More VC Money Coming To CDNs and P2P Networks

With over 30 CDN and P2P providers in the market today (www.cdnlist.com), you'd think the VC money would stop flowing to content distribution networks, but it's not. Over the first half of this I expect we'll see at least three more companies who are expected to announce funding. Looking at my list of 30+ providers, there is almost no company left on the list that hasn't raised money. I can't remember a time in the CDN market, even dating back to 1999, when nearly every company in the CDN industry all raised capital within nearly 12 months of each other.

We've seen Limelight Networks go public and EdgeCast, CacheLogic, CDNetworks, Grid Networks, BitTorrent, ChinaCache, Move Networks, Itivia, Rawflow and Rinera Networks all raise money within about the past 12 months. I expect the next round of funding announcements this year to come from Panther Express, Pando Networks and BitGravity and if that happens, nearly every company on the list will have raised money or is a publicly traded company.

This worries me. While it is great for the industry right now, over time, the market can't sustain 30+ providers. I fear that 18-24 months from now we're going to see quite a consolidation in the CDN market and only about half the providers will be left standing. The CDN market keeps going in the same cycle every couple of years. In 1998 there were about half a dozen CDNs. In 2001 that number surged to a few dozen. Then in 2004 we were back down to about six providers, and three years later, back up to a few dozen. It's a roller coaster ride for the CDN market and I really hope that the CDN and P2P providers are taking note of why companies failed in the past, where they went wrong and are aware of how not to repeat the same mistakes made in the market in years past.

Comments

[Brian Berlin]

Dan,

I share your concern. Despite the inflow of money, here's the downside:

1. No critical mass. With 30+ CDN providers, no one entity can build critical customer mass. Each will tout their individual wins, but there may not be enough savvy buyers to create a tide that lifts that many boats.

2. Lack of differentiation. During a consulting engagement for a CDN client last year, a prospective customer challenged my client, words to the effect), "Every CDN wants my business. Why should I choose you?" Unless the CDN front line sales team can pinpoint the value advantage, they fall back on "lower overall costs", "faster downloads", or "better network". Let's face it: CDN's are pretty much all the same in the mind of the buyer. Name a content provider that's going to listen to 30 duplicate pitches.

3. Poor Customer experience. You'd think with this much competition the customer would win, right? What if in order to get the wins it needs to please the investors, some CDN's resort to margin sacrificing tactics in order to get the business? If they don't meet service level expectations, the customer suffers. A bad service experience will taint all the other players.

Maybe the investors are counting on consolidation; that potential mergers and acquisitions will earn them a return. But the go-go cycle of expansion and contraction can only confuse buyers, who vote with their dollars, and may stall growth by waiting for things to shake out.

[Dwight Merriman]

Agreed - clearly the market will not support 30 vendors. Over a couple years, there will be consolidation, and a shakeout of weaker players.

Video has really created a CDN 2.0 wave which will take a while to play out.

Agree with Brian's comment on service, service matters!