The State of the Content Delivery Market

A must read from Dan Rayburn.

Just quoting here a few highlights, while we raccomend that your read the full article:

>>To those who are new to the online video industry, it may seem like the content delivery market has been around for only a few years. But amazingly, 2008 marks the 13th year since some of the first content delivery networks (CDNs)...

There are more than 50 video delivery networks now in the industry (see www.cdnlist.com), including those that are P2P-based, and the vast majority of them are competing for the same business in a market that is still small in the U.S.

Based on my calculations of vendors’ revenue, the market size for outsourced video delivery services in the U.S. was $450 million to $500 million last year and has the potential to grow to about $800 million this year (see www.cdnmarket.com)

At the same time, in the past 18 months, more than 15 video delivery vendors, including P2P-based providers, have raised almost $300 million in capital. CDNetworks, EdgeCast Networks, Panther Express, GridNetworks, Highwinds Network Group, Velocix, ITIVA, Move Networks, Pando Networks, Conviva (formerly Rinera), BitTorrent, ChinaCache, RawFlow, and Oversi Networks combined raised $282.85 million in 2007 and 2008, and that number does not take into account other CDNs that have already raised money but have not yet made it public or those that are out in the market raising another round. When all is said and done, I expect close to another $100 million will be raised in the next 12 months. Combine this much money being raised with a market that’s not as big as some think and one has to worry that, in the next 18 months, the number of video delivery networks in the industry will fall considerably. The market can’t support 50 providers, and not every company will be acquired and make back their investors’ money.

History has a way of repeating itself, and we have gone through this before. In 2000, before the bubble burst, we had nearly 50 CDN providers in the market. Two years later, we had less than 10. Five years later, we’re back to 50, but for how long? At some point, investors are going to want to see some return on their money, and with fewer video delivery networks focusing on doing more than just delivering bits, it’s going to be hard to get acquired unless they can show a lot of revenue, which most don’t have.

Back in December, AT&T announced that it would spend $70 million to $80 million this year to build out its CDN offering and focus on the video delivery business. But while financial analysts have been quick to downgrade Akamai every time a telco says it is going to enter the CDN market, even AT&T won’t make a big dent any time soon. You can’t build a CDN overnight, even if you are a telco and own the pipes, and while placing servers and turning up capacity is not hard, it’s all the other pieces around the CDN offering you need to have in place that make it difficult. Without reporting, content management, transcoding, etc., no CDN offering can get very big, and AT&T is aiming to have only 400Gbps of capacity for all of its CDN services by year’s end, which is only 20% or less of the capacity that some larger players have in the market.

While many don’t give telcos a shot at being real competitors in the CDN market, most are underestimating Level 3. I expect that by the end of this year, the company will be the No. 3 provider in the U.S., based on CDN revenue, and it will quickly become the No. 2 provider behind Akamai next year.

While AT&T and Level 3 are the only telcos in the market today, additional telcos have confirmed that they will be entering the market shortly. The real question is whether they will have the mentality of wanting to build everything themselves, like most telcos do, or of acquiring smaller players in the industry to get to market faster. Either way, one thing is for sure: The CDN market has yet to peak, and new providers will continue to enter the market in the second half of this year.

Some say HD is going to be the biggest factor for CDN growth, but HD viewing adoption in large numbers is years off. HD will have some impact this year, but most content owners are not encoding content in this format and are focusing on a bitrate around 700Kbps. But even with HD having a small impact this year, it still adds to the growth that CDNs are going to see in the next few quarters. Content owners are putting up more content in more platforms and at higher bitrates, and much of that content is longer in length. This all amounts to a huge increase in the number of bits being delivered via the CDNs.

In the next 12 months, we should see a clear indication of who the top five or six providers are going to be based on revenue. The market for CDN services shows no signs of slowing down, and the demand for video delivery services will only continue to grow as longer form, higher quality content is played back more often and on more devices. Once online video advertising gets its act together and content owners truly are able to make money from their content, more content will be produced for the web and will be delivered by the CDNs.

While I expect the number of CDN providers to drop dramatically in the next 18 months, that’s not a sign of a downturn. The reality is that there are more providers today than the market can bear, and the market will not grow fast enough in the next 18 months to support them all. When this happens, some will try to take it as a sign that the CDN market is slowing down, that customers are going to build out CDNs themselves, or that it’s too hard for the CDNs to operate profitability. This is not the case.