No Major Consolidation In The CDN Market Anytime Soon

I keep reading a lot of reports and quotes by people who all agree that there are lots of CDN providers in the U.S. and as a result, that must mean that industry consolidation is inevitable. The problem is, right now, very few CDNs have enough revenue to make them worth anything. And with many of the new CDNs not focusing on applications and IP, why would we see consolidation when there is nothing yet to acquire?

There are only three companies, Akamai, Limelight and CDNetworks who will do over $25 million this year in CDN revenue. Maybe someone would want to acquire a CDN doing less revenue, or roll up a few of them together, but since so many of the CDNs are really just getting started in the market, there is nothing to consolidate.

If CDNs start to tackle the workflow and ecosystem problems associated with video and build applications to solve those needs, then they become worth something a lot faster. Case in point. Akamai didn't buy Nine  Systems for it's $20 million in revenue and Level 3 didn't purchase Servecast for their $5 million in revenue. They purchased the companies for the applications they had developed. If either company had large revenue and applications, even better, but the applications were enough.

In the next 12-18 months, I expect we'll see almost no consolidation at all. Yes, I still think Limelight will be acquired by one of the many telcos who are looking to enter the market, and CDNetworks with its nearly $50 million in revenue for 2007 is also a potential target, but other than those, who else has enough revenue, applications or IP to make it worthwhile today? Eighteen months from now it's a whole different story as unfortunately, many of the 40 CDNs just won't have enough traction in the market. But since the CDNs have all raised so much money in the past two years, none of the new entrants are going away anytime soon. And yes, the number one player in any industry can always be taken out of the market. And while there seemed to be a lot of rumors in the past week of Cisco acquiring Akamai, I see nothing in today's market to indicate why that would happen now.

Eighteen months from now, the CDN market is going to be a completely different industry. We'll be a billion dollar market in the U.S., we'll have a few companies doing some real revenue and we won't have over 40 CDNs in the market. But for now, no consolidation is coming.

Comments

[Rue]

Dan,

I slightly disagree with your predictions. Maybe there is a need for industry-consolidation, and maybe there will be a few more telco's entering the CDn space.

However, a couple of things:
1) if I remember correctly there was an industry called fibre-optics in the early 90's that was supposed to grow exponentially, because everyone was assuming that the communications industry would require ever increasing amounts of fiber optic cable. However, that was a wrong assumption, because people forgot to calcualte the scale/utilization effects of fibre optics. The same is valid for CDN, especially if you look at the P2P developments going on.

2) you should be aware that there is basically very few M&A in Asia, where e.g. CDNetworks is located. Accordingly, it will be basically impossible for any telco, especially foreign ones, to acqurie CDNetworks and integrate them. The Korean ones maybe instead? Yes, maybe, but for that you would need to persuade a lot of people: the investors, the Korean CEO & founder, the supervisory board. I don't see that happening.

3) Same goes for Japan and China, there will be only few M&A/consolidation coming up.

[Abu Shafquat]

Dan,

Countless moons ago I led a major development effort with Inktomi. Anyone remember that company? At that time the CDN engine was so far advanced and yet the engineers felt it was so simple that anyone could have re-developed it easily. And then the bust happened. And soon after Akamai gobbled up Speedera. And everyone left the Koreans alone.

Last month a major French TV channel saw through the web (no pun intended) cast my Akamai and 'scrapped' its RFP for CDN to work with a carrier of their choice and develop their own CDN "globally".

With UGC booming and P2P becoming increasingly efficient, will traditional CDN models stand a long term chance? Probably not.

Point is that the traditional CDN business model has changed since its evolution in the late 90s and early 2000. Yet the likes of Akamai have kept their offer constant. With the “battle of eyeballs” still to be decided in favour of the PC or TV, in reality there is no great gee-whiz left in the CDN engines anymore and anyone wishing to acquire a CDN company for ‘value’ should – in reality – discover why Limelight lost the IPR battle against Akamai. For much less than the $45 Mn penalty imposed on Limelight, one can put together fresh algorithms and fresh code to serve this industry.