Level 3 Closing CDN Deals: Netflix, FOX, Microsoft, Comcast, CNN and Others

For some time now I have been writing that Level 3 is doing a good job in the CDN market closing deals and ramping up revenue, doing almost $50M last year for all CDN services. Various people always ask me why they don't see many press releases from Level 3 talking about customer wins and many ask me who exactly is using Level 3 for their CDN services?

It's a valid question and many times, the vendor does not have permission to use the customers name in a press release. That said, Level 3 does have permission from some customers to use their name in presentations and I have located other customers via trace routes. Some of Level 3's CDN customers are Netflix, FOX, Yahoo!, Microsoft, Comcast, Sky, NHL, BBC, DNC, CNN and others. How many customers Level 3 has in total for their CDN service I do not know, but I expect that as Level 3's CDN business continues to grow, their will start to give out more details on that segment of their business during their IR calls.

Based on the growth Level 3 has seen for their CDN business so far, I expect them to generate close to $100M from their CDN group for 2009.

Comments

[Dom Robinson]

Dan, in your view do Level3 have an advantage over LLNW and AKAM by also owning the underlying telecoms network. Do you think that this enables them to operate in a competative way that other CDNs cant: Ie do you think that Level3's CDN pays Level3's network services group the same rates that LLNW and AKAM would pay Level3's network services group for the same services?

I have seen a lot of evidence that Level3 can provide 'impossibly low' pricing into the market: under that which even the largest monthly commit could buy - ie they are internally canibalising thier own infrastructure revenue to buy market share in the CDN sector.

Given that as a third party CDN with multi-petabyte commit you cant buy simple transit for $0.02/GB from the Level3 network services group, it seems a little odd that they can price at $0.017/GB through thier CDN group to some content providers in the market and the CDN group must be buying the network services from the same Level3 network services group.

This indicates that Level3 are effectively buying the market.

While this is good for reporting and analyists, and whil it is helping to stimulate a market buy providing affordability, it potentially represents something anti-competitive and also un-sustainable in the long run for the sector.

I realise that is a highly charged comment: but its a conversation going on around the market behind closed doors in many parts of the sector - i think it should be bought out in the open, and either disproved or at least disapproved publically since it is not good for any party in the long run.

[damien wetzel]

Dom,
i believe the l3 cdn group doesn't pay anything to the L3 network service group. Their CDN strategy seem absurd to me. L3 sells mainly transit (+ racks) to hosters , this traffic is an inbound traffic from the hosters which goes outbound through peering (not paid) links with nationals DSL ISPs who have no interrest in assuring a quality with those peering links. The L3 cdn exacerbates this tendency furthermore aggravated by the low pricing they provide.

One day, the national ISPs will whisle the end of the game and say our peering links are too asymetrics, if you want to continue peering with us get me some of your money and L3 will have no other choices of paying if they want to provide a good quality to their CDN and Transit to their hosters. For a company full of debts, i'm not sure its a wise model.

[Dan Rayburn]

Hey Dom, Level 3 says owning the networks is an advantage from a cost perspective, but who really knows unless the company is willing to disclose all of the numbers. It would make sense that it should be cheaper, but can't say that it is as I don't know their costs.

You say that "Level3 can provide 'impossibly low' pricing" but they are not the lowest in the market. Limelight is still lower on almost all deals. So I would disagree that Level 3 is buying market share and giving it away. I know of instances where Level 3 has passed on CDN business as the price the customer wanted was too low.

As for your comment about Level 3's pricing model "represents something anti-competitive", I don't get what you are saying? Level 3 can sell their service at whatever price they want. I understand how that is "anti-competitive" or what you mean when you say it should "bought out in the open". I'd need some more details on what you mean before I could comment on it. Thanks.

[Juan]

Having insight into the Level 3 CDN business model I know, first hand, that the "CDN" business that the Level 3 "CDN Division" is doing, for the most part, is NOT CDN sales. The division is comprised of a sales team who have the ability to sell ALL Level 3 services, including CDN, and close to 90% of the revenue generated by said team comes from services other than CDN. So, while the "CDN Division" may report 50M in revenues from that division...I would assume it to be only 5-10M in actual CDN sales.

[Dan Rayburn]

Hi Juan, your assumptions are not accurate. Sit down with Level 3 and go over the numbers, specific to the CDN group and you'll see that they are talking CDN services, not things like transit or VyVx. The $50M comes from delivery of large and small objects, both video and non-video assets, storage and some of the professional services that fall under CDN like transcoding and live event management. Also keep in mind that when they acquired the CDN assets of SAVVIS, they did keep some of the small object delivery business that SAVVIS still had at the time. While much of that did not move over to Level 3 during the sale, some of it did, so they were not starting off from zero.

In addition, I mention 10 large Level 3 customers in this post. If each of them is only doing $10K a month in revenue, that's $12M a year in CDN revenue, just from 10 customers, of which they have more. So your assumption of only $5-10M would make no sense.

[Nick]

Dan, 10 customers with $10K revenue a month means $1.2M a year, not $12M. Did you mean $100K a month?

[Dan Rayburn]

Thanks Nick, glad someone is checking my math. I multiplied by 100 customers, not 10. Level 3 lists nearly 20 customers on a slide they use for presentations, so I expect they have more than 100, but I don't know the exact number. Also, some like Netflix are spending a LOT more than $10K a month though, so have to figure that in to the average as well.

Thanks for checking the numbers.