Will Giant Steps Squash CDNs?

On the face of it, the moves by big telcos – such as AT&T Inc. (NYSE: T), Level 3 Communications Inc. (Nasdaq: LVLT), and others – into the content delivery network market is bad news for specialist content delivery networks (CDNs). Telcos have a track record of ultimately destroying value in service markets, and they have the capacity to survive on thin margins because of the breadth of their portfolios and the robustness that comes with scale. The same cannot necessarily be said of all CDNs, some of which have been operating for only a couple of years or are firmly focused on delivery of premium Internet video.

The telcos' CDN play – which makes a great deal of sense for them – will force specialists to consider wholesale and retail market positioning and to decide on the extent to which they are prepared to sacrifice margin for volume. In short, they must decide how better to use telcos and other channels to market as more companies recognize the importance of timely, efficient delivery of Web/Internet content to customers, audiences, staff, and partners.

The latest Light Reading Insider, "Shrinking Margins Bring Big Changes to the CDN Market," tracks and analyzes the changes working through the CDN sector, focusing on telco strategies, continued consolidations, and the recent move by Alcatel-Lucent (NYSE: ALU) to buy into the market through its purchase of Velocix . The report also addresses how CDNs are changing their infrastructure and business models in response to changes in the nature of the content they deliver, how they are struggling to differentiate their offers, and how they are attempting to capture more value from their customers by developing value-added services appropriate to their target markets.

There are differences in strategies beginning to emerge. Players such as EdgeCast Networks Inc. have successfully signed up telcos, such as Deutsche Telekom ICSS and Global Crossing (Nasdaq: GLBC), as resellers. Other CDN specialists, such as BitGravity Inc. , have developed closer strategic ties with major operators – in BitGravity's case, Tata Communications Ltd. (NYSE: TCL) – to jointly build better CDNs. The biggest, most established players, Akamai Technologies Inc. (Nasdaq: AKAM) and Limelight Networks Inc. (Nasdaq: LLNW), continue to try to secure greater shares of spending from their biggest customers, while also selling through channel partners such as IT service companies. Many CDNs, including Internap Network Services Corp. (Nasdaq: INAP) and CDNetworks Co. Ltd. , offer broader ranges of services to boost revenue, with portfolios that look increasingly like those of a business-focused telco. Velocix – whose caching devices help Internet service providers (ISPs) build their own CDNs – looks likely to develop down a different line as part of Alcatel-Lucent.

The driver of the market change is that content delivery is becoming one significant part of a big bag of IP services that many large enterprises need as more critical content goes online: It is there alongside corporate wide-area network (WAN) connectivity, Internet security, hosting, and managed application services of all kinds. In the past, these services may have been considered distinct, but increasingly they are all part of the same "Internet service market" that many types of service providers are fighting to supply.

Over the next year or so, it is likely that a more mature CDN market structure will crystallize, with consolidation among the CDN specialists, direct sales to the biggest content owners and aggregators, and a channel structure able to support the needs of an increasing number of customers. The role that telcos and others can play here will be positive for the telcos, and for those CDNs that respond to it: Telcos' marketing and sales reach is generally bigger than most CDNs can hope to match. So perhaps it's not all completely bad news for the specialists.

— Danny Dicks, Analyst, Light Reading Insider

Shrinking Margins Bring Big Changes to the CDN Market, a 23-page report, is available as part of an annual subscription (12 monthly issues) to Light Reading Insider, priced at $1,595. This report is available for $900. To subscribe, please visit: www.lightreading.com/insider.