the last few quarters" and are "roughly cash flow break-even". Based on my estimates, Ignite should have revenue of between $11-$15M for 2009. The company has raised a total of $28M to date.

While Ignite and many of the other vendors in the enterprise video sector aren't doing anywhere near the revenue when compared to vendors that target the M&E vertical, the solution and value proposition they are selling is completely different. The growth of enterprise video is not dependent on ad formats, online video ad adoption, content syndication models or whether or not someone is willing to buy content. Video inside the enterprise continues to flourish as it has a very clear and concise value proposition. While the poor economy clearly has an impact on all vendors, in every vertical, companies like Ignite that are laser focused on enterprise video solutions, say that over the past few months, customers have been getting better with their budgets and money is starting to loosen up.

Ignite and many other enterprise video vendors also tell me that they are starting to see more RFPs in the market and continue to close deals that have a higher value. In the past few months, Ignite has closed at least half a dozen deals with companies that are all global multi-billion dollar corporations with very well knows brands. While I can't disclose who those customer wins are just yet, Ignite said many of them will be announced to the media by the end of the year. Ignite now counts roughly 50 enterprise companies as customers and said they now have over a million seats deployed, which is classified as their client being installed on the desktop or a mobile device. While still small, roughly 50 employees, they key here is that many companies like Ignite that are focused and very good at only targeting a specific vertical or ecosystem component, can succeed in the market. Ignite also mentioned that a good portion of their sales comes from a lot of referral and channel partners, an industry wide trend I wrote about a few months back.

While many vendors in the market continue to want to be the biggest or show signs of double digit revenue growth each quarter, many vendors like Ignite and others quietly continue to grow their business is a vertical that rarely gets any recognition. Video inside the enterprise is typically not very sexy, much of the content can be quite boring, but it's content that plays an essential role in the way Fortune 500 companies communicate with their employees, partners and customers.

Compared to many of the vendors selling into the M&E vertical, vendors selling into the enterprise space tend to change their strategy quickly to reflect the ever changing market conditions. A great example of this is when the market got bad and customers were not spending six figures to try out a solution, many vendors started offering SaaS based services that enabled customers to try out the offering without having to spend a lot of money or do a long integration. Vendors in this space tend to be a lot more quick and nimble, partly because of their size, but also because of their mentality. I think a lot of other vendors targeting the M&E space could learn a lesson or two from some of the enterprise video vendors.

Related Posts:

– In These Economic Times, More Video Vendors Relying On The Channel

– The FeedRoom Launches New Website, Back To Focusing On Enterprise Video

– Cisco Launches Network Based Media Processing Platform For Video

– Enterprise Video Market and Vendors Growing Nicely: VBrick Raises $11.9 Million

– Google's New Business Video Offering Not A True Enterprise Product

– Enterprise Video Still Growing: Ecosystem and SaaS The Focus

With Limelight reporting earnings last night, it's now clear that the major players in the CDN space, the vendors that control the vast majority of the market share for video delivery, are all experiencing no growth. Akamai's M&E business was down and Limelight, Internap and Level 3 all reported no revenue growth for their CDN business. And with Q3 typically being a weak quarter for the CDNs and some of them setting guidance that shows no growth over Q2, we may have yet to see the bottom.

While Limelight was very optimistic that they will see growth in the second half of this year and that the CDN market as a whole will pick up, I'm not so sure that industry wide, that's going to happen in the next two quarters. While pricing still took a decline last quarter, I see the bigger impact being that traffic growth with current customer is no where near the levels it once was and many smaller content owners continue to go under. While Akamai and Limelight both talked about the future of HD and higher-quality video, more devices on the market, blu-ray streaming etc. none of that will take place any time soon on any kind of large scale to impact their revenue in the near-term.

I'm constantly asked when is the tipping point and what's the next killer app for video that allows the industry to once again grow at a rapid rate? Devices are great, but they are not enough of them yet to make any real impact on volume overall. That will change, but not in the next two quarters. Higher quality video is coming and we see more of it every day, but again, not enough volume yet by itself to push the industry forward with rapid growth. While I think we'll start to see some growth again next year, I don't think the CDN market really starts to grow again, at the rate we've seen in the past, until 2011. As an industry, we're still waiting on all these devices to penetrate the market along with higher bitrate video, over-the-top services, the broadcast of more live content and better ad integration. I don't see this taking place in earnest by next year. That's not to say they won't be any growth next year in the CDN market, but I'm afraid it's not until 2011 that we really start to see the surge in the space that we saw in 2006.

Clearly, a lot of questions still remain about the current decline in pricing and where that is headed. With that in mind, StreamingMedia.com will be rolling out our annual video CDN pricing survey that we do each year. (entire survey results, including raw data now priced at only $295)  Last time we had over 1,000 customers complete the survey and this year, I'm keeping it even shorter and to the point. The questions that will be asked include:

• 1. Which industry vertical does your company best fall under?
• 2. How are your videos being delivered across CDN(s)?
• 3. How many CDNs do you currently use for video delivery?
• 4. What is your current contract length with your CDN?
• 5. How much has your total video traffic grown so far this year, compared to last year?
• 6. On average, what do you pay per month to CDN(s) for video delivery?
• 7. How much has your video delivery pricing declined from last year or since your previous contract?
• 8. Are you paying CDN(s) on a per GB delivered model or per Mbps sustained model?
• 9. On average, what is your video delivery traffic per month?
• 10. How much do you pay per GB delivered or per Mbps sustained?
• 11. What bitrate(s) are your content encoded for?
• 12. What is the one thing you think CDNs need to do a better job of?

The last time we did this survey, I published a lot of the data for free on my blog here, here, here and here. I'll be doing the same thing again this time and hope to have all the data collected within the next few weeks.

If you think there is a question I'm missing from this list that I should add, you're welcome to make suggestions in the comments section but please note that I'm trying to keep the survey small and keep it focused only on video delivery and pricing.

Special Note: I am having the pricing changed on the 2008 CDN pricing survey from $495 to $295. That change will be reflected on the website shortly and I hope that by make it cheaper, it's now affordable for everyone that wants to have pricing data from 1,000 customers so they can see the trends.