Netflix’s CDN News Being Overblown By Many Wall Street Analysts, Focus On The Facts

I was hoping I wasn’t going to have to write this post today, but it’s clear that far too many people on Wall Street either aren’t reading the details of what Netflix announced, or are simply trying to create a panic for their own benefit. I’ve seen quite a few reports this morning from those who put out coverage on Akamai and while some of them are on point, many of them are full of inaccurate information. I’ve also gotten a lot of questions this morning about Netflix’s CDN news, so I will try to answer those questions in this post as well. [updated: Level 3 has just posted their thoughts on the Netflix news]

At the time of this post, Akamai shares are down almost 6.5% on the Netflix news. While I’m not one who speculates on share prices or gives out any kind of share guidance or recommendations, the real impact on Akamai by Netflix building their own CDN is minimal. Far too many on Wall Street want to imply this has a big impact on Akamai’s business or that this is the start of a new trend of content owners taking their video delivery in-house. This could not be further from the truth. We have public data in the market to prove it, yet many want overlook that data to support their own agenda to investors.

From what I know, the vast majority of Netflix’s video traffic in North America is delivered by Limelight and Level 3. While Akamai does have some of the U.S based traffic, it’s not a big percentage. I estimate that Limelight and Level 3 deliver more than 80% of Netflix’s U.S. based video traffic. While Akamai delivers a larger portion of Netflix’s video outside of North America, Netflix still does not have many subscribers outside the U.S. so the overall traffic volume isn’t huge. In addition, these caches being deployed by Netflix are for video traffic only. Netflix also uses Akamai for other services like small object delivery and these caches only support the delivery of video content. So none of Akamai’s small object delivery business, or Amazon’s AWS business with Netflix is impacted in any way, which was something Netflix confirmed for me during my call with them yesterday.

I’ve also seen some suggest that Akamai lost an opportunity to sell Netflix their managed or licensed CDN platform. It’s clear that anyone who implies that does not have an understanding of what a licensed and managed CDN platform is for or how it works. Licensed and managed CDN platforms can only be deployed inside a carrier’s network. They are licensed to network operators who own their own network. Since Netflix does not own a network and is placing their caches inside third-party networks, there is no way a licensed or managed CDN platform could work for what Netflix is building. So Akamai didn’t “miss out” on any kind of licensed of managed CDN sale with Netflix.

Next up is the absurd notion I have seen from far too many people implying that over time, Netflix will be in the CDN business competing against vendors like Akamai and will deliver content for services outside of Netflix. Statements like this show a complete lack of knowledge of how caching works and what Netflix’s caches do. Not only are Netflix’s caches setup to only proactively cache Netflix’s content, but they are not demand driven caches. Netflix caches use a pre-population method that works for a set library with a known set of subscribers, but would not be appropriate for a general-purpose CDN or caching system. So Netflix’s caching platform, as it stands now, would not even work to cache content the way ISPs do it today with transparent caching platforms.

I’ve seen some suggest this is a new trend in the market, content owners delivering video themselves, and then they mention Facebook or Apple as those who may follow Netflix’s route. Why that is possible, and likely, that’s not a “trend”. How many companies are there the size of Google, Apple, Facebook, Yahoo!, Netflix or Microsoft? Very, very few. Not to mention, most of Facebook’s traffic is small object delivery, not video. There are maybe half-a-dozen content owners who are delivering enough volume of bits, have the technical expertise and have the money to build out their own CDN. If half a dozen companies end up doing this themselves, out of thousands of CDN customers, that is not a “trend”.

Many have stated that in addition to Akamai, Limelight Networks is also at risk since Netflix accounted for about 11% of Limelight’s total revenue in 2011.While that is accurate, Limelight has had this happen before with both YouTube and Microsoft taking their traffic off of Limelight’s network over an extended period of time. I’m not implying that Limelight will automatically be able to replace that revenue over the next 18 months time, they will have to work to do that, but it’s not something they are unfamiliar with and all of the CDNs have known of Netflix’s plans for some time. While I saw one report say that Netflix’s news “could deplete revenue for third-party CDNs“, that’s a completely overblown statement.

I’ve also seen members of the media get into the act by saying third-party CDNs could see, “sizable amounts of revenue depleted“. If Akamai loses 1% of their revenue, over an 18 month period of time, from one customer, is that a “sizable amount”? Of course not. But the people writing these pieces have no clue how the business works and what the real numbers are, or else they wouldn’t speak in such general terms.

This reaction to Netflix’s news by many on Wall Street reminds me of a similar reaction Wall Street had when in December of 2007, AT&T announced they would spend close to $70M dollars to grow their streaming and caching services. Akamai’s share price fell more than $2 dollars that day, and tons of Wall Street analysts downgraded the stock saying that AT&T would now move into the market and take share from Akamai. Six months later, AT&T made another CDN announcement that they would build out their CDN to have 400 Gbps of global capacity by the end of the year. Rather than look at real numbers, like the fact that 400 Gbps of capacity would only be 20% of the network capacity Limelight had at the time, Wall Street once again implied it was doom and gloom for CDN competitors. Of course that didn’t happen and five years later, AT&T isn’t any closer to impacting any of the major players in the CDN space.

Far too many Wall Street analysts want to create uncertainty, panic and confusion when news like this comes out. I wish they would focus more of their time and efforts on learning more about how these technologies actually work, how they are deployed, what they cost and better understand the competitive landscape. If you cover CDN vendors in this space and you don’t know what DSA or FEO stands for, don’t know how transparent caching works, why or how a licensed or managed CDN is deployed, or what services the CDNs actually offer, then you really can’t expect to be taken seriously when you publish coverage that is heavy on fiction instead of facts.

Note: Not all Wall Street analysts do a poor job in their coverage of the CDN space. Some know the space well. But ever since about a year ago when Akamai’s share price dropped, many new analysts have jumped in to cover CDN vendors and they have no expertise or insight into the CDN market at all. As a result, the quality of the coverage put out on CDN vendors as a whole has really suffered in the past 18 months.

Related Post:

The content delivery market is rapidly changing with new products and services coming to the market including licensed and managed CDN, dynamic site acceleration, front-end optimization, mobile content acceleration and transparent caching. If you’re a bit confused by all of these different technologies, I’ve provided definitions of some of the various¬†technologies below.

  • Dynamic Site Acceleration (DSA): Dynamic site acceleration is a suite of technologies and products that deals with optimizing dynamically served content across the network. Traditional DSA services often include TCP optimization, route optimization, connection management, on-the-fly compression, SSL offload and pre-fetching technologies.
  • Front-End Optimization (FEO): Front-end optimization technologies help to reduce the number of page resources required to download a given page and makes the browser process the page faster. FEO technology isn’t used to bring content closer, but rather makes the content itself faster by optimizing the client side delivery of website resources.
  • Transparent Caching: Transparent caching platforms make intelligent decisions about which content can and should be cached inside a carrier’s network. By deploying intelligent caches strategically throughout their networks, operators can cache and deliver popular content close to subscribers and reduce the amount of transit traffic across their networks.
  • Over-The-Top Video (OTT): Over-the-top is an industry term used to describe a video service that you utilize over a network that is not offered by your cable company (example: Netflix). It’s often referred to as “over-the-top” because these services ride on top of the service you already get from your ISP and doesn’t require any business or technology affiliations with your cable TV provider.
  • Federated CDN: Federated CDN is a term used to describe the idea of carriers and telcos getting together to connect their CDNs with one another, thereby creating a “federation” of content delivery networks. These carriers and telcos would trade traffic across their private CDNs, with the idea of trying to bypass service based content delivery networks.
  • Licensed/Managed CDN: Licensed and managed CDN refers to software and services aimed at helping telcos, carriers and service providers build and deploy their own CDN services inside their network. Licensed CDN refers to the licensing of CDN software to the carrier who then builds a CDN solution on their own. Managed CDN is when a service based content delivery vendor helps build and manage the CDN component of the carrier’s network for them.
  • Application Acceleration: Application acceleration is a suite of technologies that combines fast packet processing with SSL acceleration, connection multiplexing, dynamic caching and adaptive compression to improve application response times. These technologies enable enterprise customers to accelerate the delivery of internal, external and latency sensitive applications to distributed users across the Internet or via their enterprise network.
  • Mobile Content Acceleration: Mobile content acceleration technologies are designed to specifically eliminate latencies found on mobile broadband networks to reduce page load times on mobile devices.
  • Michael Teakwood

    I feel much better after reading this article by Dan. He is absolutely correct that some of these so-called ” analysts” have such shallow knowledge on the technology. I just wonder why the Company has not put out a statement to refute these poor analyses? Or, why Sagan announced his personal plan so early so as to create the market uncertainties on the Company; i.e., Akamai. Don’t they know how the market works at all ?

  • david cramer

    Another good write up from Dan.
    Good discussion of the current state of the CDN market and the Netflix announcement. And I really like the way he uses facts and industry knowledge to call out the bad behavior of wall street analysts.
    Also, thanks for the definitions section. very helpful in figuring out what new CDN offerings actually do.

  • Dar

    Very informative article, great effort thanks a million Ray. I would love to know Dan Rayburn’s opinion of the Citigroup analyst Mark Mahaney. He seems not knowledgeable enough in this field to be so outspoken on Akamii. Thanks in advance.

  • http://www.jet-stream.com stef

    About the Level3 blog: My contacts say that Level3 was hardly involved in the Netflix CDN appliance. So that doesn’t really match with the L3 blog statement.
    About licensed and managed CDNs: actually there are various content service providers around the world who have licensed a CDN or have a managed CDN. Licensed or managed CDNs are usually deployed within telco networks but do not necessarily have to be. They can also be used to span markets, regions or the entire Internet.
    I do understand the light panic on Wall Street. When has Limelight ever seen profitability? Is Level3s CDN really profitable or is it still subsidized by the real revenues from Level3 on carrier services? Does Akamai really get their profits from video delivery or is it from enterprise, cloud and application services? Which CDNs are actually earning back the vast investments today with video delivery services? Any large customer now saying “Hey telcos, let’s cut out the CDNs in the middle” is a signal to the industry that Internet CDNs are challenged again and now by one of their largest and best known customers. Most of these CDNs have no proven business model. FYI I do not trade so I have no financial interest in writing this.

  • JRobb

    Brilliant. Well written Dan and I appreciate the non-partisan commentary.

  • http://jasonnthibeault.com/wp/mind/2012/06/06/has-the-tipping-point-for-online-video-finally-come/ Jason Thibeault

    Dan,
    Great post. Actually think that most analysts don’t know enough about digital media, not just CDN. If they did, they might speculate about the “why” behind Netflix’s decision. Sure, there are economic reasons (saving money on content delivery) and may be even some operational efficiencies (having more control over what’s stored at the edge) but there may even be an underlying reason: subscriber protection. Think about it. Access networks are feeling increased network pressure from backhauling Netflix content. They only thing they can do is put downward pressure on their internet access subscribers. Raise rates. Institute a cap. What happens then? users make concessions and changes. They might even cancel Netflix subscriptions, especially if the access network launches a competitive OTT solution. So may this is a proactive move by Netflix to help networks alleviate some of that (and maybe keep their traffic out of a cap). Perhaps, it’s even a tipping point and actually points to a much greater opportunity for delivery networks in the future as online video/content delivery continues to displace traditional linear.
    http://jasonnthibeault.com/wp/mind/2012/06/06/has-the-tipping-point-for-online-video-finally-come/
    @jnthibeault

  • tee s.

    Good discussion of the current state of the CDN market and the Netflix announcement. And I really like the way he uses facts and industry knowledge to call out the bad behavior of wall street analysts.

  • tee s.

    thank you for the definitions section. very helpful in figuring out what new CDN offerings actually do.