Netflix Launches In-House CDN - Analyst Blog
07 Giugno 2012 - 4:53PM
Zacks
Netflix Inc. (NFLX) recently announced the
launch of its in-house content delivery network (“CDN”), Open
Connect. This CDN will directly connect Netflix’s video library to
Internet service providers, ensuring smooth and fast data transfer
that would eventually enrich customer experience.
So far Netflix relied on third-party CDN service providers such
as Akamai Technologies Inc. (AKAM),
Limelight Networks (LLNW) and Level 3
Communications Inc. (LVLT). The company confirmed that it
would continue its present relationships with these CDN service
providers owing to the multi-year contracts that remain in
force.
But Netflix added that all data transfers in the future would be
done through its in-house CDN, Open Connect. Netflix said that
about 5% of its content is already being delivered through Open
Connect.
With Netflix’s future growth strategy entirely based on the
online streaming business, the company’s initiative in building its
own CDN is commendable. First, the company will obtain the service
at cost (since it eliminates CDN service provider profit). Second,
the reliability of its services could increase, thus improving
relationships with Internet service providers. Therefore, margins
will expand over time.
Nonetheless, if the company suffers another subscriber exodus
like last year, the capital expenditure in building Open Connect
would weigh on the results of the company. But on the brighter
side, Netflix witnessed additions to its domestic subscriber base
in the recently concluded quarter.
Netflix has been trying hard to recover from the 2011 fiasco and
has taken positive measures including improving its content and
expanding its streaming business internationally. However, its DVD
business continues to lose subscribers.
Moreover, Netflix faces significant competition from
Amazon.com Inc. (AMZN), HBO and Verizon
Communications (VZ). Higher capital expenditure arising
from international expansion and building its own CDN will also
impact profits.
Thus, we have a Neutral recommendation on Netflix over the long
term. Currently, Netflix has a Zacks #3 Rank, which implies a Hold
rating in the short term.
AKAMAI TECH (AKAM): Free Stock Analysis Report
AMAZON.COM INC (AMZN): Free Stock Analysis Report
LIMELIGHT NETWK (LLNW): Free Stock Analysis Report
LEVEL 3 COMM (LVLT): Free Stock Analysis Report
NETFLIX INC (NFLX): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
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