Friday, August 7, 2009

Limelight Networks comments on CDN pricing

from LLNW conference call, transcripts by Seeking Alpha (emphasis added):

  • David Hilal - FBR Capital Markets
  • Okay and on pricing, Jeff, your comment on aggressive pricing or it is pretty comparable to what Akamai had said last week and I do no think it is probably a surprise to anybody at least in common sector but maybe you can talk to us about the pace of that aggressive pricing and I mean pricing war sometimes can last a long time and sometimes can be short and you obviously need to manage your business based on how you forecast that. So, when you think add over the next year or so, do you think the pricing environment stays equally tough or starts to improve or could possibly get worse from what you have seen recently?
  • Jeffrey Lunsford
  • Sure, so let us give you some historical context here. So, three years ago, we were modeling about 20% to 25% annual unit price decline and about a year ago, we started looking at and talking to investors about probably you should model 25% to 30% annual price decline. What we saw in Q2 was in between 30% and 35% so if you want to be conservative, you would model a 30% to 35% going forward.
  • If you look back over a decade, that is much more rapid price decline than the industry has historically had and so, we do think that that will improve. We think we should return back to 25% to 30% and then ultimately back to 20% to 25% per year and we think there is two root causes for the compression going to this level.
  • Number one, the business environment, the economy customers are putting dramatic pressure on all of their vendors, CDNs included. Number two, which we have talked about in the past is that large telcos that began to offer CDN services are able to get paid when they deliver those bits on the ISP side and so to try to establish themselves in the business, they will subsidize CDN with other big delivery services. The effect of that second one, the entrance of the telcos into the market, we believe has now being felt and absorbed by the industry and so we believe that from here forward, we should be looking at a more return to normal.
  • What happened is that has caused a shakeout effectively. It is no secret that there are many smaller companies that were trying to make a run at the CDN sector have given up, shutdown or sold for $0.20 on a $1 and we now have a market that as I said earlier is solidifying around two or three market leaders. So, while at short term pain, we believe there will be a long term benefit and that this is a business that requires global scale and the analogy that we used is the package delivery business where you have that actual GPS and DHO and if you are going to build a global infrastructure to deliver anything where there is packages or bits, you only need two or three platforms.
  • And so with the way of a traffic that continues to grow and with the complexity of all the new devices people are accessing content with, we think that those two or three global platforms will going to have an amazing opportunity and an amazing amount of work ahead of them and so the shakeout when you look back a couple of years from now while short term painful, you will look back and say, "Well, I was a good there winning in shakeout and the markets are now really healthy around these two or three platforms."

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