--Price drops threaten companies' core market
--Video volume grows yet margins pressured
--Akamai, Limelight finding revenue growing slowly in new
high-margin Web services
By Drew FitzGerald
Exploding Internet data loads have put companies responsible for
its distribution in a quandry--not because traffic is too heavy,
but because managing it has become too cheap.
For years, pioneers of the so-called content delivery
network--such as Akamai Technologies Inc. (AKAM) and Limelight
Networks Inc. (LLNW)--earned a windfall off the Internet's growth
by deploying machines that help customers download popular data
faster. Yet sustaining that expansion has grown harder in recent
years because of growing competition, often from their own
customers, which have been lured into the business by the lower
costs.
As a result, content delivery providers have had to diversify
into other business lines, such as Web security, an effort that has
progressed in fits and starts.
Content delivery networks remain a crucial Internet cog. They
work by cutting the distance information travels through
intelligent caching--storing commonly used content in databases
closer to the customers demanding it.
"The Internet basically would stop working without CDNs today,"
said James Segil, president of EdgeCast Networks Inc., a privately
held content delivery network based in Santa Monica, Calif. "If it
weren't for caching content at the edge of the Internet, the whole
thing would fall apart."
Content delivery networks began as services offered by
independent providers like Akamai and later attracted interest from
Internet backbone companies, such as Level 3 Communications Inc.
(LVLT). Cable and telecom companies also jumped into the market,
adding pressure on pure-play content delivery networks to keep
their services unique.
The rush is driven by consumers' exploding demand for digital
information, especially video. The market for content delivery
services generated $2.7 billion last year, according to
network-gear maker Cisco Systems Inc. (CSCO).
Falling prices have stunted some of that growth opportunity,
however. The average cost of wholesale content delivery dropped at
least 15% last year, according to Dan Rayburn, principal analyst at
research firm Frost & Sullivan. That's made other business
lines even more important to the survival of companies.
"If they just sold CDN, I don't think they'd be profitable," Mr.
Rayburn said of Akamai. "The problem is, those businesses outside
CDN haven't grown as fast as they expected."
Akamai managers say they've recognized telecom customers' desire
for more control and responded with new business models, one of
which licenses Akamai's own technology for a fee. The company in
November struck a deal with France Telecom (FTE, FTE.FR) to license
a content delivery service to business customers, for instance,
expanding its addressable market.
"We've always said that do-it-yourself is our largest
competitor," Chief Executive Tom Leighton said in an interview. "I
think we'll continue to see companies return to the Akamai platform
after experimenting with [other models]."
About 60% of Akamai's revenue now comes from more specialized
businesses like its website acceleration network and its security
products, which avoid some of the pitfalls of distributing cheaper
data like video content in bulk. Revenue from those specialized
businesses grew 20% in the latest quarter--faster than the 11%
increase in the CDN business.
Akamai's stock has still dropped to about $37 from its nearly
$60 high six years ago, when overall revenue was growing roughly
50% each year.
High-volume media delivery has taxed the top line at Limelight
even more, analysts say. Core content delivery still accounts for
about 65% of the lossmaking Tempe, Ariz., company's top line. Its
stock has fallen 84% since its initial public offering at $15 a
share in 2007.
Limelight's losses reflect the threat of relying on an older
business model that's growing less profitable each year. Research
firm DeepField Inc. estimates content delivery networks now provide
53% of most large Internet service providers' traffic, yet the
sector's recent growth hasn't always helped networks' bottom
lines.
"Margins from Netflix are negative," said EdgeCast's Mr. Segil.
"It's a bad business to cover them."
Write to Drew FitzGerald at andrew.fitzgerald@dowjones.com
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