>>Telecom carriers are beginning to radically shake up the market for content delivery networking (CDN) now crowded with standalone players, according to Yankee Group senior analyst David Vorhaus, who predicts the current pricing pressure in the CDN sector will accelerate carrier participation in the space, either through acquisitions or partnerships they may or may not be preludes to acquisition.
In a recent assessment of CDN players, the Yankee Group already ranked AT&T (NYSE: T) and Level 3 Communications (NASDAQ: LVLT) in fourth and fifth place, respectively, in terms of the quality of their offerings. But in talking about carrier participation in the CDN space today, Vorhaus said, “What we’ve seen thus far is only the tip of the iceberg.”
Carriers are inexorably moving into the CDN space not just because it’s becoming an increasingly vital part of their business but because they have certain innate competitive advantages there. During the company’s second-quarter earnings call, Level 3 executives, while reporting pricing pressure in their CDN business, argued that it will be remedied eventually by the cost structure they enjoy as a carrier. Jim Crowe, the company’s chief executive officer, emphasized the advantage that carriers wield over standalone CDNs simply by owning their own underlying transport infrastructure. “Over time, if you're not a carrier with your own low-cost source of bandwidth, you're going to end up as a reseller,” Crowe said. “Resellers can grow to a certain size, but then because they don't control such a large portion of their cost, they get squeezed.”
Vorhaus agreed in general that CDNs have already begun to squeeze. CDN market leader Akamai Technologies has significantly dropped its typically premium prices lately for existing big-name customers, something Crowe hinted at in the earnings call as a tactic of incumbents trying to keep their market share. And Akamai’s biggest competitor, Limelight Technologies, which reported sequentially flat second-quarter revenue, is expecting third-quarter revenue to be sequentially flat as well.