Limelight Locks In Microsoft

Limelight Networks Inc. (Nasdaq: LLNW) yesterday announced a licensing deal with Microsoft Corp. (Nasdaq: MSFT) that could help the content delivery network (CDN) avoid losing another large customer. (See Limelight Teams With Microsoft.)

Mike Gordon, founder and chief strategy officer at Limelight, says the agreement builds on an existing relationship. "This builds on it by representing a bigger commitment to Limelight in our role as service provider, and also expands our relationship to a strategic relationship," Gordon says.

Terms of the agreement were not disclosed, but Gordon says this is the licensing deal with "a major existing customer" that was alluded to in the company's second-quarter earnings call. (See Limelight's Dim Q2 and LimeLight Reports Q2.)

On that call, Limelight CFO Matt Hale described the five-year agreement as "a large multi-element contract that includes a substantial traffic commitment over five years. And it also includes custom CDN services and consulting and cross-licensing, a key intellectual property from both companies, related to content delivery."

According to Hale, the intellectual property being licensed includes "certain components of Limelight's CDN software," which could allow a customer like Microsoft to deliver its own content in-house, but using the Limelight platform.

The five-year licensing deal also helps Limelight avoid losing another major customer if Microsoft chooses to serve its own content. That is significant because, over the past year, Limelight lost a large portion of its business with MySpace and YouTube Inc. after both companies decided it made more sense to become their own content delivery networks.

Morgan Stanley analyst Peter Kuper says there's a tipping point for how big a customer can get before it moves content delivery in-house. "What we've seen with Limelight before, when their customers get to a certain size, they ask, 'What's the point of using a CDN?' "

The Microsoft agreement helps alleviate that tension by locking in Microsoft's business for five years, with commitments built into the deal, regardless of how large the overall business gets. "It's a win-win for both sides," Kuper says. "Microsoft clearly sees value in the Limelight platform, so instead of Limelight losing all the revenues, they get to keep Microsoft as a customer."

That could be important as Microsoft pushes its Silverlight video product as an alternative to Adobe Systems Inc. (Nasdaq: ADBE)'s Flash, and as it positions Silverlight Streaming as an end-to-end alternative to YouTube's user-generated content offering.

"Silverlight is one of the areas where we are closely collaborating with Microsoft," Gordon says. As part of that collaboration, he said, Microsoft is using Limelight's network and CDN to deliver Silverlight Streaming services.

Kuper says, "For Limelight, it helps them get a full reach into the user-generated content model. This is more of a platform partnership, so if Microsoft is successful at all they continue to benefit from that."

Limelight could do more licensing in the future, although, according to CEO Jeff Lunsford, it is not in discussions with other customers to do so. On the earnings call, Lunsford said, "If something makes good business sense for us, we will look at it, and now that we’ve done that once, we certainly wouldn’t rule out doing it again. But we are not on a dramatic path of becoming a software company."

— Ryan Lawler, Reporter, Light Reading