The Current State of the Content Delivery Market

To those who are new to the online video industry, it may seem like the content delivery market has been around for only a few years. But amazingly, 2008 marks the 13th year since some of the first content delivery networks (CDNs)—such as Sandpiper and Real Broadcast Networks—began offering streaming media services on the internet. In that time frame, the video delivery market has gone through enormous changes, both from a technology standpoint and assorted business standpoints, including how these services are priced, packaged, productized, and marketed.

Now that the service is evolving and the process of delivering bits has become somewhat of a commodity, people in the industry are just starting to talk about all of the other pieces in the content ecosystem. Today, most CDNs are still focused only on moving bits across the internet, while many content owners are struggling to figure out all of the other pieces in the workflow process that truly enable them to monetize their content. Delivering bits is not the complex part. Content owners are wrestling with the entire ecosystem workflow of content creation, capture, ingestion, transcoding, management, authentication, syndication, storage, delivery, and reporting, among other possible steps.

That being said, video delivery networks still play a vital role in the industry and will continue to do so down the road. Today, almost no company builds out its own video delivery network, as most CDNs can do it far more economically and efficiently than a content publisher can, especially when capacity and global reach are crucial.

As CDNs evolve, so does the term. Today, there is still no clear definition agreed upon by the industry that determines which companies will be classified as a CDN and which won’t. The term is very vague and continues to have a very broad definition as more types of content outside of video—such as applications—are delivered across CDNs. Everyone seems to have a different answer as to what makes a company a CDN and what kind of infrastructure CDNs are required to have in place in order to use the term.

Even with that confusion, the video delivery market is hot. In the past 6 months alone, the content delivery market specific to video has seen some enormous growth in the number of new vendors in the market, the amount of venture capital raised, and the expectations many people have regarding what the video market will grow into down the road. We’ve seen telcos enter the market and lawsuits over patents, and many hybrid or P2P-only networks have entered the fray. There are more than 50 video delivery networks now in the industry (see www.cdnlist.com), including those that are P2P-based, and the vast majority of them are competing for the same business in a market that is still small in the U.S.

While many reports in the industry have talked about how the size of the CDN market is much more than a billion dollars, none of those reports break out video-only revenue, which is the fastest growing segment of content delivery and takes up the most bits on any network. Based on my calculations of vendors’ revenue, the market size for outsourced video delivery services in the U.S. was $450 million to $500 million last year and has the potential to grow to about $800 million this year (see www.cdnmarket.com).

At the same time, in the past 18 months, more than 16 video delivery vendors, including P2P-based providers, have raised over $300 million in capital. CDNetworks, EdgeCast Networks, Panther Express, GridNetworks, Highwinds Network Group, Velocix, ITIVA, Move Networks, Pando Networks, Conviva (formerly Rinera), BitTorrent, ChinaCache, RawFlow, Oversi Networks and BitGravity combined raised $285.35 million in 2007 and 2008, and that number does not take into account other CDNs that have already raised money but have not yet made it public or those that are out in the market raising another round. When all is said and done, I expect close to another $100 million will be raised in the next 12 months. Combine this much money being raised with a market that’s not as big as some think and one has to worry that, in the next 18 months, the number of video delivery networks in the industry will fall considerably. The market can’t support 50 providers, and not every company will be acquired and make back their investors’ money.

History has a way of repeating itself, and we have gone through this before. In 2000, before the bubble burst, we had nearly 50 CDN providers in the market. Two years later, we had less than 10. Five years later, we’re back to 50, but for how long? At some point, investors are going to want to see some return on their money, and with fewer video delivery networks focusing on doing more than just delivering bits, it’s going to be hard to get acquired unless they can show a lot of revenue, which most don’t have.

While all this is going on inside the industry, on the outside, customers who are trying to choose the right video delivery network for their needs are more confused than ever. Thirteen years on, there are still no standards for online video and no agreed-upon way to fairly compare one vendor against another for the many different levels of services. In addition, while video delivery pricing continues to drop each year (see www.cdnpricing.com), it’s no longer falling at the rates we have seen in years past. All the while, consumers are watching more online video content more frequently, at higher bitrates, for longer periods of time, and on more devices. More than ever, CDNs are a crucial piece of the puzzle in helping this industry grow to the next level.

When it comes right down to it, the entire CDN market hinges on the ability of all CDNs to be able to use the economics of scale to operate their networks more efficiently. They need to spend less money to deliver more content with fewer resources and less infrastructure so they can reduce pricing to drive more consumption while still trying to earn a profit. Today, most CDNs are still losing money and spending a lot on capital expenditures, all while trying to stand out in a very crowded market.

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Comments

[Steve]

Dan so if I recall you were 8 when you started in the biz so that would make you 21 this year?

[Dan Rayburn]

Thank god I'm not 21 anymore. Happy to be 33, even though the photo on my blog is from years ago and makes me look 21. I need to get a new photo taken. Did my first webcast in 95, so it's been awhile. But still having fun. Is this Steve from the InterVU days?

[Hank]

"Today, almost no company builds out its own video delivery network, as most CDNs can do it far more economically and efficiently than a content publisher can"

I disagree. I see more and more people considering their own CDN - especially when they own a IP network. But content owners as well. This is because most CDN's are so focussed on competition instead on the customers. CDN technology is not rocket science anymore, it is actually becoming affordable and easy to use.

50 CDN's is crowded and most of them are burning a lot of cash. Not delivering the promised performance. And most are over-investing in capacity, just to prove theirs is bigger than yours. As you may know, to handle 90% of the largest peaks is affordable. To handle 95% of the peaks is expensive. And to handle 99% of the peaks... there is no business case.

Furthermore, I predict that most P2P service providers will fail. It is not about their business case, or their efforts. It's the technology that fails.

[Steve]

Yup that's would be me...

[Stephen]

This is Stephen (not Steve) formerly from INTERVU, as you correctly note in the second paragraph above Dan (some) people are starting to talk about the other pieces in the content ecosystem. Brian Kenner one of the mercurial INTERVU founders was VERY passionate about preaching the fact that the CDN war would be won by those who successfully deploy revenue generating applications on their networks' and was pushing us back in 1999 to do this. The problem is the larger your network becomes, the more difficult it is to deploy enterprise class applications and report and monitor their performance. I believe Akamai realizes the value of this strategy and the complexity of executing is why we do not see Akamai acquisitions on the market as product offerings for extended periods of time. Maybe Brian and the INTERVU team had a lasting influence on what Akamai has become today.

[Scott Monson]

Dan,
I think it is fair to say that Akamai first established its dominance by having superior core technology (algorithms). This enabled them to deliver a better web commerce experience via image caching and to offer the reliability that large vendors required to outsource their business.

I agree that today's market is definitely saturated with too many new vendors going to market with no real value proposition outside of “cheaper”. If it was only about being cheap, P2P would have won, and everyone would be using it for everything. Clearly that is not the case. With consumer expectations rising and web video to the TV screen becoming a more broad reality, video delivery challenges will continue to rise since delivering higher bit rate content is significantly more challenging. As you mention, buying more servers and extra capacity will not be the sustainable, workable model. As the market consolidates, I believe the companies that endure and prosper will, like Akamai early on, leverage core technical advantages to improve today's current systems and optimize delivery/QoS without requiring new, massive investments in infrastructure.