Akamai To Lose Netflix As A Customer, Level 3 and Limelight Pick Up The Business

Updated 3:45pm: I have written a follow up to this post here: “Update On My Netflix and Akamai Story With Comments From Both Companies

Updated 10:26am: I thought my post was pretty clear, but just in case there is any confustion, I am specifically talking about Netflix’s current streaming business, as it stands today. I am not talking about any potential business Akamai may have with Netflix outside of video streaming.

——————————-

At the beginning of this year, Akamai took the Netflix business away from Level 3 and become the primary CDN for Netflix with at least 51% of their video traffic. While it was a big win for Akamai at the time, it appears that it was short lived. Due to poor performance issues that Netflix has experienced with the Akamai network, Netflix now plans to move all of their “video” traffic off Akamai in the coming months and will go back to only using Level 3 and Limelight.

Last week, on Limelight’s Q3 earnings call, the company announced that Netflix had extended their contract with Limelight for another three years until the end of 2013. And while Level 3 did not mention any customer by name, they also said on their earnings call last week that part of their recent CAPEX spend was, “in support of a large content customer CDN contract we just won in October,” with Level 3 expecting to see revenue from that contract beginning to ramp in 2011. In addition, Level 3 also put out a release saying that they added 1.65Tbps of capacity to their CDN network in Q3 and added five new network locations, not surprisingly, two of which were in Canada. Clearly a move by Level 3 to offer more support for Netflix’s new streaming service in that region.

I sent Akamai an email to see if they wanted to comment on my post and they said, “It’s no secret that Netflix has a multiple vendor strategy. We continue to have an ongoing relationship with Netflix but we don’t comment on the specifics of customers, contracts or other providers.” So while Akamai is accurate and Netflix is still a customer of Akamai today, it won’t be for much longer.

While I am not going to go into Netflix’s pricing at this time, it is interesting to note that Netflix moved to Akamai for lower pricing, yet then didn’t get the performance they wanted. It’s another great example in the market that the CDN business is not just about the low cost leader, but rather good performance with reasonable pricing. Naturally, one of the things you have to wonder is why Netflix would have performance issues with Akamai, yet other video customers I speak to say they don’t have any. It’s hard to know exactly why that is, but part of it could simply be that Netflix has more video traffic going over CDNs than anyone else on the web, by far.

If there is one thing Netflix is good at, probably the best in the industry, it’s measuring the quality of their streaming. They constantly send out emails asking customers to rank the quality of the video they just watched and they have so much data on what works and what doesn’t. So when they choose one provider over another, they really have the data to back it up.

I know some are going to ask me what the value of Netflix’s business is to Akamai and while I don’t have exact numbers, it’s in the $10M-$15M range. (yearly) In addition to Level 3 picking up the Netflix business, Limelight also stands to get more of Netflix business in the New Year, as Limelight indicated on their earnings call, especially when it comes to Netflix expanding further out into the mobile space. And I heard at the Streaming Media West show last week that Netflix plans to release an Android app in the New Year, which would generate even more ridiculous growth for Netflix.

Another interesting point to note is that Limelight isn’t spending any additional CAPEX to support the increase in Netflix traffic, but Level 3 said that they estimate they will spend $14M in CAPEX in Q4 just to support “a large content customer” and already spent $10M in Q3 for additional CDN capacity. That’s $24M of CAPEX in two quarters for Level 3, just for their CDN business. That shows some of the differences in network capacity between Limelight and Level 3 and also gives you an idea at just how big of a customer Netflix really is.

  • Dan Wrongburn

    Dan, as usual, you couldn’t be any more wrong.
    Akamai was just fine for them I’m sure. You’re not going into “pricing at this time” because you have no idea what it is.

  • gabe

    Glad to see this happening. Buffering on my wii for netflix has been terrible. In los angeles. On 20mbit cable. No excuse for that.

  • DC

    I really find this hard to believe. Akamai and poor performance rarely exist in the same sentence. Not to disparage other CDNs, but Akamai is generally considered to be the best in QoS.
    Frankly, I’m shocked.

  • swingtraderbilly

    Here you go bashing Akamai yet again, Dan. And based on your own personal conjecture…yet again.
    SeekingAlpha likes this Akamai bashing done regularly I see..it can generate a quick price dip, then right back up goes Akamai. Very suspect practice, even more suspect attempt at ‘facts’ by Dan.
    Try though he might, Dan’s third rate writing can’t keep a first rate company like Akamai down.

  • WC

    Level 3 is an 88 cent stock. Are you telling me Akamai is inferior to a struggling penny stock CDN?

  • marc

    One has to wonder if Dan has close friends at Level 3. This question is particularly cogent since Level 3 was warned by NASDQ last Wednesday that it would be delisted if it could not get its stock price above a dollar. Curious how this rumor of Level 3 grabbing a big client marvelously emerges a week after it got the bad news.

  • Jack Moves

    You haven’t provided any conclusive evidence that:
    a) Netflix was getting poor network performance from Akamai
    b) Netflix is even leaving Akamai
    Your continued attempts at yellow journalism are highly amusing however.

  • http://profile.typepad.com/ultiblootypepad UltimateOutsider

    LOL @ these comments. I’m wondering if this has anything to do with the greatly increased Netflix stream load times I’ve seen over the past month or so? Once a stream’s actually playing it’s usually fine, but recently it’s been taking up to 2 minutes before things will even start buffering, which is the worst I’ve ever seen it.

  • Jack Moves

    And what does $15M work out to, a couple thousand servers? Not exactly impressive growth when you’re Level 3.

  • Ignorace get attention

    It’s truly amazing that such conjecture and speculation is considered legit news by so many. Sir, you should be investigated by these SEC.

  • Grodon

    Its easy to see why you wouldn’t be allowed to post this under Frost and Sullivan banner. Bashing of a company with no facts, no named sources is just manipulation. The stock has moved down sharply on your allegations and I would agree that an SEC look into your report is warranted.

  • R

    From AKAM IR: “We are clarifying for investors and reporters that issues of “poor performance” by the Akamai network, as reported, are simply untrue. We have a continuing ongoing relationship with them and they remain an Akamai customer.”

  • Bob

    I am glad to see Netflix doing something about the streaming buffering issues I’ve been seeing these past few months.
    One comment, though, on your article. Couldn’t Netflix’s streaming app that runs in our computers also report back streaming stats to Netflix? The app knows when there are buffering issues. I think Netflix would be foolish not to use that capability.

  • anon

    Then why not say akam looses nflx streaming business. Be very particular!!!

  • R

    From Netflix Spokesman Steve Swasey: “We have been satisfied with Akamai’s performance,” and that “Netflix will continue to engage Akamai as part of our multi-vendor strategy.”

  • Haters- Ease

    Dan wrote a report. He’s generally been correct in the past. Actually, more than generally. Of course Akamai denies the story- but that doesn’t mean it isn’t true.

  • Grodon

    So, Dan…. someone has now picked this story up as Dan “of Frost and Sullivan”.
    Do THEY stand behind this reporting or is this drivel just part of the moonlighting rumor gig?

  • anon

    “Level 3 said that they estimate they will spend $14M in CAPEX in Q4 just to support “a large content customer”
    Dan – This is not for Netflix but another very large customer that likely will never be announced.

  • Daniel

    first headline: “Akamai To Lose Netflix As A Customer”
    update: “At no time did I say Netflix is, “no longer a customer of Akamai”. Nor did I imply that, “Netflix won’t have any relationship with Akamai in the New Year”.”
    LOL

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

    @ Anon: “I can confirm that we have been awarded a deal with Netflix,” a Level 3 spokeswoman told TheStreet. The Level 3 spokeswoman also confirmed that the company was referring to Netflix during its conference call.
    http://www.thestreet.com/_yahoo/story/10916915/1/level-3-surges-on-netflix-deal.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA

  • Juan

    I got re-reimbursed for the bad video delay I got 3 percent of my total bill cut off. That tells you something. I’m sure others can confirm this as well.

  • Unknown Person

    Dan,
    I believe there is a bug in some video streaming servers (Adobe’s?) that causes them to miscalculate the available bandwidth. When this problem is present, it will show up as buffering problems when the attempted stream rate is quite close to the actual maximum bandwidth available. It may even be a difference in what features are enabled on Adobe’s (or someone elses?) streaming server. I observed that this bug is more severe if the ping times over the connection do NOT rise when approaching maximum bandwidth. If the ping times do rise at maximum bandwidth, the problem is much reduced (or possibly eliminated)
    After reading your comment that ‘Netflix has Data,’ I wonder if they have discovered a correlation of this problem to the Akamai CDN; but they probably don’t know WHY. I myself only discovered it by accident when trying to figure out what was happening at the TCP level on some video sites that couldn’t play without pauses.

  • David

    When I read about Netflix being a hot technology stock in the stock market for 2010, I didn’t realize the level of operational and business detail that exists. Things are much easier viewed from 20,000 feet.