Akamai Gaining Market Share With Their Lower CDN Video Pricing
For a couple of quarters now, Akamai has been talking about being more aggressive with their CDN pricing. But historically, those pricing reductions have only been with a limited number of customers that Akamai defined as "strategic". After the Streaming Media West show in November, I wrote that Akamai had begun to get a lot more aggressive across the board and they have only accelerated this trend last month and into January.
Over the past four weeks I have seen bids where Akamai has matched pricing from Limelight, Level 3 and EdgeCast or in some cases, undercut their pricing all together. I have seen fewer video contracts steer away from Akamai in December and January and it's clear the company is taking a serious pricing reduction strategy and applying it to a wide portion of their video business. I estimate that by the third quarter of this year, Akamai will have re-priced roughly 75% of their contracts that include video.
While Akamai may be matching competitors pricing now, I don't expect that trend to continue throughout the entire year. Since Akamai was so high compared to the competition, matching the market rate gets customers attention very quickly. But as many content owners have stated in the past, Akamai typically only has to reduce their pricing to be about 15-20% more than their competitors to retain the business. Some content owners have said that's the pricing threshold that makes or break the contract for them. And considering that in Akamai was, in many cases, 200-250% higher in pricing, it's a drastic pricing reduction on Akamai's part, but one that's necessary. Even with that decline, one has to think that Akamai can still make money from the video delivery business, just not as much as before.
Of course, even with pricing declines, all CDNs always hope to offset that by increased traffic on their network. While I do think Akamai is growing their video delivery traffic, they can't grow it at the rate they would need to in order to make up for the reduction in pricing, which I think is ok. Yes, they can charge more now and make higher margins, on lower volume, or realize this is a long-term play where you make more revenue by taking advantage of the economics of scale.
For Akamai's competitors, this is not good news. Speaking to a couple of them over the past few weeks it's clear that they are feeling the pricing pressure and they all acknowledged that Akamai is now getting very competitive on pricing. When Akamai's pricing was so out of whack, their job was a lot easier. But with Akamai now playing hardball, it makes their job that much tougher.
While I am seeing many say that CDN pricing is stabilizing, it's not, yet. Video CDN pricing was all over the map last quarter and declined by huge numbers, primarily due to Akamai's new strategy and some CDNs simply wanting to close as much business as they could at the end of the year. I saw more than one CDN get lax with their pricing polices just to try and end the year with as much revenue in the door as possible.
That said, CDN pricing will stabilize later this year, but I don't expect that to happen until the third quarter. Keep in mind, while all the CDNs always say they are having to reduce pricing, they never say what percentage of their customers they are reducing it for. Last year, content owners saw an average pricing decline of about 40%, with only 35% of traffic growth. I expect that by the end of 2010, pricing will be down about 20-25% on average with traffic growth around 40-50%, which is good news for all the CDNs.