If you thought the pricing battle between the CDNs was fierce today, just wait till the next quarter when Level 3 (LVLT) enters the market with its new content delivery service for video.
Back in May in a post entitled "Level 3 Could Become A Major Player In The Content Delivery Market" I outlined the reasons why Level 3 has the potential to really enter the market as a major player in the content delivery arena. Based on everything I have seen, Level 3 has finished it's CDN initial build-out for the caching and progressive download of content and is nearly complete with being able to support the delivery of video via streaming. I expect we'll see an announcement about this in the next 30 days followed shortly thereafter by the launch of the CDN service for streaming video.
And if my prediction is right, I expect Level 3 will come to the market with an aggressive marketing campaign talking to competitive functionality and performance at a much lower price. And I don't mean slightly lower, I mean less expensive by a wide margin. While that would not be a new tactic by a CDN, (remember iBEAM?) it is unique to Level 3 since they own the network and should be able to have lower costs than anyone else. While other CDNs in the past lowered pricing to essentially buy market share, none of them ever succeeded, as in the end, their costs caught up with them. If Level 3 is this aggressive, we're going to have to wait to see what impact it has on the market and what tactics the other CDNs will deploy to combat Level 3. While we know that customers are not buying on price alone, and Level 3 still has to prove it has a good service, other CDNs will have to decide how to adjust to the shift in the market.
Now I know that some CDNs will say that it does not affect them as they sell "value added services" and customers will pay more for those, which is true, but only at times. Not all customers need more than a CDN product and if that's all they are looking to buy, then additional services won't allow CDNs to keep their pricing higher for that specific customer. Also, Level 3 is an interesting one to watch in that it also offers co-lo and other services, so some of the CDNs who offer those additional services are getting a competitor on multiple levels when it comes to the product portfolio.
Level 3's caching platform is already fully deployed in the U.S. and Europe and will also be beefed up in Asia by the end of the year. They started selling their progressive download capability last month and will continue to add to it to have nearly 500Gbps of capacity by years end for their caching platform. While Level 3 was able to use some of the infrastructure they acquired from SAVVIS for static caching of content, the streaming assets of SAVVIS were discarded and Level 3 has built a CDN for video from the ground up, which could be an advantage. Yes, late to the market, but a completely new network with no legacy issues that they have to deal with. They own all aspects of what it takes to operate a CDN; wavelengths, collocation, power and cooling, server infrastructure, the largest IP backbone on the planet and direct interconnectivity to other top networks and their core knowledge has always been deep intelligence of their costs to move bits across their backbone, to their customers and to their peers.
Does cheaper pricing mean Level 3 is guaranteed to succeed? No. They have to prove they have a reliable network, have the geographic reach customers want and have all the other services that go along with a CDN offering like reporting, SLA, customer service etc. in order to be taken seriously. But when they have all of that in place, which I expect will be before the end of the year, Level 3 will have a service that the other CDNs will have to compete with. We already know that Metacafe is now a customer of Level 3 and other large customers are currently using signed on and others have been testing the network for both live and on-demand streaming. While Level 3 would not comment on who any of these customers are, or even confirm that Metacafe signed on with them, Dan Golding at Tier 1 Research correctly pointed out last week in a report that the URLs for Metacafe were coming from Level 3. Level 3 has been busy signing up numerous large customers and since they have a huge customer base for other services to leverage, I expect we'll see some announcements about these customers in the fourth quarter. Throw into this the fact that Level 3 acquired Servecast back in July and Level 3 is going to hitting the market in multiple locations globally from a sales, marketing and product perspective.
From day one, Level 3 has also talked about being a major player in this arena in the long run. Level 3 does not need to do tons of revenue next year. The company won't be impacted by the revenue from CDN Services for a long time to come since it already generates billions from other products. But that's also an advantage for Level 3 in that it does not need to ramp revenue as fast and as hard as companies who's sole revenue, or a large chunk of it, comes strictly from the CDN product. Level 3 is not looking at this in the short-term and clearly wants to win not only the business that is out there today for short-form content, but really win down the road when it comes to long-tail content.
Will Level 3 be successful? It's still too early to know. But it would be pretty hard for anyone looking at all of the resources Level 3 has to not realize that they could easily become a serious competitor in the market for the long run. Come the middle of next year, I think the market will shake out quite a bit and that out of all the new CDN players that are entering the industry, we'll see who the real ones are. I would be surprised if Level 3 is not on the top of that list.
