CDNs See 3 Price Pressures
Pricing decreases are nothing new in the CDN industry, analysts say. In his research note initiating coverage of Limelight, Morgan Stanley analyst Peter Kuper writes: "Pricing has declined historically and we expect this trend to continue."
Even so, pricing pressures were prominent players in recent earnings calls by Akamai and Limelight. "We do get more aggressive on the prices and the prices are lower," said Akamai CEO Paul Sagan in his company's call.
Streamingmedia.com analyst Dan Rayburn says Akamai has been very aggressive in its price cuts over the past 60 to 90 days, in some cases cutting prices in half to lock down large media deals.
"Akamai is feeling the most pressure," Rayburn says, "because they've always been two to three times higher than other providers."
Merriman Curhan Ford & Co. analyst Colby Synesael says Akamai can still afford to ask a premium price for its services because of its size, scale, and service offerings.
But the company is starting to see the impact of volume pricing and more competitive pressures, which he says "is a big concern for the investment community."
Increased competition could drive prices yet lower, as more companies treat content delivery as a low-cost, commodity business. Synesael says certain providers have told their sales force, 'We will not lose a deal on price.' "
In addition to lower bandwidth costs and increased competition, customer education on the cost of content delivering is also driving CDNs to become more competitively priced.
Analysts say Limelight's IPO and news surrounding the emergence of other CDNs has raised customer awareness of competition in the market, which is causing customers to be more proactive in seeking better deals -- or finding creative ways to control more of the content delivery process themselves. (See Limelight Locks In Microsoft.)
Limelight spoke to this effect in its second quarter earnings call. During the call, CEO Jeff Lunsford said in some cases customers were asking for "lower per-unit rates as their volumes grow and as their business models develop."
Even with lower per-unit prices for larger media deals, analysts believe larger deal volumes at Akamai and Limelight will make up for any loss of profit margins.
"The amount of bandwidth hitting this industry is going to support this pricing model," says Morgan Stanley analyst Brian Essex. "Other players have cut into the bottom line from a commodity perspective, but Akamai and Limelight still provide value-added services, adding incremental value for these types of deals."
— Ryan Lawler, Reporter, Light Reading