This morning, web and application acceleration provider Cotendo announced they have raised $17M in a third round of funding, adding Citrix Systems and Juniper Networks as new investors and partners. The company has raised a total of $39M and now counts 75 employees around the world. In addition to the funding announcement, Cotendo also announced a new mobile acceleration suite to speed up the delivery of mobile websites and mobile applications.
When Cotendo launched in the market two years ago, nearly all of the content delivery networks in the industry were fighting over the video delivery business. At the time, Akamai was really the only CDN that had started to diversify their revenue away from just delivering bits and they started coining the term "value add services" to refer to products and services outside of just video delivery.
With the price of delivery video dropping for the average content owner by about 30% over the last three years, (45% in 2009, 25% in 2010, 20% in 2011) today, every CDN talks about value add services and is working very hard to try and shift their product portfolio over to offer higher margin services. With Cotendo, the company decided from day one that they would not focus on video and instead, offer product suites specifically around app acceleration, dynamic site acceleration, cloud applications, advanced DNS and SSL features and products all classified in today's market as value add services.
Clearly, the company's strategy is paying off and while still small when compared to someone like Akamai, Cotendo is challenging and disrupting the value add services market and competitive landscape. In just over two years the company has signed up more than 200 customers including Facebook, HTC, Conde Nast, Answers.com, Vistaprint, DIgg, Mashable, Bayer, Bluecoat amongst others. Some of these customer names have not been announced by Cotendo, but I have been getting a lot of calls lately from customers about value add services and who they are using. In addition to the growing customer count, Cotendo also has partnerships with AT&T and Google and now adds Citrix and Juniper to that list.
With content owners I have spoken to, Cotendo is quickly becoming known as an alternative to Akamai for some value add services and every quarter, the number of customer I hear from who have made the switch from Akamai to Cotendo continues to grow. While it's still a small number when compared to Akamai's overall market share and customer count, Cotendo is clearly a growing threat to Akamai in the market. And with Cotendo's recent deal with AT&T and Akamai suing Cotendo, thereby giving them more exposure in the market, Cotendo is growing their customer count nicely each quarter and gaining more visibility in the market.
With the Juniper announcement, it also interesting to see that Cotendo is working to get their platform embedded into devices, something I don't see other CDNs working on too much. As for Cotendo's new mobile acceleration offering, they are taking a different approach than Akamai by going directly to content owners, while Akamai is going to the carrier with their partnership with Ericsson. (I'll talk more about mobile acceleration in a follow up post.)
With Cotendo having success in the value add services business, and by success I mean a healthy list of growing clients and partners buying services with high margins, the logical thing to think about is the impact Cotendo will have on pricing overall in the market. Make no mistake, pricing for value add services will come down and pricing pressure is already being applied in the market. But, it's not the kind of pressure we have seen from video CDN as value add services are in no way commoditized the way video is. AT&T has already said that with their partnership with Cotendo, they could charge 50% less than Akamai charges and would still be "extremely happy".
Of course you have to be comparing specific services one to the other though to talk real numbers and you have to talk performance of the services, which can only be judged by talking to customers. But content owners have shown the market that they are not willing to pay more for Akamai's video delivery services as they don't see Akamai offering better performance with video delivery, especially as of late. For value add services, Akamai has to show that they can perform better and if they can, customers will be willing to pay more because unlike video, fractions of a second in better performance can and do impact the bottom line. So there will be pricing pressure in the market, but it won't be as severe as we have seen with video.
From customers I have spoken to, the average content owner switching from Akamai to Cotendo pays 35-40%% less, which is a pretty big number considering we are talking about services that have high margins. For me, the immediate thing to watch is not how many customers Cotendo can take from Akamai, or the market share they grab, but rather how fast they drive pricing down in the market, for all vendors, just like we saw Limelight Networks and Level 3 do in the video space. How severe that pricing pressure will be applied in the value add services market is too hard to know right now, but it is happening and it has picked up since the beginning of the year.
If you want to see more details about Akamai, Cotendo, Limelight and Level 3's app acceleration and DSA offerings in the market, you can watch a video presentation from all of them at the CDN Summit last month and download their presentations from the CDN Summit website.