CDN Startups Talk Tough

There was plenty of trash talk at the Streaming Media East Show, as new content delivery network (CDN) players sought to differentiate themselves from the large incumbents, and those incumbents touted early mover advantages.

The number of CDNs is rapidly expanding, as many startups and other service providers seek to grab their share of the fast-growing market for delivering Internet content. In the past two years, companies like CacheLogic , Level 3 Communications Inc. (Nasdaq: LVLT), NaviSite (Nasdaq: NAVI), and Panther Express Inc. have joined incumbents in the increasingly crowded CDN space.

New CDNs Abound
Without the size and scale of companies like Akamai Technologies Inc. (Nasdaq: AKAM) and Limelight Networks Inc. (Nasdaq: LLNW), some new entrants are seeking to compete on price and customer service, while others are searching out underserved markets to grab customers that may not already have a CDN.

NaviSite, for instance, is making a larger push into the content delivery market after years spent primarily as a hosting and collocation provider for enterprises. The company sees an opportunity serving retailers, enterprises, and other businesses that are not traditional content publishers.

Doug Mow, VP of marketing at NaviSite, says, "a lot of attention is being paid to major media players," but he says that video is becoming a must-have for almost all businesses with a Web presence.

To reach this market, NaviSite has formed a partnership with online video company Vidavee to offer a hosted video service similar to YouTube Inc. , but with more robust content control and better targeted ad insertion. (See NaviSite Makes Announcements.)

CacheLogic, which launched its CDN service in January, announced that it will begin offering configurable class of service capabilities that allow content providers to designate different performance levels for different assets. (See CacheLogic Configures Service, CacheLogic Pushes Hybrid P2P, CacheLogic Fires Up Its CDN, and CacheLogic Intros P2P CDN.)

The service offers a tiered pricing structure that the company says will save service providers money. By offering them the ability to dial down bandwidth for less-critical assets, CacheLogic says it is bucking the traditional "one size fits all" pricing structure.

Gary Croke, director of U.S. marketing for CacheLogic, says the tiered service also provides a new revenue opportunity for content providers. The service will allow publishers to set classes of service for end users, allowing them to provide higher levels of service for a premium.

Panther Express, which was started by DoubleClick Inc. founders Kevin Ryan and Dwight Merriman, also plans to compete with the big boys on price. The company claims approximately 120 customers and says it initially sells its services on a pay-as-you-go basis. (See Panther, Gomez Partner.)

"We have no contracts or commitments to start," says Panther Express CEO Mark Pesonen. "But what tends to happen is customers want to convert to contracts" to lock in delivery prices. This model, he says, provides a much lower barrier to entry for potential customers.

Majors Question Startup Scale
While the number of CDN upstarts is expanding, the larger players don't seem to be particularly worried about losing business to new competitors. They say that size, scale, and experience will be important in offering content delivery to the businesses that produce the majority of rich media content.

Thierry Curis, digital media product manager for Akamai, says a lot of the new competitors "haven't run into problems of scalability yet." He says "anyone can set up a server and stream a meg of content over the network," but smaller competitors run into more and more issues as they take on customers and expand capacity.

"We've seen some competitors that run for a year or two and then they run into problems," Curis says, noting that there is an order of magnitude in the difference between scaling to serve a couple hundred customers and meeting the needs of the thousands that Akamai serves.

"There aren't that many CDNs with a footprint of any substance," says Gustav Vik, CEO of Mirror Image Internet Inc. , which has been operating in the CDN space for 10 years. As a result, he believes the largest accounts will continue to be won by incumbents. Vik says large media customers like Fox aren't interested in doing business with an upstart delivery provider.

"They are interested in [CDNs] with the scale and robustness required" to deliver rich media content reliably, Vik says. "The challenge for large customers is that they need scale, and scale costs money."

One new entrant that may not have problems of scale is Level 3, which acquired the CDN business of Savvis Inc. (Nasdaq: SVVS) earlier this year. The company has its own fiber backbone and a host of customers in its content markets business. (See Level 3 Looks for Big CDN Push, Level 3's CDN Story Rides on Fiber, and Level 3 Spends $135M on Savvis CDN.)

After a few months spent integrating the Savvis technology into its network, Level 3 announced at the show that it will begin offering caching and downloading services through the newly acquired CDN business, and it named AOL LLC as a new customer for the services. (See Level 3 Enhances Platform.)

Level 3 touts its fiber network and its existing services portfolio -- and customers -- as key differentiators from the competition. It also talked up its experience in dealing with spikes in traffic. Lisa Guillaume, vice president of CDN services at Level 3, says the company has capacity planning "down to a science," and it is "applying that science now" with its push into the CDN market.

Melanie Posey of IDC expects to see more business models like this, where "CDN isn't a discrete service in and of itself." She sees more companies creating an "integrated value proposition that they can tie their CDN into."

Akamai in the Crosshairs
Akamai was a popular target at the show, as competitors discussed what they viewed as problems with the market leader's network architecture.

A Panther rep we talked to touted benefits from his company deploying newer technology, without having the same constraints of a large, legacy network that exists at Akamai. "The more servers you have, the more likely it is that they're going to break," he said, noting that Akamai's distributed system of servers means the company inevitably has higher opex costs than its competition.

And Mirror Image's Vik says his company is better prepared to serve rich content than Akamai because it moves content closer to the user, within network access points, than the market leader, which positions its caching servers at the edge. "We have a 98 percent cache hit ratio," compared with Akamai's, which Vik says is closer to 60 percent.

Posey says Akamai's network "is what it is because they've been around since 1998," but she believes concerns about the company's cost structure are exaggerated. "[The network] doesn't cost them that much to run."

Curis says that despite competitors' views of his company's architecture, Akamai wouldn't have it any other way. He says Akamai keeps the same architecture simply because that's how the company has always done business.

"We could do it differently if we wanted to. It's way easier to be centralized," Curis says. But he believes that its customers see a real benefit from how traffic is delivered by Akamai now. "How we do it really makes sense, and at the end of the day our customers are happy."

Is the CDN Market Big Enough?
For now, most CDN players we talked to agreed that there should be enough business to go around in the short term. However, many believe there might be a shakeout on the horizon.

Panther's Pesonen says, in the short term, "sheer volume will allow them to compete," but as time goes by on the market, it "will be tough for a lot of companies."

These remarks were echoed by Jason Alves of Internap Network Services Corp. (Nasdaq: INAP), who says that the current CDN market reminds him of the early 2000s, when there were about 35 different players in the space, before "there was some pretty substantial consolidation."

While some think there are too many players in the market, Posey says that right now "there's room in the market for everyone," and the key to success for CDNs will be for them to "keep their eyes open and see what the digital content market is doing" and respond accordingly.

— Ryan Lawler, Reporter, Light Reading