Despite Limelight Networks Earnings, CDN Growth Still Strong

It's good to see I'm not the only one who doesn't think anyone needs to panic over Limelight Networks Q2 earnings that were reported yesterday. Light Reading's article entitled "Limelight Outlook Won't Doom CDNs" also talks to the tremendous growth in all aspects of the CDN market that I also see on a daily basis.

As much as Limelight Networks feel short of their projections by about $3 million, they did sign up 149 customers and grew revenue from Q1. The bottom line, all of the CDNs revenue from content delivery services are growing each quarter. Are they growing as much as investors want, maybe not. But since I don't own any stock in any CDNs, I don't care about stock prices. Stock prices do not reflect the true market opportunity. Stock prices go up and down based on many factors, most of which are all short term. And none of the CDN providers are thinking short term, they are all focusing on winning this game for the long run.

That being said, the number of analysts and writers out there who keep talking and writing about the vendors incorrectly seems to be increasing every day. No wonder there is so much confusion in the market. It's a sign of just how hot the CDN industry is right now. But these folks need to take a deep breath, learn the market and then talk about the vendors with some clarity.

As an example, I was reading an article on Reuters about Limelight's numbers and it says "CDNetworks is sniping at Limelight's heels and said in July that it is well positioned take the second spot in the race to supply so-called content delivery networks used to speed up Web services." CDNetworks has less than 30 customers in the U.S. for content delivery and half a dozen employees. Limelight has over 800 customers and 58 employees just for sales alone, not to mention $100 million in sales by year's end. CDNetworks has a third of Limelight's revenue in Korea and will only do a few million this year for U.S. based sales. Mirror Image and Internap will do more revenue in the U.S. this year for content delivery than CDNetworks will do, so why wouldn't they be nipping at the heels instead? The reason is that the quote the writer used is from CDNetworks and they take it as they are given it, without doing any analysis of what they are being told.

There are also a lot of articles being published talking about "startups" that aren't startups and have been in the space for years. For instance from an article this week, "There are also an increasing number of startups in the CDN space, including players like CacheLogic, NaviSite, and Panther Express." Panther Express launched almost 2 years ago, and CacheLogic and NaviSite have been in the CDN space for a long time. The startups in the U.S. are folks like EdgeCast and CDNetworks who have launched in the past few months. That's a startup.

In another article posted on Seeking Alpha, which talks about Akamai and the content delivery market, the author says "Upstart competitors Limelight Networks, Internap, and EdgeCast have recently received glowing press and funding from big names." Really? EdgeCast got reviewed by one press outlet. Limelight has been around for over five years and Internap is not new to content delivery. And Limelight is the only one that has gotten large funding lately.

The bottom line, there is huge growth coming from all customers. I hear from them directly and they are all putting more content online, at higher bitrates and getting longer playback times. Yesterday alone, two large content owners called me to ask advice on the going rate for CDN pricing and both said they expected to do two or three times the volume of delivery next year than they did this year. Both of whom are currently spending over $300k this year alone.

Content delivery has been around since 1994 when Sandpiper, InterVU and RBN started providing delivery services for video and it's taken the past 14 years to get where we are today. As much as it's been 14 years, the market is just now taking off and we've only scratched the surface of where this is going to go and the explosion we are going to see over the years for video delivery.

As much as people always says "content is king" the real winners in this space are not the ones who own the content but rather the ones that control the flow of delivery. The real game has just started and the winners, of which there will be many, will be the ones that are in this for the long-haul.

Comments

[tech_analyst]

Dan - I understand your views on the strong growth in the CDN market. I also understand your thoughts on how some analysts and press misrepresent the details of the competitive landscape.

But, I cannot follow your reasoning on why the real winners will be "the ones who control the flow of delivery." It seems to me that the flow is increasingly being commoditized just like the data networks of the large telecom companies have been over the past few decades. The end-user, after all, is paying for the content, not the delivery mechanism.

[Snowy]

Finally, someone telling it like it is....

great post !

[Dan]

Dan

You are confident that CDN market will do well. But it is sick companies like limelight are competing on price and are digging their own grave. Your article does not discuss price war. I am surprised that your article does not even mention about the profits limelight is making. Stocks are not valued by revenues but by profits. Please throw light to your readers on the profits limelight is making. What is disturbing to me is that this page is sponsored by limelight, so I do not expect anything but positive coverage for them.

[Dan Rayburn]

I don't care about the profits Limelight is or is not making in one quarter of business. Companies are only judged on that by Wall Street, not by those who judge companies based on long-term growth, over many quarters, over years of doing business. Like many, I am not one who is trading stocks in these companies, so I don't have anything to lose or gain over Limelight or any other CDNs based on one quarters worth of numbers. I've also posted multiple times on my blog about pricing, along with actual numbers and data.

Yes, Limelight is a sponsor of this blog, but Akamai isnt', and I did a blog post about them and the positive side of the industry, even though their stock price went way down after their last earnings call. So you can try to imply whatever you like in my coverage but my posts speak for themselves. My name is with all of my postings, as opposed to you not posting your name with your comments.

[Simon]

Hi Dan - from what I can see the price war going on is pretty vicious – competitive prices for big contracts are often below 10c per GB now. Some simple math illustrates the situation (and I completely agree with you that facts are always good):
Nielsen/Netratings published data for unique users and minutes of use of the top 10 video sites in June 2007 (see www.websiteoptimization.com/bw/0707/ for highlights).
Even if you assume a generous average bitrate of 500kbps, you add it up and come out with a little over 10m GB transferred in June by the top 10 video providers.
Thats about $1m of monthly CDN business at current price levels.
So even if you look at multipliers like increasing audience, minutes of use, encoding rates pushing this market size upwards, how quickly is this going to happen?
Even if it grows quickly to $10m of available revenue per month? Is that really a big enough pie for Akamai and Limelight and all the other CDNs to share?
(Oh, and I forgot to mention that nearly 80% of the top 10 video is currently YouTube/Google - who are building their own CDN)
(And I didn't even get started on imminent arrival P2P players who can price at these levels without losing money.)
I know that CDNs are layering on lots of other services on top of pure dumb delivery, but with market pressures in the core business like this, can other services hope to make up the difference?
What am I missing here?

[Dan Rayburn]

Hi Simon, I am going to post this week about pricing amongst CDNs, what the going rate it, and what I am seeing in terms of the differences in price. The real issue here is that many customers who are doing over 100TB a month, still don't know the going rate and many are still paying $0.40 per GB. More to come this week. Thanks.

[David]

CDN's are a short term solution to a long term problem.

As another user posted, bitrates will increase, storage will increase, demand will increase. The missing part? BANDWIDTH. As I sit here, I can say that in 1999 I had a 768 down, 128 up cable modem. Now I am sitting at 9mb down and 1.5mb up. When the user's bandwidth increases the need for a CDN will decrease as it will be more economical for companies to host their own data at a few data centers instead of at a CDN.

I still believe that CDN's do a wonderful job of a one to many delivery system, but do not do well with a many to one or a many to many delivery.

[Robert]

David - in 1999 the average web page was 20k, now some are well over 1 MB or larger. I always compare it to Microsoft & Software: in 1985 MS DOS fitted on 1x 5.25" Floppy disk; now you need 2 DVD's - the increased availability and speed of internet connectivity will not be the end of CDN's - it will only be the end of boring, static only web pages and will allow content owners to start publishing content in High Definition and other large formats that earlier were just simply not available.