Limelight’s Recent Network Buildout Lowering CDN Pricing, Impacting Margins

Over the past few weeks, content delivery pricing for video is once again starting to show signs of major pricing declines coming in this fourth quarter. And while aggressive upstarts like BitGravity and others are leading the pack with some of the most affordable pricing in the market, Limelight Networks has quietly been getting a lot more aggressive on pricing, all the while reducing their own delivery costs.

The interesting thing I am seeing in deals is that Limelight seems to be lowering their price based on new messaging to customers telling them that due to Limelight's recent and continued network buildout, their costs to deliver video has dropped dramatically. If this in fact the case, Limelight is taking advantage of the economics of scale on their network faster than I was anticipating. I originally thought Limelight and others would be able to leverage their new scalability sometime in the first or second quarter of next year and at that time we would see another price drop in the market. Now, it appears that at least Limelight is seeing this cost savings even sooner and is passing that savings along to customers with lower pricing.

While that is good news for customers and potential bad news for Limelight's competitors, the question also has to be asked if Limelight is giving away business to grab market share and lowering their margins. While that is possible, I don't think that is happening. Limelight knows what happens when any company gives away business to grab a share of the market and Limelight is well educated on the economics of the CDN industry. If anything, I think the new scale of Limelight's network is allowing them to cut costs and should allow them to actually increase their margins.

If they can cut their own costs, pass that savings onto customers in the form of lower pricing and increase their margins all at the same time, we are going to see another huge shift in pricing in this quarter. Not to mention, Limelight is going to continue to grab a lot of the new business in the market and continue their momentum. I am already starting to see some big changes in pricing this month as compared to last quarter and if Limelight continues to put pressure on some of the other providers, we're going to see CDN pricing for video slashed over the remaining two months of the year.

  • http://www.telecomramblings.com Rob Powell

    You may still be right that the actual benefits actually kick in more in Q1 and Q2, but if they sense the need to move early on pricing they can still do that. As long as they can be positive the benefits will show up, it would simply be a short term promotional move.

  • shaun

    thanks dan, always appreciate the inside view :) bad news for AKAM though…..

  • Paras Chopra

    is it more likely that llnw dropped their prices in advance of the “cost savings” so they can fill up their customer ranks? ..that the price drop signals further weakness and not strength? i guess we’ll see after they post earnings next. buying puts over here-

  • Jill Smith

    Is it possible that llnw lost some large customers (e.g. Stage 6) and they are giving away CDN pennies on the dollar as they have unused capacity that they are paying for anyway?

  • http://www.BusinessOfVideo.com Dan Rayburn

    Hi Jill, fair question, but data would say otherwise.
    Limelight already stated that they made up for all the lost traffic from Stage6 in Q2. So they have already filled their network with new traffic to replace the Stage6 traffic. I gave details on that here: http://blog.streamingmedia.com/the_business_of_online_vi/2008/08/limelight-netwo.html
    As for the capacity issue, if Limelight had lots of unused capacity, they would not be spending millions of dollars in this quarter alone to upgrade their network with additional capacity. Hopefully we hear more on their next earnings call.