AT&T Inc. (NYSE: T) is preparing a big push in the content delivery market, putting it in competition with Akamai Technologies Inc. (Nasdaq: AKAM), Limelight Networks Inc. (Nasdaq: LLNW), and others in the fast-growing space.

During the company's analyst day yesterday, Ron Spears, AT&T's group president of global business services, said the carrier would increase its focus on businesses adjacent to its core networking capabilities, including content distribution.

AT&T already offers streaming and caching services, Spears said. But he added that AT&T is "now focused on rapidly expanding capacity" so it can better snare customers in the content delivery network (CDN) space.

AT&T is committed to adding content servers to network locations around the world. By the end of 2008, AT&T plans to have a sixfold increase in its caching and live streaming capabilities.

"In very short order, we will have the ability and all of the asset capacity necessary to optimally deliver and host content in the needed formats with the superior quality of service that our customers demand," Spears said.

AT&T's CDN push comes after Level 3 Communications Inc. (NYSE: LVLT), another network services provider, announced its entry into the CDN market with the acquisition of Savvis's CDN assets earlier this year. (See Level 3 Completes Buy and Level 3 Enhances Platform.)

The announcement left some analysts and investors spooked. Akamai shares fell 6 percent today on worries that AT&T could eat into its business.

Cowen and Co. analyst Thomas Watts downgraded the stock to Neutral from Outperform on concerns that AT&T's efforts could signal faster commoditization of the CDN market. In a research note issued this morning, Watts cited AT&T's lower costs and greater network reach as competitive advantages over Akamai.

The cost advantage comes from AT&T owning its network, since Akamai leases capacity from carriers like, well, AT&T. "While much of the content delivery is over the public Internet, [Akamai] pays fees to network providers for bandwidth and collocation services to support its network," Watts writes.

As for reach, "AT&T claims that on average it can serve content to a customer from only 100 miles away. Akamai's analysis suggests its average distance is more than 250," he notes.

Akamai, not surprisingly, disputes that owning a backbone network would be a built-in cost advantage.

"AT&T and Level 3 claim their cost structure is lower, but I'd love to see the numbers," says David Belson, senior competitive analyst for Akamai. While the network infrastructure of those providers represents a "sunk cost" between regions, Belson says, "the real challenge is in reaching end users."

In this respect, Belson claims Akamai has the upper hand, because its network is built to serve files from within ISP networks. As a result, Akamai says that most of its content does not travel over the backbone networks to reach end users, eliminating that transport cost.

Belson also says that on a performance level, operators like Level 3 and AT&T are still beholden to the possible logjam of peering points when trying to connect to end users. While AT&T's story is "a little bit better, because it has some last-mile access in North America," the carrier is "still reliant on network partners to get to the end user," Belson says.

AT&T's expanded CDN plans might not affect the market right away. "We do not expect customers to begin switching to AT&T immediately. However, AT&T could begin to have an impact as soon as late 2008," Watts writes.

Even when AT&T does ramp up, some analysts question how much the company will affect the more established CDN players.

"The real value of Akamai or Limelight is in the value they add around basic transit," says Morgan Stanley analyst Brian Essex. "The vendors most at risk are the commodity vendors and smaller CDNs."

— Ryan Lawler, Reporter, Light Reading