Network Status 2009: The European CDN Market
This report looks at the current state of the European CDN market. Consolidation, failures, and write-downs in the IP video delivery industry have been making headlines for months. The real story is the shift from the creative and unprofitable supplier pricing models to distinct services with clear and realistic pricing models providing a solid foundation for a profitable online video publishing industry. This is an area that is quietly being dominated by the content delivery network (CDN) industry through innovation, strong management, and aggressive but sustainable economics.
CDN volumes and revenues are growing (see Figures 1 and 2 for Frost & Sullivan’s assessment of the global CDN market). The market leaders and the smaller, nimble, and innovative players alike are gunning for a similar goal, albeit at different strata of the market. This goal is to capitalise on historical high-investment levels to leverage growth and future revenue in online video and gaming. They each have clear target markets and operating regions and defined business and technological road maps; they are largely being creative to meet the diverse needs of customers. This report will discuss this in some detail and provide insights into a market that has been incorrectly categorised as commoditised.
A Commodity? Far From It!
The key findings of this report may surprise you. The CDN market in Europe is not the commodity market one may expect. Commodity describes a market where no qualitative differentiation is evident between the providers. This does not describe well the innovation, creativity, range, and quality of services that I have found to be present during the research for this report. While some players continue to define themselves successfully as commodity players to address specific corporate and market needs, the activities of these few do not in themselves create a commoditised market place.
The “price war” is also a myth and, perhaps, a U.S. phenomenon. A few key regional accounts may be seeing some very competitive renewal negotiations, but this is confined to those largely national or public sector broadcasters whose justification for the continual collection of public funds relies on such metrics as volumes, reach, and quality and less so on fiscal constraints. These accounts provide significant revenue to the big three—Level 3 Communications, Akamai, and Limelight Networks. While these key accounts represent significant volumes and a high percentage of the overall volumes of the market, they also represent very few contracts and are really only able to be serviced by the big three, although Akamai is in the small asset delivery market rather than medium to large asset delivery, which is the focus of this report.
It is natural to see markets invest behind revenues when the capital markets dry up; there are a few exceptions such as Nokeena with its recent $6.5 million successful fundraiser. Although I am not able to quantify this, it would make an interesting article in its own right, as I suspect that a significant percentage of industry historical “revenue” has been the movement, internal to the industry, of capital raised over the past 10 years in zero net gain “mutual” or “ghost” deals creating false buoyancy in our market. Now that this has ended, the industry is highly focused on external revenues with sustainable margins. The surviving CDNs fall into this camp, as do most of the platform operators and periphery service providers. Clearly, the future revenue in the European CDN will be directly or indirectly from advertising-related revenue and telecom companies investing in CDN infrastructure to address demand created by realistic advertising revenue opportunities in their markets.
The CDN industry was the first to take this seriously and to recognise that aligning the delivery costs with industry growth and revenue is key to both driving the volumes and profitability for publishers and protecting the future of their businesses. The platform providers and other suppliers in the video publishing and monetisation stack are or will be forced to more closely address this cost sensitivity if they are to survive. Those CDNs that invested heavily are often able to price slightly ahead of the market and bet on volumes with controlled risk management in their calculations. This is useful as the online video industry still needs a sliver of subsidy.
Figure 1. Video Content Delivery Networks MArket: Dual Scneario Revenue Forecasts (World, 2007-2013). Source: Frost & Sullivan.
An interesting aside is that co-location space is now a premium; in the key European territories this is at near 100% capacity. Adam Smith would tell you that this means a shift in the supply curve, so ceteris paribus, prices will rise—something to consider in contract negotiations. Outside traditional economics, it is also encouraging ISPs and telecoms operators to evaluate the value of data-centre real estate and the allocation of resources to peering- and edge-network services on behalf of third parties seeking to deliver into their networks.
Sunk Capital Investment
IP networks in Europe have seen two key investor categories: pure IP international networks (usually U.S. networks) and local or regional telecom operators (usually the national incumbent). Level 3’s $14 billion of investment, both capital and acquisition, has resulted in a very significant network capacity in Europe that is being re-engineered to provide high-volume, high-bitrate streaming. Limelight’s largest investment is in private networks followed by co-location and peering arrangements in Europe; this is again significant, and this gives both operators the ability to offer market-leading pricing in order to fill their networks. It is strongly arguable that the investment of these two players (and Akamai to a lesser degree) is acting as a catalyst to long-form content delivery in 2009. This is pulling the entire industry up 200Kbps and improving the quality of professional content legally available to consumers.
Both companies are seeing significant growth. Level 3 quoted an interesting observation that only once a market reaches more than 40% of broadband penetration does it see significant investment in content and marketing by the national broadcaster, which results in services such as iPlayer, ITV, ProSieben, and the TF1 WAT player driving very significant volumes of long-form, high-bitrate, free-to-consumer content. Once you fall outside these markets, the picture is very different.
In the end, the European market falls into three clear tiers, with each provider servicing one of these tiers.
• Major pan-European players
• Regional operators
• CDN Technology enablers