Content and broadband providers put the squeeze on CDNs

Josh Wein, FierceOnlineVideoVerizon (NYSE: VZ) is buying EdgeCast, having apparently decided it needs its own global content delivery network (CDN). What's the significance for online video? I don't claim to be an expert in the CDN business, but it's not hard to spot one industry trend.

CDNs look like they're getting squeezed. On one side, broadband providers are building their own CDN capabilities or acquiring CDNs outright. On the other, the biggest content providers like Google (Nasdaq: GOOG) and Netflix (Nasdaq: NFLX) are deploying their own CDN-like infrastructure.

Why is this happening? One reason is because of control over the media asset. "Today, you lose quite a bit of control," said Keith Wymbs, vice president of marketing for Elemental Technologies, a video processing vendor. "Handing it off to the CDN, where they're trying to do more than just deliver the content with some getting into processing and packaging, you start to lose control of the brand identity."

Money must surely be a factor too. Quarterly revenue at the largest operators is measured in the hundreds of millions of dollars. While that's eclipsed by the kind of cash the largest carriers and cable operators bring in each quarter, it's still real money. When Netflix (Nasdaq: NFLX) announced it would be moving most of its traffic to its own Open Connect CDN in 2012, the share price of the three largest CDNs promptly dropped.

The revenue is there and it's growing in spite of Netflix's moves. Akamai's quarterly sales have seen mid-single-digit percentage increases compared to 2012. EdgeCast revenue, according to Streaming Media's Dan Rayburn, is growing even faster. He wrote that the company was estimated to have $100 million in sales in 2013 and $140 million in 2014.  If ISPs are looking for ways to make more money from the increase in online video consumption happening on their networks, offering CDN-like services seems like an obvious way do that (net neutrality concerns aside).

So content owners are adding CDN capabilities to save money and ISPs see revenue potential for themselves. CDNs may be getting squeezed, but they're not going away. Even the largest content owners and ISPs will have trouble justifying the expense of putting infrastructure into remote areas. Owning that kind infrastructure may make sense in large, densely populated markets, but not everywhere.

CDNs are responding to this trend and to greater competition and pricing pressure within the industry by adding value to the baseline service of making sure media assets are globally available. "How do you make the content providers more successful? By enabling their business models around the content request, versus just the standard delivery of content" said Charles White, chief revenue officer for Mirror Image. "Intelligence is everything when it comes to delivery."

The CDNs are also looking to generate new business through customers outside the traditional media industry. Some of them, like distance learning, still rely heavily on video distribution. Others such as gaming and advertising are connected to video less directly.

Looking at the relationships Verizon already has with content owners through FiOS, its recent acquisition of upLynk and the reports that it might buy Intel Media's over-the-top TV technology, it's tempting to speculate that the company is cooking up a full-fledged IP video product targeted at either its Verizon Wireless customers or more broadly at U.S. broadband households.

There are other ways Verizon can benefit from those same pieces without an over-the-top TV product of its own. We'll soon find out what direction it takes and the amount of resources it will put behind the effort.--Josh